PROSPECTUS SUPPLEMENT
(To Prospectus dated May 21, 1997) 5/21/97 5:00 p.m.
(MEGO LOGO)
$58,794,841
MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-2
$15,950,000 CLASS A-1 6.87% HOME LOAN ASSET-BACKED NOTES
$ 8,100,000 CLASS A-2 6.88% HOME LOAN ASSET-BACKED NOTES
$ 6,750,000 CLASS A-3 7.00% HOME LOAN ASSET-BACKED NOTES
$13,600,000 CLASS A-4 7.17% HOME LOAN ASSET-BACKED NOTES
$14,394,841 CLASS A-5 7.63% HOME LOAN ASSET-BACKED NOTES
FINANCIAL ASSET SECURITIES CORP.,
as Depositor
MEGO MORTGAGE CORPORATION,
as Seller and Servicer
HOME LOAN ASSET-BACKED NOTES, SERIES 1997-2
DISTRIBUTIONS PAYABLE ON THE 25TH DAY OF EACH MONTH, COMMENCING IN JUNE 1997
The Mego Mortgage Home Loan Owner Trust 1997-2 (the "Trust") will be
formed pursuant to a trust agreement dated as of May 1, 1997 (the "Trust
Agreement") among the parties specified herein. The Trust will issue
$58,794,841 aggregate principal amount of Home Loan Asset-Backed Notes,
Series 1997-2 (the "Notes") pursuant to an indenture dated as of May 1, 1997
(the "Indenture") between the Trust and First Trust of New York, National
Association, as indenture trustee (in such capacity, the "Indenture
Trustee"). The Trust will also issue a class of residual certificates (the
"Residual Certificates"). The Notes and the Residual Certificates
collectively are referred to herein as the "Securities". Only the Notes are
offered hereby.
Financial Asset Securities Corp. (the "Depositor") has caused MBIA
Insurance Corporation (the "Securities Insurer") to issue an unconditional
securities guaranty insurance policy (the "Securities Insurance Policy") for
the benefit of holders of the Notes (the "Insured Securities") as described
herein.
(MBIA LOGO)
The Trust will consist primarily of a pool of home loans (the "Pool")
consisting of fixed-rate residential home improvement loans, debt
consolidation loans and retail installment sale contracts (collectively, the
"Loans"), that are either
continued on next page
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
NOTES, SEE THE INFORMATION HEREIN UNDER "RISK FACTORS" BEGINNING ON PAGE S-12
AND IN THE PROSPECTUS ON PAGE 11.
THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE SERVICER, THE
MASTER SERVICER, THE OWNER TRUSTEE, THE INDENTURE TRUSTEE, THE SECURITIES
INSURER, THE CLAIMS ADMINISTRATOR, THE CONTRACT OF INSURANCE HOLDER OR ANY
AFFILIATE OF ANY OF THE FOREGOING, EXCEPT TO THE EXTENT PROVIDED HEREIN.
NEITHER THE LOANS NOR THE NOTES ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OTHER THAN TO THE EXTENT OF THE FHA INSURANCE DESCRIBED HEREIN.
THE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
May 21, 1997
unsecured or secured by first- and junior-lien mortgages, deeds of trust or
other similar security instruments (the "Mortgages") as described herein
under "The Pool". The Loans will be acquired by the Depositor from Mego
Mortgage Corporation (in such capacity, the "Seller") pursuant to a home loan
purchase agreement dated as of May 1, 1997 (the "Home Loan Purchase
Agreement"), whereupon the Loans will be sold by the Depositor to the Trust
and serviced pursuant to a sale and servicing agreement dated as of May 1,
1997 (the "Sale and Servicing Agreement") among the parties specified herein.
The assets of the Trust will include the Loans, the Securities Insurance
Policy and certain other property. See "The Trust" herein. As of May 1,
1997 (the "Cut-Off Date"), Loans representing approximately 95.7% of the
Original Pool Principal Balance (as defined herein) will be Conventional
Loans (as defined herein), with the remaining Loans (representing
approximately 4.3% of the Original Pool Principal Balance) being partially
insured by the Federal Housing Administration (the "FHA") of the United
States Department of Housing and Urban Development ("HUD") under Title I of
the National Housing Act of 1934, as amended (the "FHA Loans"). See "The
Title I Loan Program and the Contract of Insurance--The Contract of
Insurance" herein.
Distributions on the Notes will be made to the holders of the Notes on
the 25th day of each month or, if such day is not a business day, the next
succeeding business day (each, a "Distribution Date"), beginning in June
1997. The Notes will be secured by the assets of the Trust pursuant to the
Indenture. Interest on all Classes of Notes will accrue at the above-
specified per annum fixed interest rates. On each Distribution Date, the
Noteholders will be entitled to receive, from and to the extent that funds
are available therefor in the Note Distribution Account, distributions with
respect to interest and principal calculated as described herein. See
"Description of the Securities--Priority of Distributions" herein.
Distributions on the Residual Certificates will be subordinated in priority
to payments due on the Notes as described herein.
THE YIELDS TO MATURITY ON ANY NOTES MAY VARY FROM THE ANTICIPATED YIELDS
TO THE EXTENT SUCH NOTES ARE PURCHASED AT A DISCOUNT OR PREMIUM AND TO THE
EXTENT THE RATE AND TIMING OF PAYMENTS THEREOF ARE SENSITIVE TO THE RATE AND
TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF THE LOANS.
NOTEHOLDERS SHOULD CONSIDER, IN THE CASE OF ANY NOTES PURCHASED AT A
DISCOUNT, THE RISK THAT A SLOWER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS
COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD AND,
IN THE CASE OF ANY NOTES PURCHASED AT A PREMIUM, THE RISK THAT A FASTER THAN
ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT
IS LOWER THAN THE ANTICIPATED YIELD.
Greenwich Capital Markets, Inc. (the "Underwriter") intends to make a
secondary market in the Notes but has no obligation to do so. There is
currently no secondary market for the Notes and there can be no assurance
that such a market will develop or, if it does develop, that it will
continue. See "Risk Factors," herein.
____________________
The Notes are being offered by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the Depositor are expected to be approximately
$58,305,617.43, plus accrued interest from the Cut-Off Date to, but not
including, the Closing Date, before deducting issuance expenses payable by
the Depositor.
The Notes are offered by the Underwriter, subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to
approval of certain legal matters by counsel. It is expected that delivery of
the Notes will be made in book-entry form only through the facilities of The
Depository Trust Company (the "Depository") on or about May 28, 1997.
____________________
This Prospectus Supplement does not contain complete information about
the offering of the Notes. Additional information is contained in the
Prospectus dated May 21, 1997 (the "Prospectus") which accompanies this
Prospectus Supplement and purchasers are urged to read both this Prospectus
Supplement and the Prospectus in full. Sales of the Notes may not be
consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus.
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Notes, whether or not participating in
this distribution, may be required to deliver a Prospectus Supplement and the
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and the Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
To the extent statements contained herein do not relate to historical or
current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the distributions to be made on, or the yield of, the Notes,
which risks and uncertainties are discussed under "Risk Factors" and
"Prepayment and Yield Considerations" herein. As a consequence, no assurance
can be given as to the actual distributions on, or the yield of, any Class of
Notes.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended, on or subsequent to the
date of this Prospectus Supplement and prior to the termination of the
offering of the Notes. The Depositor will provide without charge to each
person to whom this Prospectus Supplement and Prospectus are delivered, on
request of such person, a copy of any or all of the documents incorporated
herein by reference other than the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents).
Request should be made to Paul D. Stevelman, Assistant Secretary of Financial
Asset Securities Corp. in writing at 600 Steamboat Road, Greenwich,
Connecticut 06830.
AVAILABLE INFORMATION
In addition to the locations specified under "Available Information" in
the accompanying Prospectus, the Securities and Exchange Commission (the
"Commission") 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.
SUMMARY
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and in the accompanying Prospectus. Certain
capitalized terms used herein are defined elsewhere in the Prospectus
Supplement or in the Prospectus.
Issuer . . . . . . . . . . . . . Mego Mortgage Home Loan Owner Trust
1997-2 (the "Trust" or the
"Issuer"), a Delaware business
trust, established pursuant to a
trust agreement dated as of May 1,
1997 (the "Trust Agreement"), among
the Depositor, the Seller, the
Owner Trustee and the Co-Owner
Trustee.
Depositor . . . . . . . . . . . . . Financial Asset Securities Corp.
(the "Depositor"), a Delaware
corporation. The Depositor is an
indirect limited purpose finance
subsidiary of National Westminster
Bank Plc and an affiliate of
Greenwich Capital Markets, Inc.
(the "Underwriter"). See "The
Depositor" in the Prospectus and
"Method of Distribution" herein.
None of the Depositor, National
Westminster Bank Plc or any of
their affiliates or any other
person or entity (other than the
Securities Insurer to the extent
set forth herein) will insure or
guarantee or otherwise be obligated
with respect to the Notes.
Master Servicer . . . . . . . . . . Norwest Bank Minnesota, N.A. (the
"Master Servicer"), a national
banking association with its
executive offices at Sixth and
Marquette, Minneapolis, Minnesota
55479 and its master servicing
offices located at 11000 Broken
Land Parkway, Columbia, Maryland
21044.
The Seller, Servicer and Claims
Administrator . . . . . . . . . . Mego Mortgage Corporation ("Mego").
Pursuant to a home loan purchase
agreement (the "Home Loan Purchase
Agreement") dated as of May 1, 1997
between Mego and the Depositor,
Mego (in such capacity, the
"Seller") will sell the Loans to
the Depositor. Pursuant to a
servicing agreement (the "Servicing
Agreement") dated as of May 1, 1997
among Mego, the Issuer, the
Indenture Trustee, the Co-Owner
Trustee, the Contract of Insurance
Holder and the Master Servicer,
Mego (in such capacity, the
"Servicer") will service the Loans
on behalf of the Master Servicer.
Pursuant to a sale and servicing
agreement (the "Sale and Servicing
Agreement") dated as of May 1, 1997
among Mego, the Depositor, the
Master Servicer, the Indenture
Trustee, the Co-Owner Trustee, the
Contract of Insurance Holder and
the Trust, Mego (in such capacity,
the "Claims Administrator"), on
behalf of the Contract of Insurance
Holder, will administer claims
filed under the Contract of
Insurance (as defined herein).
Indenture Trustee, Co-Owner Trustee First Trust of New York, National
and Contract of Insurance Holder Association, a national banking
association, as trustee under the
Indenture (in such capacity, the
"Indenture Trustee"), as co-owner
trustee under the Trust Agreement
(in such capacity, the "Co-Owner
Trustee"), and as contract of
insurance holder under the Sale and
Servicing Agreement (in such
capacity, the "Contract of
Insurance Holder").
Owner Trustee . . . . . . . . . . . Wilmington Trust Company, as owner
trustee under the Trust Agreement
(the "Owner Trustee").
Custodian . . . . . . . . . . . . . First Trust National Association,
as the custodian (the "Custodian")
under the Custodial Agreement dated
as of May 1, 1997 among the
Depositor, the Issuer, the
Indenture Trustee, the Custodian
and Mego.
Closing Date . . . . . . . . . . . On or about May 22, 1997.
Cut-Off Date . . . . . . . . . . . May 1, 1997.
Distribution Date . . . . . . . . . The 25th day of each month or, if
such day is not a business day,
then the next succeeding business
day, commencing in June 1997 (each,
a "Distribution Date").
Due Period . . . . . . . . . . . . With respect to any Distribution
Date, the calendar month
immediately preceding such
Distribution Date (each, a "Due
Period").
Determination Date . . . . . . . . The fifth business day preceding
the related Distribution Date
(each, a "Determination Date").
Record Date . . . . . . . . . . . . For any Distribution Date, the last
business day of the month
immediately preceding the month in
which such Distribution Date occurs
(each, a "Record Date").
Securities Issued . . . . . . . . . The Home Loan Asset-Backed Notes,
Series 1997-2, which will consist
of the Class A-1, Class A-2, Class
A-3, Class A-4 and Class A-5 Notes
(collectively, the "Notes"), will
constitute the "Insured
Securities". Also being issued by
the Trust are the "Residual
Certificates" representing
undivided beneficial ownership
interests in the Trust. Only the
Notes are offered hereby.
Each Class of Notes will accrue
interest at the applicable per
annum rate set forth on the cover
hereof (each such rate, a "Note
Interest Rate"), payable monthly,
and will receive payments of
principal to the extent provided
below. The aggregate Class
Principal Balance of the Notes
initially will equal $58,794,841,
which represents 92.65% of the
Original Pool Principal Balance (as
defined below). The principal
amount of each Class of Notes
(each, a "Class Principal Balance")
on any date is equal to the
applicable Class Principal Balance
set forth on the cover hereof as of
the Closing Date minus the
aggregate of amounts actually
distributed as principal to the
holders of such Class. On any
date, the "Aggregate Note Principal
Balance" is the aggregate of the
Class Principal Balances of all
Classes of Notes on such date.
Payments with respect to the
Residual Certificates will be
subordinate in right of payment to
the Notes and will not be
guaranteed or insured by the
Securities Insurance Policy. The
Residual Certificates are not
offered hereby.
Final Maturity Date . . . . . . . . The outstanding principal amount of
each Class of Notes, to the extent
not previously paid, will be
payable in full on May 25, 2023
(the "Final Maturity Date").
However, it is anticipated that the
actual final Distribution Date for
each Class of Notes will occur
earlier, and may occur
significantly earlier, than the
Final Maturity Date.
Form and Registration of the
Notes . . . . . . . . . . . . . The Notes will initially be issued
only in book-entry form. Persons
acquiring beneficial ownership
interests in the Notes
("Noteholders") will hold such
Notes through the book-entry
facilities of The Depository Trust
Company ("DTC"). Transfers within
DTC will be made in accordance with
the usual rules and operating
procedures of DTC. So long as each
Class of Notes is in book-entry
form, each such Class of Notes will
be evidenced by one or more
certificates registered in the name
of the nominee of DTC. The
interests of such Noteholders will
be represented by book-entries on
the records of DTC and
participating members thereof. No
Noteholder will be entitled to
receive a definitive certificate
representing such person's
interest, except in the event that
Definitive Securities are issued
under the limited circumstances
described herein. All references
in this Prospectus Supplement to
any Class of Notes reflect the
rights of the Noteholders of such
Class only as such rights may be
exercised through DTC and its
participating members so long as
such Class of Notes is held by DTC.
See "Description of the Securities-
-General" herein and in the
Prospectus and "Description of the
Securities--Book-Entry Registration
of Securities" in the Prospectus.
The Noteholders' interests in each
Class of Notes will be held only in
minimum denominations of $1,000 and
integral multiples of $1 in excess
thereof.
Assets of the Trust . . . . . . . . On the Closing Date, the Trust will
purchase fixed-rate residential
home improvement loans, debt
consolidation loans and retail
installment sale contracts
(collectively, the "Loans") having
an aggregate principal balance as
of the opening of business on the
Cut-Off Date of approximately
$63,459,084 (the "Original Pool
Principal Balance") pursuant to the
Sale and Servicing Agreement.
The assets of the Trust primarily
will include the Loans. The assets
of the Trust will also include (i)
payments of principal in respect of
the Loans received on or after the
Cut-Off Date and payments of
interest in respect of the Loans
due on or after the Cut-Off Date;
(ii) amounts on deposit in the
Collection Account, Note
Distribution Account and
Certificate Distribution Account
(each as defined herein); (iii)
certain other ancillary or
incidental funds, rights and
properties related to the
foregoing; (iv) the rights to the
FHA Insurance Reserves attributable
to the FHA Loans (both as defined
below); and (v) the assignment of
all rights of the Depositor under
the Home Loan Purchase Agreement.
See "The Trust--General" herein.
The Trust will include the unpaid
principal balance of each Loan as
of the opening of business on the
Cut-Off Date (each, a "Cut-Off Date
Principal Balance"). The
"Principal Balance" of any Loan on
any day is equal to its Cut-Off
Date Principal Balance, minus all
principal reductions credited
against the Principal Balance of
such Loan on or after the Cut-Off
Date; provided that the "Principal
Balance" of any Defaulted Loan (as
defined herein) shall be deemed to
be zero as of the last day of the
Due Period in which such Loan
became a Defaulted Loan. With
respect to any date, the "Pool
Principal Balance" will be equal to
the aggregate of the Principal
Balances of the Loans as of such
date.
The Loans . . . . . . . . . . . . . As of the Cut-Off Date, Loans
representing approximately 95.7% of
the Original Pool Principal Balance
consist of closed-end fixed-rate
home improvement loans, debt
consolidation loans and retail
installment sales contracts
(collectively, the "Conventional
Loans") secured generally by
junior-lien mortgages, deeds of
trust and security deeds on
residential properties (which are
primarily condominiums, townhouses
and one- to four-family
residences). The residential
properties securing the
Conventional Loans, together with
residential properties securing the
Secured FHA Loans, are referred to
herein as the "Mortgaged
Properties". A substantial
majority of the Conventional Loans
are debt consolidation loans. In
addition, as of the Cut-Off Date,
Loans representing approximately
4.3% of the Original Pool Principal
Balance consist of either (i)
closed-end fixed-rate home
improvement loans and retail
installment sale contracts secured
by first- and junior-lien
mortgages, deeds of trust and
security deeds on residential
properties (including investment
properties) that will be partially
insured by the Federal Housing
Administration ("FHA") of the
United States Department of Housing
and Urban Development ("HUD") under
Title I of the National Housing Act
of 1934, as amended (the "Secured
FHA Loans") or (ii) closed-end
fixed-rate home improvement loans
and retail installment sale
contracts which are partially
insured by the FHA under the
Title I Program but which are
unsecured general obligations of
the related borrowers (the
"Unsecured FHA Loans", and together
with the Secured FHA Loans, the
"FHA Loans"). The Loans will not
be insured by primary mortgage
insurance policies or any pool
insurance policy. In addition,
with respect to the Secured FHA
Loans, the Master Servicer will not
require hazard insurance to be
maintained on the related Mortgaged
Properties. Moreover, the Loans
will not be guaranteed by the
Seller, the Depositor or any of
their respective affiliates.
Substantially all of the Loans will
be either unsecured or secured by
liens on Mortgaged Properties in
which the borrowers have little or
no equity (i.e., the related
combined loan-to-value ratios
exceed 100%) at the time of
origination of such Loans. See
"Risk Factors--Additional Factors
Affecting Delinquencies,
Foreclosures and Losses on Loans"
and "The Pool" herein and "The
Trust Fund--The Loans" in the
Prospectus.
The Servicer may, at its option,
either (a) repurchase any Defaulted
Loan or (b) remove any such
Defaulted Loan and substitute a
Qualified Substitute Loan (up to an
aggregate principal amount of Loans
representing 10% of the Original
Pool Principal Balance). As used
herein, the term "Defaulted Loan"
means any Loan with respect to
which (i) the Mortgaged Property
has been repossessed and sold, (ii)
any portion of a scheduled monthly
payment of principal and interest
is in excess of 180 days past due
or (iii) a claim has been paid or
finally rejected pursuant to the
Contract of Insurance.
The Seller will be obligated either
to repurchase any Loan as to which
a representation or warranty has
been breached, which breach remains
uncured for a period of 60 days and
has a materially adverse effect on
the interests of the Noteholders or
the Securities Insurer in such Loan
(each, a "Defective Loan"), or to
remove such Defective Loan and
substitute a Qualified Substitute
Loan. As used herein, a "Qualified
Substitute Loan" is a Loan having
characteristics generally the same
as or substantially similar to the
characteristics of the Loan which
it replaces. Any repurchase of a
Defective Loan will result in an
accelerated payment of principal on
the Notes. See "The Pool--
Repurchase or Substitution of
Loans" herein.
Priority of Distributions . . . . . On each Distribution Date,
distributions on the Securities
will be made in accordance with the
priorities described below.
Interest . . . . . . . . . . . . . On each Distribution Date, to the
extent of funds available therefor
in accordance with the priorities
described herein, interest will be
distributed with respect to each
Class of Notes in an amount equal
to the related Class Interest
Distributable Amount (defined
herein) for such Distribution Date.
As to any Distribution Date and any
Class of Notes, the "Class Interest
Distributable Amount" is equal to
the sum of (a) the interest accrued
during the related Due Period (as
defined herein) at the applicable
Note Interest Rate on the related
Class Principal Balance (the "Class
Monthly Interest Distributable
Amount") and (b) any related Class
Interest Carry-Forward Amount (as
defined below). As to any
Distribution Date and any Class of
Notes, the "Class Interest Carry-
Forward Amount" is equal to the
excess of (A) the sum of the
related Class Monthly Interest
Distributable Amount for the
preceding Distribution Date and any
related Class Interest Carry-
Forward Amount on such preceding
Distribution Date, over (B) the
amount that is actually paid as
interest to the Noteholders of such
Class on such preceding
Distribution Date, plus interest on
such excess to the extent permitted
by law at the applicable Note
Interest Rate.
The interest entitlement of each
Class of Notes will be reduced on
each Distribution Date by such
Class's pro rata share of
Prepayment Interest Shortfalls (to
the extent not covered by reduction
of the Servicing Fee) and Civil
Relief Act Interest Shortfalls.
See, "Description of the Transfer
and Servicing Agreements--Servicing
Compensation and Payment of
Expenses" and "Risk Factors--
Additional Factors affecting
Delinquencies, Foreclosures and
Losses on Loans--Civil Relief Act
Shortfalls" herein.
The Master Servicer is required to
deposit in the Note Distribution
Account with respect to each
Distribution Date, an amount equal
to the scheduled installment of
interest due on each Loan (other
than a Defaulted Loan) during the
related Due Period but not received
as of the related Determination
Date, net of the related Servicing
Fee (each, an "Interest Advance").
The Master Servicer is not required
to make any Interest Advance that
it determines would be
nonrecoverable. Interest Advances
are reimbursable to the Master
Servicer subject to certain
conditions and restrictions, and
are intended to provide liquidity
for the required distributions of
interest on the Notes.
Principal . . . . . . . . . . . . On each Distribution Date, to the
extent of funds available therefor
and in accordance with the
priorities described herein, the
Noteholders' Principal
Distributable Amount and the
Distributable Excess Spread (each
as defined herein) generally will
be distributed sequentially to the
holders of the Class A-1, Class A-
2, Class A-3, Class A-4 and Class
A-5 Notes, in that order, until the
respective Class Principal Balances
thereof are reduced to zero.
Credit Enhancement
General . . . . . . . . . . . . . Credit enhancement with respect to
the Insured Securities will be
provided by the Securities
Insurance Policy (as defined
below). As further described
herein, credit enhancement with
respect to the Insured Securities,
in addition to that provided by the
Securities Insurance Policy, will
be provided by (i) the FHA
Insurance to the extent described
herein, (ii) the subordination in
priority of payments in respect of
the Residual Certificates to
payments in respect of the Notes
and (iii) the overcollateralization
feature described herein. See "The
Title I Loan Program and the
Contract of Insurance" herein.
Securities Insurance Policy . . . The Depositor will obtain a
securities guaranty insurance
policy in the name of the Indenture
Trustee and the Co-Owner Trustee
for the benefit of the holders of
the Insured Securities (the
"Securities Insurance Policy") from
the Securities Insurer. Pursuant
to the Securities Insurance Policy,
the Securities Insurer will
irrevocably and unconditionally
guaranty payment on each
Distribution Date to the Indenture
Trustee, for the benefit of the
Noteholders, of the Noteholders'
Interest Distributable Amount and
the related Noteholders' Guaranteed
Principal Distribution Amount. The
Securities Insurer's obligations
under the Securities Insurance
Policy will be discharged to the
extent funds equal to the
applicable Insured Payments are
received by the Indenture Trustee
whether or not such funds are
properly applied by the Indenture
Trustee. See "Description of
Credit Enhancement--The Securities
Insurance Policy" herein. The
Securities Insurance Policy is not
cancelable for any reason. The
Securities Insurance Policy does
not guarantee any specified rate of
prepayments, nor does it provide
funds for any early redemption of
any of the Notes. For a
description of the Securities
Insurer, See "Description of Credit
Enhancement--The Securities
Insurer" herein.
Subordination . . . . . . . . . . The rights of the holders of the
Residual Certificates to receive
distributions from amounts
available in the Certificate
Distribution Account on each
Distribution Date will be
subordinate in priority to the
rights of the holders of the Notes
to receive payments in respect
thereof as described herein. Such
subordination in priority of the
Residual Certificates to the Notes
is intended to enhance the
likelihood of regular receipt by
the holders of the Notes of the
full amount of interest and
principal distributions due to such
holders and to afford such holders
protection against losses on the
Loans. See "Description of Credit
Enhancement--Subordination and
Allocation of Losses" herein.
Overcollateralization . . . . . . The credit enhancement available to
the Notes includes (i) the initial
Overcollateralization Amount (as
defined herein) (which is equal to
$4,664,242.77 or 7.35% of the
Original Pool Principal Balance)
and (ii) a feature providing for
limited acceleration of principal
distributions on the Notes in the
early months of the transaction
that is intended to create
additional overcollateralization.
This acceleration of principal
distributions on the Notes is
achieved by application of
Distributable Excess Spread (as
defined herein) as principal on the
Notes. Once the level of
overcollateralization specified in
the Sale and Servicing Agreement is
reached, and subject to the
provisions described herein under
"Description of the Securities--
Overcollateralization Provisions",
the acceleration feature will
cease, unless necessary to maintain
the required level of
overcollateralization.
The Sale and Servicing Agreement
provides that, subject to certain
trigger tests, the required level
of overcollateralization may
increase or decrease over time. An
increase would result in a
temporary period of accelerated
amortization of the Notes to
increase the actual level of
overcollateralization to its
required level; a decrease would
generally result in a temporary
period of decelerated amortization
to reduce the actual level of
overcollateralization to its
required level. See "Description
of the Securities--Priority of
Distributions" herein.
The Insurer . . . . . . . . . . . MBIA Insurance Corporation (the
"Securities Insurer"), a stock
insurance company organized under
the laws of the State of New York.
See "Description of Credit
Enhancement--The Securities
Insurer" herein.
Servicing . . . . . . . . . . . . . The Master Servicer is responsible
for servicing, managing and making
collections on the Loans. All
collections in respect of the Loans
will be deposited into the
Collection Account or the Note
Distribution Account as described
herein. Not later than the fifth
business day prior to each
Distribution Date (the
"Determination Date"), the
Indenture Trustee will calculate
the amounts to be paid, as
described herein, to the holders of
the Securities (the
"Securityholders") on such
Distribution Date. See
"Description of the Securities--
Distributions on the Notes." On
each Distribution Date, the Master
Servicer will receive a monthly
master servicing fee (each a
"Master Servicing Fee") in the
amount of 0.08% per annum (the
"Master Servicing Fee Rate") on the
Pool Principal Balance as of the
first day of the immediately
preceding Due Period.
The Servicer will service the Loans
on behalf of the Master Servicer
pursuant to the terms of the
Servicing Agreement. On each
Distribution Date, the Servicer
will receive a monthly servicing
fee (the "Servicing Fee") in an
amount equal to 1.00% per annum
(the "Servicing Fee Rate") on the
Pool Principal Balance as of the
first day of the immediately
preceding Due Period, subject to
certain reductions as described
herein. See "Description of the
Transfer and Servicing Agreements--
Servicing Compensation and Payment
of Expenses." In certain limited
circumstances, the Master Servicer
may resign or be removed, in which
event either the Indenture Trustee
or a third-party servicer will be
appointed as a successor Master
Servicer. See "Description of the
Transfer and Servicing Agreements--
Certain Matters Regarding the
Master Servicer and Servicer."
Optional Redemption . . . . . . . . Each of Mego, the Master Servicer
or the Securities Insurer may, on
or after the Distribution Date on
which the Pool Principal Balance
declines to 10% or less of the
Original Pool Principal Balance,
purchase the then outstanding Loans
at the price equal to the
Termination Price (as defined
herein), thereby causing an early
redemption of the Notes. The Owner
Trustee will thereafter cause the
Indenture Trustee to redeem the
Notes by paying (i) to the
Noteholders, an amount in respect
of the Notes equal to the then
outstanding Class Principal Balance
of each Class of Notes, plus
accrued interest thereon at the
applicable Note Interest Rate,
(ii) to the Securities Insurer, an
amount equal to any amounts owed to
the Securities Insurer under the
Insurance Agreement and (iii) to
the applicable parties, any unpaid
trust fees and expenses, and any
remaining amounts to the holders of
the Residual Certificates.
Tax Status . . . . . . . . . . . . In the opinion of Tax Counsel (as
defined herein) for federal income
tax purposes, the Notes will be
characterized as debt, and the
Trust will not be characterized as
an association (or publicly traded
partnership) taxable as a
corporation or as a taxable
mortgage pool. Each Noteholder, by
the acceptance of a Note, will
agree to treat the Notes as
indebtedness. See "Certain
Material Federal Income Tax
Considerations--Tax
Characterization of the Trust as a
Partnership" and "--Tax
Consequences to Foreign
Certificateholders" in the
Prospectus for additional
information concerning the
application of federal income tax
laws to the Trust and the
Securities.
ERISA . . . . . . . . . . . . . . . Generally, plans that are subject
to the requirements of ERISA and
the Code are permitted to purchase
instruments like the Notes that are
debt under applicable state law and
have no "substantial equity
features" without reference to the
prohibited transaction requirements
of ERISA and the Code. In the
opinion of ERISA Counsel (as
defined herein), the Notes will be
classified as indebtedness without
substantial equity features for
ERISA purposes. However, if the
Notes are deemed to be equity
interests and no statutory,
regulatory or administrative
exemption applies, the Trust will
hold plan assets by reason of a
Plan's investment in the Notes.
Accordingly, any Plan fiduciary
considering whether to purchase the
Notes on behalf of a Plan should
consult with its counsel regarding
the applicability of the provisions
of ERISA and the Code and the
availability of any exemptions.
See "ERISA Considerations" herein
and in the Prospectus.
Legal Investment . . . . . . . . . The Notes will not constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA"), because some Loans are
not secured by Mortgages and other
Loans are secured by Mortgages that
are not first mortgages.
Accordingly, many institutions with
legal authority to invest in
comparably rated securities based
solely on first mortgages may not
be legally authorized to invest in
the Notes. See "Legal Investment
Considerations" herein and "Legal
Investment" in the Prospectus.
Ratings of the Notes . . . . . . . It is a condition to the issuance
of the Notes that each of the Class
A-1 Notes, Class A-2 Notes, Class
A-3 Notes, Class A-4 Notes and
Class A-5 Notes be rated "AAA" by
Standard & Poor's, a division of
The McGraw-Hill Companies, Inc.
("Standard & Poor's") and "Aaa" by
Moody's Investors Service, Inc.
("Moody's" and, together with
Standard & Poor's, the "Rating
Agencies"). A security rating does
not address the frequency of
principal prepayments or the
corresponding effect on yield to
holders of the Notes. None of the
Depositor, the Seller, the Master
Servicer, the Servicer, the
Indenture Trustee, the Owner
Trustee, the Claims Administrator,
the Contract of Insurance Holder,
the Securities Insurer or any other
person is obligated to maintain the
rating on any Class of Notes.
RISK FACTORS
Prospective investors in the Notes should consider the following risk
factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with the purchase of Notes. These factors are
intended to identify the significant sources of risk affecting an investment
in the Notes. Unless the context indicates otherwise, any numerical or
statistical information presented is based upon the characteristics of the
Loans proposed to be included in the Pool as of the Cut-Off Date.
Investors are urged to carefully consider, among other things, the
following factors in connection with a purchase of the Notes.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS. The yields to maturity of the Notes may vary from
the anticipated yields to the extent the Notes are purchased at a discount or
premium and to the extent the rate and timing of payments thereon are
sensitive to the rate and timing of principal payments (including
prepayments) of the Loans. Noteholders should consider, in the case of any
Notes purchased at a discount, the risk that a slower than anticipated rate
of principal payments could result in an actual yield that is lower than the
anticipated yield and, in the case of any Notes purchased at a premium, the
risk that a faster than anticipated rate of principal payments could result
in an actual yield that is lower than the anticipated yield. In addition,
the timing of changes in the rate of principal prepayments on the Loans may
significantly affect an investor's actual yield to maturity, even if the
average rate of principal prepayments is consistent with such investor's
expectation. In general, the earlier a principal prepayment on a Loan
occurs, the greater the effect of such principal prepayment on an investor's
yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated
by the investor during the period immediately following the issuance of the
Notes may not be offset by a subsequent like decrease (or increase) in the
rate of principal prepayments.
The extent to which the yield to maturity of a Note may vary from the
anticipated yield will depend upon the degree to which it is purchased at a
premium or discount, and the degree to which the timing of distributions to
holders thereof is sensitive to scheduled payments, prepayments,
liquidations, defaults, delinquencies, substitutions, modifications and
repurchases of Loans and to the distribution of Distributable Excess Spread.
In the case of any Note purchased at a discount, an investor should consider
the risk that a slower than anticipated rate of principal distributions to
the holders of the Notes (including without limitation principal prepayments
on the Loans) could result in an actual yield to such investor that is lower
than the anticipated yield and, in the case of any Note purchased at a
premium, the risk that a faster than anticipated rate of principal
distributions to the holders of the Note (including without limitation
principal prepayments on the Loans) could result in an actual yield to such
investor that is lower than the anticipated yield. On each Distribution
Date, until the excess of (A) the Pool Principal Balance as of the end of the
preceding Due Period over (B) the Aggregate Note Principal Balance (such
excess, the "Overcollateralization Amount") equals or exceeds the required
level of overcollateralization specified in the Sale and Servicing Agreement,
the allocation of the Distributable Excess Spread for such Distribution Date
as an additional distribution of principal on the Notes will accelerate the
amortization of the Aggregate Note Principal Balance relative to the
amortization of the Pool Principal Balance; however, on any date specified in
the Sale and Servicing Agreement that the required level of
overcollateralization is permitted to be reduced, any reduction of the
Noteholders' Principal Distributable Amount, as described herein, would
result in a slower amortization of the Aggregate Note Principal Balance.
Further, in the event that significant prepayments of principal distributions
are made to holders of the Notes as a result of prepayments, liquidations,
repurchases and purchases of the Loans or distributions of Distributable
Excess Spread, there can be no assurance that holders of the Notes will be
able to reinvest such distributions in a comparable alternative investment
having a comparable yield. See "Prepayment and Yield Considerations" herein.
PREPAYMENT CONSIDERATIONS AND RISKS. The rates of principal payment of
the Notes and the aggregate amount of distributions and yields to maturity of
the Notes will be related to, among other things, the rate and timing of
payments of principal of the Loans. The rate of principal payments on the
Loans will in turn be affected by the amortization of the Loans and by the
rate of principal prepayments thereon (including for this purpose,
prepayments resulting from (i) refinancing, (ii) liquidations of the Loans
due to defaults, casualties and condemnations and (iii) repurchases by the
Seller, Master Servicer and the Servicer pursuant to the Transfer and
Servicing Agreements (as defined herein)). Generally, if prevailing interest
rates on similar loans fall significantly below the interest rates on the
Loans, the Loans may be subject to higher prepayment rates than if prevailing
rates remain at or above the interest rates on the Loans. Conversely, if
prevailing interest rates rise significantly above the interest rates on the
Loans, the rate of prepayments may decrease. As discussed below, the Loans
may be prepaid by the obligors thereunder (the "Obligors") at any time. The
Mortgage Loans are subject to the "due-on-sale" provisions included therein.
Prepayments, liquidations and purchases of the Loans (including any purchase
by the Master Servicer, the Securities Insurer or Mego of the remaining Loans
and Mortgaged Properties (title to which has been acquired by the Trust) in
connection with the optional repurchase of the Loans, as described herein)
will, subject to certain conditions, result in distributions to holders of
the Notes then entitled to receive principal distributions of principal that
would otherwise be distributed over the remaining terms of such Loans. In
addition, the overcollateralization provisions will result in a limited
acceleration of principal payments to the holders of the Notes. See
"Description of the Securities" herein. Since the rate of payment of
principal of the Loans will depend on future events and a variety of factors,
no assurance can be given as to such rate or the rate of principal
prepayments.
All of the Loans may be prepaid in whole or in part at any time;
however, with respect to certain Loans, a prepayment charge may apply to full
and partial prepayments generally during the first three years after
origination. Home loans such as the Loans have been originated in
significant volume only during the past few years, and neither the Seller,
Depositor nor the Master Servicer is aware of any publicly available studies
or statistics on the rate of prepayment of such loans. The Trust's
prepayment experience may be affected by a wide variety of factors, including
general economic conditions, interest rates, the availability of alternative
financing and homeowner mobility. In addition, substantially all of the
Loans contain due-on-sale provisions and the Master Servicer intends to
enforce such provisions unless (i) such enforcement is not permitted by
applicable law or (ii) the Master Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related
Mortgaged Property to assume the Loan. To the extent permitted by applicable
law, such assumption will not release the original borrower from its
obligation under any such Loan. See "Certain Legal Aspects of the Loans--
`Due-on-Sale' Clauses" in the Prospectus.
DEFAULTS AND DELINQUENT PAYMENTS. The yields to maturity of the Notes
will be sensitive to defaults and delinquent payments on the Loans. Neither
the Master Servicer nor the Servicer will be required to advance amounts in
respect of delinquent payments of principal of the Loans. If a holder of a
Note calculates its anticipated yield based on an assumed rate of default and
amount of losses that is lower than the default rate and amount of losses
actually incurred and such actual losses are not covered by the Securities
Insurance Policy, its actual yield to maturity will be lower than that so
calculated and could, in the event of substantial losses, be negative. The
timing of losses that are not covered by the Securities Insurance Policy will
also affect an investor's actual yield to maturity even if the rate of
defaults and severity of such losses are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater is the
effect on an investor's yield to maturity. There can be no assurance as to
the delinquency, foreclosure or loss experience with respect to the Loans.
PAYMENT DELAY. Payments of principal and interest on the Loans in
respect of any Due Period generally will not be distributed to the holders of
the Notes until the Distribution Date in the following calendar month. As a
result, the monthly distributions to the holders of the Notes generally will
reflect Obligor payments during the prior calendar month. Each Distribution
Date will be on the 25th day of each month (or the next succeeding business
day), and the first Distribution Date will not occur until June 1997. Thus,
the effective yields to the holders of the Notes will be lower than those
otherwise produced by the related Note Interest Rates because distributions
on the Notes in respect of any given month will not be made until on or about
the 25th day of the following month and will not bear interest during such
delay.
RATINGS OF SECURITIES INSURER
The rating of each Class of Notes depends primarily on an assessment by
the Rating Agencies of the claims-paying ability of the Securities Insurer.
Any reduction in a rating assigned to the claims-paying ability of the
Securities Insurer below the rating initially given to the Notes may result
in a reduction in the rating of the Notes. There can be no assurance that
future adverse economic events will not cause a reduction in the rating of
the Securities Insurer or otherwise impair the ability of the Securities
Insurer to make any Insured Payments pursuant to the Securities Insurance
Policy. See "Description of Credit Enhancement--The Securities Insurance
Policy" herein.
RECENT ORIGINATION OF LOANS
No Loan was 30 days or more late in its scheduled monthly payments of
principal and interest as of the opening of business on the Cut-Off Date;
however, approximately 62.1% of the Original Pool Principal Balance consists
of Loans that have a first scheduled monthly payment due on or after April 1,
1997, and therefore, it was not possible for such Loans to have had a
scheduled monthly payment that was 30 days or more late as of the Cut-Off
Date.
ADDITIONAL FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES ON LOANS
RISK OF HIGHER DEFAULT RATES ASSOCIATED WITH CALIFORNIA REAL PROPERTY.
Since a substantial portion (approximately 24.9% by Original Pool Principal
Balance) of the Mortgaged Properties is located in California, an overall
decline in the California residential real estate market could adversely
affect the values of the Mortgaged Properties securing the related Loans (as
defined herein) such that the Principal Balances of such Loans, together with
any primary financing on such Mortgaged Properties, could equal or exceed the
value of such Mortgaged Properties. As the residential real estate market is
influenced by many factors, including the general condition of the economy
and interest rates, no assurances can be given that the California real
estate market will not weaken further. If the California residential real
estate market should experience an overall decline in property values after
the dates of origination of the Loans on California properties, the rates of
losses on the Loans may be expected to increase, and may increase
substantially. Because a substantial portion of the Mortgaged Properties is
in California, the risk of occurrence of earthquake damage exists that may
not be covered by any hazard insurance.
NATURE OF MORTGAGES; MORTGAGED PROPERTIES. The Mortgage Loans (as
defined herein) are secured by first- and junior-lien mortgages and security
deeds. Mortgage Loans secured by junior-lien mortgages are entitled to
proceeds that remain from the sale of the related Mortgaged Property after
any related senior mortgage loan or mortgage loans and prior statutory liens
have been satisfied. In the event that such proceeds are insufficient to
satisfy such loans and prior liens in the aggregate or any FHA Insurance, if
applicable, is insufficient or unavailable, the Trust and, accordingly, the
Noteholders, bear (i) the risk of delay in distributions while a deficiency
judgment against the Obligor is obtained and (ii) the risk of loss if the
deficiency judgment cannot be obtained or is not realized upon. See "Certain
Legal Aspects of the Loans" in the Prospectus.
Furthermore, neither the Conventional Loans nor the Secured FHA Loans
generally are required to be written with any equity in the Mortgaged
Property above the aggregate amount of the liens (including the amount of the
related lien securing the Mortgage Loan on the related Mortgaged Property).
In addition, a junior lienholder may not foreclose on the property securing a
junior lien unless it forecloses subject to the senior lien(s), in which case
it must either pay the entire amount due on the senior lien(s) to the senior
mortgagee at or prior to the foreclosure sale or undertake the obligation to
make payments on the senior mortgage(s) in the event the mortgagor is in
default thereunder. See "Certain Legal Aspects of the Loans" in the
Prospectus. In servicing loans in their respective portfolios such as the
Conventional Loans and the Secured FHA Loans, it is not the Master Servicer's
or the Servicer's practice to satisfy the senior lien(s) at or prior to the
foreclosure sale, nor to advance funds to keep the senior mortgage(s)
current. The Trust will have no source of funds to satisfy the senior
mortgagee(s) or make payments due to the senior mortgagee(s), and therefore,
Noteholders should not expect that any senior mortgage(s) will be kept
current by the Trust for the purpose of protecting the Trust's junior lien.
As a result, it is not expected that the Master Servicer or the Servicer will
pursue foreclosure proceedings with respect to the Loans secured by a junior
lien on a Mortgaged Property. See "The Title I Loan Program and the Contract
of Insurance" herein.
As of the Cut-Off Date, the Combined Loan-to-Value (as defined herein)
ratios for the Conventional Loans ranged from approximately 22.0% to 125.0%,
with approximately 86.8% of such Conventional Loans having Combined Loan-to-
Value ratios in excess of 100%. As of the Cut-Off Date, the weighted average
Combined Loan-to-Value ratio of such Conventional Loans was approximately
113.5%. Accordingly, the Mortgaged Properties may not provide adequate
security for the Loans. Even assuming that a Mortgaged Property provides
adequate security for the related Mortgage Loan, substantial delays could be
encountered in connection with the liquidation of a Loan that would result in
current shortfalls in distributions to the holders of the Notes to the extent
such shortfalls are not covered by the credit enhancement described herein.
In addition, liquidation expenses relating to any Defaulted Loan (such as
legal fees, real estate taxes, and maintenance and preservation expenses)
would reduce the liquidation proceeds otherwise payable to the holders of the
Notes. In the event that any Mortgaged Property fails to provide adequate
security for the related Loan, any losses in connection with such Loan will
be borne by holders of the Notes as described herein to the extent that the
credit enhancement described herein is insufficient to absorb all such
losses.
CIVIL RELIEF ACT SHORTFALLS. The amount required to be distributed as
interest on the Notes may be reduced as a result of shortfalls ("Civil Relief
Act Interest Shortfalls") on the Loans attributable to the application of the
Civil Relief Act (as defined herein). See "Description of the Securities--
Distributions of Interest" and "Certain Legal Aspects of the Loans--Soldiers'
and Sailors' Civil Relief Act" in the Prospectus. Civil Relief Act Interest
Shortfalls will not be covered by the Master Servicer, the Servicer or the
Securities Insurer.
LEGAL CONSIDERATIONS. The Seller will warrant that the transfer of the
Loans from the Seller to the Depositor pursuant to the Home Loan Purchase
Agreement will be treated by the Seller and the Depositor as a sale of the
Loans by the Seller to the Depositor. The Seller will warrant that such
transfer is a sale of its interest in the Loans. In the event of an
insolvency of the Seller, the bankruptcy trustee of the Seller may attempt to
recharacterize the sale of the Loans as a borrowing by the Seller secured by
a pledge of the Loans. If such attempt were successful, the Trust would have
a perfected security interest in the Loans. If the bankruptcy trustee
decided to challenge such transfer, delays in payments on the Notes and
possible reductions in the amount thereof could occur. The Depositor will
warrant in the Sale and Servicing Agreement that the transfer of the Loans to
the Trust is a valid transfer of all of the Depositor's right, title and
interest in the Loans to the Trust.
The assignments to the Indenture Trustee of any mortgage or deed of
trust securing a Mortgage Loan will be recorded in the appropriate public
office for real property records within the time period specified in the Sale
and Servicing Agreement, except where, in the opinion of counsel, such
recording is not required to protect the Indenture Trustee's interest in the
related Mortgage Loan against the claim of any subsequent transferee or any
successor to a creditor of the Depositor or the Seller. See "Description of
the Transfer and Servicing Agreements--Sale and Assignment of the Loans"
herein and "Certain Legal Aspects of the Loans" in the Prospectus.
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE LOANS. Applicable
state laws generally regulate interest rates and other charges and require
certain disclosures. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability to collect all or part of the principal of or interest on the Loans,
may entitle the Obligor to a refund of amounts previously paid and, in
addition, could subject the Trust as the owner of the Loans to damages and
administrative enforcement. See "Risk Factors--Certain Other Legal
Considerations Regarding the Loans" in the Prospectus.
LIMITATIONS ON REPURCHASE OR REPLACEMENT OF DEFECTIVE LOANS BY SELLER
Pursuant to the Sale and Servicing Agreement, the Seller has agreed to
cure in all material respects any breach of the Seller's representations and
warranties set forth in the Sale and Servicing Agreement with respect to
Defective Loans. If the Seller cannot cure such breach within a specified
period of time, the Seller is required to repurchase such Defective Loans
from the Trust or substitute other loans for such Defective Loans and to
indemnify the Trust and the Securities Insurer for certain losses incurred by
the Trust with respect to Defective Loans in excess of the proceeds received
from the repurchase or substitution of such Defective Loans. For a summary
description of the Seller's representations and warranties, See "The
Agreements--Assignment of the Trust Fund Assets" in the Prospectus.
If the Seller repurchases, or is obligated to repurchase, defective home
loans from any other series of asset-backed securities, the financial ability
of the Seller to repurchase Defective Loans from the Trust may be adversely
affected. In addition, other events relating to the Seller and its home
lending can occur that would adversely affect the financial ability of the
Seller to repurchase Defective Loans from the Trust, including without
limitation the sale or other disposition of all or any significant portion of
its assets. If the Seller is unable to repurchase or replace a Defective
Loan, then the Master Servicer, on behalf of the Trust, will cause the
Servicer to pursue other customary and reasonable efforts, if any, to recover
the maximum amount possible with respect to such Defective Loan, and any
resulting loss will be borne by the holders of the Notes to the extent that
such loss is not otherwise covered by amounts available from the credit
enhancement provided for the Notes, including, the Securities Insurance
Policy. See "The Pool--Repurchase or Substitution of Loans" herein.
ADDITIONAL FACTORS RELATING TO FHA LOANS
LIMITATIONS ON FHA INSURANCE. The availability of FHA Insurance
following a default on an FHA Loan is limited and is subject to a number of
conditions, including strict compliance by the Seller, the Contract of
Insurance Holder, the Claims Administrator, the Master Servicer and the
Servicer with FHA Regulations in originating and servicing the FHA Loan and
limits on the aggregate insurance coverage available with respect to all
Title I Loans then owned and reported for FHA Insurance by the Contract of
Insurance Holder. The availability of FHA Insurance in respect of the FHA
Loans is also limited to the extent of the Trust Designated Insurance Amount.
Although the Seller has represented that it has complied with all applicable
FHA Regulations, such regulations are susceptible to differences in
interpretation. The Contract of Insurance Holder is not required to obtain,
and has not obtained, approval from FHA of the origination and servicing
practices of the Seller, the Master Servicer and the Servicer. Failure to
comply with all FHA Regulations may result in a denial of FHA Insurance
claims, and there can be no assurance that FHA's interpretation of its
regulations will not become stricter in the future. In addition, any claim
paid by FHA will cover, at most, 90% of the sum of the unpaid principal on
the related FHA Loan, a portion of the unpaid interest and certain other
liquidation costs up to the Contract of Insurance Holder's aggregate amount
of FHA insurance coverage. The Seller and, in limited circumstances, the
Master Servicer have agreed in the Sale and Servicing Agreement to purchase
from the Trust any FHA Loan that is rejected by the FHA for insurance
benefits under the Contract of Insurance (other than rejection for clerical
error in computing the claim amount or due to the exhaustion of the Combined
FHA Insurance Amount). See "The Title I Loan Program and the Contract of
Insurance" herein.
UNSECURED FHA LOANS. As of the Cut-Off Date, Loans representing
approximately 0.7% of the Original Pool Principal Balance were Unsecured FHA
Loans. A default by an Obligor on an Unsecured FHA Loan or the application
of federal bankruptcy laws and state debtor relief laws could result in such
loan being written-off by the Servicer or Master Servicer. In the event of a
default of an Unsecured FHA Loan, if the FHA Insurance is insufficient and
the Securities Insurer does not perform its obligations under the Securities
Insurance Policy, the Trust and, accordingly, the Noteholders will bear (i)
the risk of delay in distributions while a judgment against the Obligor is
obtained and (ii) the risk of loss if the judgment cannot be obtained or is
not realized upon.
THE TRUST
GENERAL
Mego Mortgage Home Loan Owner Trust 1997-2 (the "Trust"), is 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 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 other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto
or in connection therewith.
The Residual Certificates represent undivided beneficial ownership
interests in the Trust. The net proceeds from the sale of the Notes will be
used by the Trust to purchase the Loans from the Depositor pursuant to the
Sale and Servicing Agreement.
On the Closing Date, the Trust will purchase the Loans having an
aggregate principal balance as of the opening of business on the Cut-Off Date
of approximately $63,459,084 (the "Original Pool Principal Balance") from the
Depositor pursuant to a sale and servicing agreement dated as of May 1, 1997
(as amended and supplemented from time to time, the "Sale and Servicing
Agreement"), among the Seller, the Trust, the Depositor, the Master Servicer,
the Servicer, the Claims Administrator, the Contract of Insurance Holder, the
Co-Owner Trustee and the Indenture Trustee.
The assets of the Trust will primarily include the Loans, which will
either be unsecured or will be secured by first- or junior-lien Mortgages on
the Mortgaged Properties. See "The Pool" herein. The assets of the Trust
will also include (i) payments in respect of principal of the Loans received
on or after the Cut-Off Date and payments of interest in respect of the Loans
due on or after the Cut-Off Date; (ii) amounts on deposit in the Collection
Account, Note Distribution Account and Certificate Distribution Account;
(iii) an assignment of the Depositor's rights under the Home Loan Purchase
Agreement; (iv) the rights to the FHA Insurance Reserves (defined herein)
attributable to the FHA Loans; and (v) certain other ancillary or incidental
funds, rights and properties related to the foregoing.
The Trust will include the unpaid principal balance of each Loan as of
the opening of business on the Cut-Off Date (the "Cut-Off Date Principal
Balance"). The "Principal Balance" of a Loan on any day is equal to its
related Cut-Off Date Principal Balance, minus all principal reductions
credited against the Principal Balance of such Loan on or after the Cut-Off
Date. With respect to any date, the "Pool Principal Balance" will be equal
to the aggregate Principal Balances of all Loans as of such date.
The Master Servicer is obligated to service the Loans pursuant to the
Sale and Servicing Agreement (collectively with the Indenture, the
Administration 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 Compensation
and Payment of Expenses" herein. The Master Servicer's servicing obligations
will, in turn, be performed by the Servicer, on behalf of the Master
Servicer, pursuant to the Servicing Agreement, in exchange for the
compensation described herein. See "Description of the Transfer and
Servicing Agreements--Servicing Compensation and Payment of Expenses" 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.
THE OWNER TRUSTEE AND CO-OWNER TRUSTEE
Wilmington Trust Company will act 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 19890-0001.
Certain functions of the Owner Trustee under the Trust Agreement and the
Sale and Servicing Agreement will be performed by First Trust of New York,
National Association, in its capacity as Co-Owner Trustee under the Trust
Agreement and the Sale and Servicing Agreement, including maintaining the
Certificate Distribution Account and making distributions therefrom.
However, upon the occurrence and continuation of a Securities Insurer
Default, the Co-Owner Trustee's duties shall be limited to acting as Contract
of Insurance Holder; all other duties of the Co-Owner Trustee will be
performed by the Owner Trustee.
MEGO MORTGAGE CORPORATION
GENERAL
Mego Mortgage Corporation ("Mego"), a Delaware corporation commenced
operations in March 1994. Mego is a publicly traded company listed on the
NASDAQ National Market. Mego primarily originates, purchases and services
conventional, uninsured home improvement or home equity loans typically
undertaken to pay for a home improvement project, a combination of home
improvement and debt consolidation or solely for debt consolidation
("conventional loans"). All of the conventional loans are secured by a first-
or junior-lien mortgage on one-to four-family residences (including
condominiums and townhomes) that are the borrower's principal residence.
Mego generally originates conventional loans to high credit quality borrowers
who tend to have limited equity in their residence after giving effect to the
amount of senior loans.
Mego is also an approved Title I lender that is engaged in the business
of originating, purchasing, selling and servicing loans for property
improvement that qualify under the provisions of Title I (such loans, "Title
I Loans" and the program, the "Title I Program") of the National Housing Act
of 1934, as amended, which is administered by the Federal Housing
Administration (the "FHA") of the U.S. Department of Housing and Urban
Development ("HUD"). The principal amounts of the Title I Loans purchased or
originated by Mego generally range from a minimum of $2,500 to a maximum of
$25,000. The mortgaged properties securing such Title I Loans are generally
one- to four-family residences, including condominiums and townhomes, and
such properties may or may not be occupied by the owner.
Mego is a FNMA approved seller/servicer. Mego has not applied to be and
therefore is not a FHLMC approved seller/servicer.
Mego has two principal divisions for the origination of Title I Loans
and conventional loans, the Correspondent Division and the Dealer Division.
The Correspondent Division represents Mego's largest source of Title I Loans
and virtually all of the conventional loans. Through its Correspondent
Division, Mego originates loans from a nationwide network of financial
intermediaries, mortgage companies, commercial banks and savings and loan
institutions (collectively, "Correspondents"). Mego typically originates
loans from Correspondents on an individual loan basis, pursuant to which each
loan is pre-approved by Mego and is purchased after the closing, generally
before the first payment is due. The Correspondent Division conducts
operations from its headquarters in Atlanta, Georgia. At February 28, 1997,
Mego had a network of approximately 484 active Correspondents. In addition
to purchasing individual Title I Loans and conventional loans, from time to
time the Correspondent Division purchases portfolios of loans from
Correspondents. Mego generally pays its Correspondents premiums on the loans
it purchases based on the credit score (described below) of the borrower and
the interest rate on the respective loan.
The Dealer Division originates Title I Loans and recently has commenced
the origination of conventional loans in each case through a network of home
improvement construction contractors (collectively, "Dealers") approved by
Mego (in accordance with Title I, if applicable) by acquiring individual
retail installment sale contracts ("Installment Contracts") from Dealers. An
Installment Contract is an agreement between the Dealer and the borrower
pursuant to which the Dealer performs the improvements to the property and
the borrower agrees to pay in installments the price of the improvements.
Before entering into an Installment Contract with a customer, the Dealer
assists the borrower in submitting a loan application to Mego. If the loan
application is approved, the Dealer enters into an Installment Contract with
the borrower, the Dealer assigns the Installment Contract to Mego upon
completion of the home improvements and Mego, upon receipt of the requisite
loan documentation and completion of a satisfactory telephonic interview with
the borrower, purchases the Installment Contract from the Dealer. As of
February 28, 1997, Mego maintained 18 branch offices located in Warwick, New
Jersey; Patchogue, New York; Kansas City, Missouri; Las Vegas, Nevada;
Austin, Texas; Oklahoma City, Oklahoma; Seattle, Washington; Columbus, Ohio;
Elmhurst, Illinois; Waterford, Michigan; Philadelphia, Pennsylvania; Denver,
Colorado; Bowie, Maryland; Dublin, California; Phoenix, Arizona; Stuart,
Florida; St. Petersburg, Florida and Miami Lakes, Florida; through which it
conducts its marketing to Dealers in the state in which the branch is located
as well as certain contiguous states. At February 28, 1997, Mego had a
network of approximately 467 active Dealers in 32 states.
Correspondents and Dealers qualify to participate in Mego's programs
only after a review by Mego's management of their reputation and expertise,
including a review of references and financial statements, as well as a
personal visit to Dealers by one or more representatives of Mego. Title I
requires Mego to reapprove its Dealers annually and to monitor the
performance of those Correspondents that are sponsored by Mego.
UNDERWRITING
The following is a brief description of the underwriting policies
customarily employed by Mego with respect to its home loan program (including
secured and unsecured Title I Loans and secured conventional loans).
Mego's loan application and approval process generally is conducted over
the telephone and applications usually are transmitted to Mego's centralized
processing facility from Correspondents and Dealers by facsimile
transmission. Upon receipt of an application, the information is entered
into Mego's system and processing begins. All loan applications are
individually analyzed by Mego employees at its loan processing headquarters
in Atlanta, Georgia. The Title I Loans originated by Mego are executed on
forms meeting FHA requirements and the conventional loans originated by Mego
are executed on similar forms. All such forms meet applicable federal and
state regulations. Loan applications and Installment Contracts are submitted
to Mego's processing headquarters for credit verification. The information
provided in loan applications is first verified by, among other things, (i)
written confirmations of the applicant's income and, if necessary, bank
deposits, (ii) a formal credit bureau report on the applicant from a credit
reporting agency, (iii) a title report, (iv) if necessary, a real estate
appraisal and (v) if necessary, evidence of flood insurance.
A credit report by an independent, nationally recognized credit
reporting agency reflecting the applicant's complete credit history is
required. The credit report typically contains information reflecting
delinquencies, repossessions, judgments, foreclosures, garnishments,
bankruptcies and similar instances of adverse credit that can be discovered
by a search of public records. An applicant's past credit performance weighs
heavily in the evaluation of risk by Mego. Slow payments on the borrower's
credit report must be satisfactorily explained and will normally reduce the
amount of the loan for which the applicant can be approved.
In evaluating a borrower for creditworthiness a key factor viewed by
Mego is the debt to income ratio. The monthly first and all junior lien
payments plus impounds for real estate taxes and insurance premiums are
factored into the debt to income ratio which generally may not exceed
approximately 45% of the applicant's stable gross monthly income. If the
property is subject to any homeowner's association fees or common element
charges, property charges or maintenance charges, they are included in the
calculation of the debt to income ratio. In cases where compensating factors
exist, the 45% debt to income ratio may be exceeded.
Mego has developed a proprietary credit index profile ("CIP") as a
statistical credit based tool to predict likely future performance of a
borrower. A significant component of this customized system is the credit
evaluation score methodology developed by Fair, Isaac and Company ("FICO"), a
consulting firm specializing in creating default predictive models through a
high number of variable components. The other components of the CIP include
debt to income analysis, employment stability, self employment criteria,
residence stability and occupancy status of the subject property. By
utilizing both scoring models in tandem, all applicants are considered on
the basis of their ability to repay the loan obligation while allowing Mego
to maintain its risk based pricing for each loan.
Based upon FICO score default predictors and Mego's internal CIP score,
loans are classified by Mego into gradations of descending credit risks and
quality, from "A" credits to "D" credits, with subratings within those
categories. Quality is a function of both the borrower's creditworthiness,
and the value of the collateral. "A+" credits generally have a FICO score
greater than 680. An applicant with a FICO score of less than 620 would be
rated a "C" credit unless the combined loan-to-value ratio was 75% or less
which would raise the credit risk to Mego to a "B" or better depending on the
borrower's debt service capability. Depending on loan size, typical combined
loan-to-value ratios for "A" and "B" credits range from 90% to 125%, while
combined loan-to-value ratios for "C" and "D" credits range from 60% up to
90%. "D" credits are only accepted if there are compensating factors. For
purposes of assigning a credit risk classification to a Title I Loan, Mego
relies on the stated value of the mortgaged property provided by the borrower
in computing the combined-loan-to-value ratio.
Mego's underwriters review the applicant's credit history, based on the
information contained in the application as well as reports available from
credit reporting bureaus and Mego's CIP score, to determine the applicant's
acceptability under Mego's underwriting guidelines. Based on the
underwriter's approval authority level, certain exceptions to the guidelines
may be made when there are compensating factors subject to approval from a
corporate officer. The underwriter's decision is communicated to the
Correspondent or Dealer and, if approved, fully explains the proposed loan
terms and contingencies to be satisfied prior to funding.
Subject to underwriting approval of an application forwarded to Mego by
a Dealer, Mego issues a commitment to purchase an Installment Contract from a
Dealer upon Mego's receipt of a fully completed loan package and notice from
the borrower of satisfactory work completion. Subject to underwriting
approval of an application forwarded to Mego by a Correspondent, Mego issues
a commitment to purchase a loan upon Mego's receipt of a fully completed loan
package. Commitments indicate loan amounts, fees, funding conditions,
approval expiration dates and interest rates. Loan commitments are generally
issued for periods up to 45 days in the case of Correspondents and 90 days in
the case of Dealers.
Mego's underwriting personnel review completed loan applications to
verify compliance with Mego's underwriting standards, FHA requirements, if
applicable, and federal and state regulations. In the case of loans being
acquired from Dealers, Mego conducts a prefunding telephonic interview with
the property owner to determine that the improvements have been completed in
accordance with the terms of the Installment Contract and to the owner's
satisfaction. Mego utilizes a nationwide network of independent inspectors
to perform required on-site inspections of improvements generally within six
months, with respect to the conventional loans and, with respect to the Title
I Loans, within the time-frames specified by the Title I Program.
CONVENTIONAL LOANS. Mego has implemented policies for its conventional
loan program that are designed to minimize losses by adhering to high credit
quality standards or requiring adequate loan-to-value levels. Mego will only
make conventional loans to borrowers with an "A" or "B" credit grade using
the CIP. Terms of conventional loans made by Mego, as well as the maximum
combined loan-to-value ratios and debt to income ratios (calculated by
dividing fixed monthly debt payments by gross monthly income), vary depending
upon Mego's evaluation of the borrower's creditworthiness. Borrowers with
lower creditworthiness generally pay higher interest rates and loan
origination fees.
As part of the underwriting process for conventional loans with an
original principal balance in excess of $35,000, Mego generally requires an
appraisal of the mortgaged property as a condition to the commitment to
purchase. If an appraisal is utilized, Mego requires the independent
appraiser to be state licensed and certified. Mego requires that all
independent appraisals be completed within the Uniform Standards of
Professional Appraisal Practice as adopted by the Appraisal Standards Board
of the Appraisal Foundation. Prior to originating a conventional loan, Mego
audits the appraisal for accuracy to ensure that the appraiser used
sufficient care in analyzing data to avoid errors that would significantly
affect the appraiser's opinion and conclusion. This audit includes a review
of housing demand, physical adaptability of the real estate, neighborhood
trends and the highest and best use of the real estate. In the event the
audit reveals any discrepancies as to the method and technique that are
necessary to produce a credible appraisal, Mego will perform additional
property data research or may request a second appraisal to be performed by
an independent appraiser selected by Mego in order to further substantiate
the value of the subject property.
In lieu of requiring a new appraisal, for conventional loans with
original principal balances of less than $50,000, Mego may accept a HUD-1
settlement statement no older than 12 months, a brokers' price opinion, a tax
assessment, an existing drive-by or an Uniform Residential Appraisal Report
no older than 12 months. With respect to conventional loans with an original
principal balance in excess of $35,000 but less than $40,000, Mego may accept
the stated value of the mortgaged property if the borrower meets certain
credit criteria.
Mego also requires a title report on all subject properties securing its
conventional loans to verify property ownership, lien position and the
possibility of outstanding tax liens or judgments. In the case of loans in
the first lien position, Mego requires a full title insurance policy
substantially in compliance with the requirements of the American Loan Title
Association.
The applicant is also required to secure hazard insurance and flood
insurance if the mortgaged property has been identified by the Federal
Emergency Management Agency (FEMA) as having special flood hazards, to the
extent described herein under "Description of the Transfer and Servicing
Agreements -- Insurance."
TITLE I LOANS. Mego's underwriting guidelines for Title I Loans meet
the FHA's underwriting criteria.
Mego will make Title I Loans to borrowers with an "A" to "C" credit
grade based on CIP score and lien position. Mego generally does not obtain
appraisals of the mortgaged properties related to the Title I Loans because
such appraisals are not required by the FHA. FHA regulations do not require
the calculation of combined loan-to-value ratios for Title I Loans as part of
the underwriting process.
Mego does not require title insurance on the mortgaged properties
securing the Title I Loans it originates or purchases but reviews a title
report on the related mortgaged property prepared by a pre-approved title
insurance company. The applicant is also required to secure flood insurance
if the mortgaged property is located in an area that has been identified by
the Federal Emergency Management Agency (FEMA) as having special flood
hazards, in an amount sufficient to cover the Title I Loan, subject to the
maximum amount available under the National Flood Insurance Program.
Since Mego does not currently originate or acquire Title I Loans on an
individual basis with an original principal balance in excess of $25,000, the
FHA does not individually review the Title I Loans originated by Mego.
QUALITY CONTROL. In accordance with Mego policy, the Quality Control
Department reviews a statistical sample of loans closed each month. This
review is generally completed within 60 days of funding. Typical review
procedures include reverification of employment and income, re-appraisal of
the subject property, obtaining separate credit reports and recalculation of
debt to income ratios. The statistical sample is intended to cover 10% of
all new loan originations with particular emphasis on new Correspondents and
Dealers. Emphasis will also be placed on those loan sources where higher
levels of delinquency are experienced, physical inspections reveal a higher
level of non-compliance, or payment defaults occur within the first six
months of funding. On occasion, the Quality Control Department may review
all loans generated from a particular loan source in the event an initial
review determines a higher than normal number of exceptions. The account
selection of the Quality Control Department is also designed to include a
statistical sample of loans by each underwriter and each funding auditor and
thereby provide management with information as to any aberration from Mego
policies and procedures in the loan origination process.
Under the direction of the Vice President of Credit Quality and
Regulatory Compliance, a variety of review functions are accomplished. On a
daily basis, a sample of recently approved loans are reviewed to insure
compliance with underwriting standards. Particular attention is focused on
those underwriters who have developed a higher than normal level of
exceptions. In addition to this review, Mego has developed a staff of post-
disbursement review auditors which reviews 100% of recently funded accounts,
typically within two weeks of funding. All credit reports are analyzed, debt
to income ratios recalculated, contingencies monitored and loan documents
inspected. Exception reports are forwarded to the respective Vice Presidents
of Production as well as senior management. Mego also has a Physical
Inspection Group that is responsible for monitoring the inspection of all
homes which are the subject of home improvement loans. Non-compliance is
tracked by loan source and serves as another method of evaluating a loan
source relationship.
SERVICING
Pursuant to the Servicing Agreement, the Servicer will be responsible
for servicing, managing and making collections on the Loans. Upon the
occurrence of certain events specified in the Servicing Agreement, any of the
Master Servicer or the Securities Insurer, or, in certain circumstances, the
Indenture Trustee may terminate all of the Servicer's rights under the
Servicing Agreement.
Under the Sale and Servicing Agreement, Mego will act as Claims
Administrator and as such will be responsible for the administration of
claims under Title I in respect of the Title I Loans.
The following is a description of the servicing policies and procedures
customarily and currently employed by Mego with respect to its conventional
and Title I loan portfolio. Mego revises such policies and procedures from
time to time in connection with changing economic and market conditions and
changing legal requirements.
Mego's loan servicing activities, which are facilitated under an
existing sub-servicing agreement by a direct link to the servicing system of
Mego's affiliate, Preferred Equity Corporation ("PEC"), include responding to
borrower inquiries, processing and administering loan payments, reporting and
remitting principal and interest to the purchasers who own interests in the
loans, collecting delinquent loan payments, processing Title I insurance
claims, conducting foreclosure proceedings and disposing of foreclosed
property and otherwise administering the loans. Mego uses a computer based
mortgage servicing system developed and maintained by PEC. It provides
payment processing and cashiering functions, automated payoff statements, on-
line collections, statement and notice mailing along with a full range of
investor reporting requirements. PEC's servicing systems conform to the
servicing standards and procedures mandated by the Title I Program.
Mego's loan collection functions are organized into two areas of
operation: routine collections and management of nonperforming loans.
Routine collection personnel are responsible for collecting loan
payments that are less than 60 days contractually past due and providing
prompt and accurate responses to all customer inquiries and complaints.
Borrowers are contacted on the due date for each of the first six payments in
order to encourage continued prompt payment. Generally, after six months of
seasoning, collection activity will commence if a loan payment has not been
made within five days of the due date. Borrowers usually will be contacted
by telephone at least once every five days and also by written correspondence
before the loan becomes 60 days delinquent. With respect to loan payments
that are less than 60 days late, routine collection personnel utilize a
system of mailed notices and telephonic conferences for reminding borrowers
of late payments and encouraging borrowers to bring their accounts current.
Installment payment invoices and return envelopes are mailed to each borrower
on a monthly basis.
Once a loan becomes 30 days past due, a collection supervisor generally
analyzes the account to determine the appropriate course of remedial action.
On or about the 45th day of delinquency, the supervisor determines if the
property needs immediate inspection to determine if it is occupied or vacant.
Depending upon the circumstances surrounding the delinquent account, a
temporary suspension of payments or a repayment plan to return the account to
current status may be authorized by the Vice President of Loan
Administration. In any event, it is Mego's policy to work with the
delinquent customer to resolve the past due balance before Title I claim
processing (in the case of an FHA Loan) or legal action is initiated.
Nonperforming loan management personnel are responsible for collection
of severely delinquent loan payments (over 60 days late), filing Title I
insurance claims or initiating legal action for foreclosure and recovery.
Operating from Mego's headquarters in Atlanta, Georgia, collection personnel
are responsible for collecting delinquent loan payments and seeking to
mitigate losses by providing various alternatives for further actions,
including modifications, special refinancing and indulgence plans. In the
case of conventional loans, a foreclosure coordinator will review all
previous collection activity, evaluate the lien and equity position and
obtain any additional information as necessary. The ultimate decision to
foreclose, after all necessary information is obtained, is made by an officer
of Mego. Foreclosure regulations and practices and the rights of the owner
in default vary from state to state, but generally procedures may be
initiated if: (i) the loan is 90 days (120 days under California law) or
more delinquent; (ii) a notice of default on a senior lien is received; or
(iii) Mego discovers circumstances indicating potential loss exposure.
Title I insurance claim personnel are responsible for managing Title I
insurance claims, utilizing a claim management system designed to track
insurance claims for Title I Loans so that all required conditions precedent
to claim perfection are met. See "Certain Legal Aspects of the Loans - The
Title I Program--Claims Procedures Under Title I" in the Prospectus for a
description of the regulatory procedures that Mego is required to follow
subsequent to the default and acceleration of the maturity of a secured Title
I home improvement loan.
DELINQUENCY EXPERIENCE
The following table sets forth information relating to the delinquency
and Title I insurance claims experience of Mego for its servicing portfolio
of all Title I Loans and conventional loans (including loans serviced for
others) for the periods indicated.
Mego commenced originating and purchasing conventional loans in May
1996. Accordingly, the information set forth in the table below reflects,
for the most part, the loss and delinquency experience of the Title I Loans
in the servicing portfolio. Of the 4,421 conventional loans in Mego's
servicing portfolio as of February 28, 1997, only 20 of such loans are 31
days or more past due. Mego believes that such delinquency experience is not
representative of the loss and delinquency experience of a seasoned
conventional loan portfolio. Furthermore, the loss and delinquency
experience set forth below for the Title I Loans is not necessarily
indicative of the loss and delinquency experience of a seasoned conventional
loan portfolio.
The information in the table below has not been adjusted to eliminate
the effect of the significant growth in the size of Mego's loan portfolio
during the periods shown. Accordingly, delinquency as percentages of
aggregate principal balance of loans serviced for each period would be higher
than those shown if a group of loans were artificially isolated at a point in
time and the information showed the activity only in that isolated group.
However, since most of the loans in Mego's portfolio are not fully seasoned,
the delinquency information for such an isolated group would also be
distorted to some degree.
AT AUGUST 31, at February 28,
------------------------------- ---------------
1994(1) 1995 1996 1997
------- ---- ---- ---------------
(dollars in thousands)
Delinquency period(2)
31-60 days past due . . . . . . . . . . . . . . . . . . . . . 2.06% 2.58% 2.17% 2.46%
61-90 days past due . . . . . . . . . . . . . . . . . . . . . 0.48% 0.73% 0.85% 1.06%
91 days and over past due . . . . . . . . . . . . . . . . . . 0.36% 0.99% 4.53%(3) 3.86%(3)
91 days and over past due, net of claims filed (4) . . . . . . 0.26% 0.61% 1.94% 2.03%
Claims filed with HUD(5) . . . . . . . . . . . . . . . . . . . . . 0.10% 0.38% 2.59% 1.83%
Number of Title I insurance claims outstanding . . . . . . . . . . 1 23 255 394
Total servicing portfolio at end of period . . . . . . . . . . . . $8,026 $92,286 $214,189 $368,368(6)
Amount of FHA insurance available for all 813 $9,552 $21,205 $23,342(7)
Title I Loans serviced by Mego . . . . . . . . . . . . . . . . . .
Amount of FHA insurance available as a percentage of Title I Loans
Title I Loans serviced (end of period) . . . . . . . . . . . . . . . 10.13% 10.35% 10.46% 9.82%(7)
Losses on liquidated loans(8) . . . . . . . . . . . . . . . . . . . $0.00 $16.8 $32.0 $58.0
______________________
(1) Mego commenced originating loans in March 1994.
(2) Represents the dollar amount of delinquent loans as a percentage of
total dollar amount of loans serviced by Mego (including loans owned by
Mego) as of the date indicated.
(3) During the year ended August 31, 1996, and the six months ending
February 28, 1997, the processing and payment of claims filed with HUD
was delayed. See the following paragraph for a further discussion.
(4) Represents the dollar amount of delinquent loans (net of delinquent
Title I Loans for which claims have been filed with HUD and payment is
pending) as a percentage of total dollar amount of loans serviced by
Mego (including loans owned by Mego) as of the date indicated.
(5) Represents the dollar amount of delinquent Title I Loans for which
claims have been filed with HUD and payment is pending as a percentage
of total dollar amount of loans serviced by Mego (including loans owned
by Mego) as of the date indicated.
(6) Of this amount $130,736 represents conventional loans and $237,632
represents Title I loans (dollars in thousands).
(7) If all claims with HUD had been processed as of period end, the amount
of FHA insurance available would have been reduced to $16,900,000, which
as a percentage of Title I loans serviced would have been 7.3%.
(8) A loss is recognized upon receipt of payment of a claim or final
rejection thereof. Claims paid in a period may relate to a claim filed
in an earlier period. Since Mego commenced its Title I lending
operations in March 1994, there has been no final rejection of a claim
by the FHA. Aggregate losses on liquidated Title I Loans were related
to 290 of the 684 Title I insurance claims made by Mego since commencing
operations through February 28, 1997. Losses on liquidated loans will
increase as the balance of the claims are processed by HUD. Mego has
received an average payment from HUD equal to 90% of the outstanding
principal balance of such Title I Loans, plus appropriate interest and
costs.
The processing and payment of claims filed with HUD have been delayed
for a number of reasons including (i) furloughs experienced by HUD personnel
in December 1995 and January 1996, (ii) the growth in the volume of Title I
Loans originated from approximately $750 million in 1994 to $1.3 billion in
1995 without a corresponding increase in HUD personnel to service claims and
(iii) the transition of processing operations to regional centers during the
second and third quarters of 1996. It is expected that once appropriate
staffing and training have been completed at HUD regional centers, the
timeframe for payment of HUD claims will be significantly shortened.
If the loss and delinquency levels for the loans in a Related Series
Trust (defined below) exceed certain levels specified in the related pooling
and servicing agreement or sale and servicing agreement, as the case may be,
the Master Servicer and the Servicer (who serve as master servicer and
servicer, respectively, for each such trust) may be terminated by the
Securities Insurer pursuant to such related agreement. See "Description of
the Transfer and Servicing Agreements - Events of Master Servicing
Termination." Such levels have been exceeded in each of the Mego Mortgage
FHA Title I Loan Trust 1996-1 and the Mego Mortgage FHA Title I Loan Trust
1996-2; however, at this time the Securities Insurer has elected not to
terminate the Master Servicer under the related pooling and servicing
agreement or the Servicer under the related servicing agreement for either
such Related Series Trust.
THE TITLE I LOAN PROGRAM AND THE CONTRACT OF INSURANCE
THE TITLE I PROGRAM
The National Housing Act of 1934, as amended (the "Housing Act"),
authorized the creation of the FHA and the Title I Program. Under the Title
I Program, the FHA is authorized to insure qualified lending institutions
against losses on certain types of loans, including loans to finance actions
or items that substantially protect or improve the basic livability or
utility of several types of properties ("home improvement loans"). All of
the FHA Loans are home improvement loans for one- to four-family residences
that have been originated under the Title I Program, and will be partially
insured under the Title I Program. None of the FHA Loans are loans made to
finance improvements of manufactured housing or multifamily residences. For
a description of the FHA regulations that apply to the origination, servicing
and claims payment procedures of the FHA Loans, see "Certain Legal Aspects of
the Loans--The Title I Program" in the Prospectus.
THE CONTRACT OF INSURANCE
The aggregate amount of insurance provided by the FHA pursuant to the
Title I Program that is expected to be available to the Claims Administrator
in respect of the FHA Loans is approximately $273,578 (the "Trust Designated
Insurance Amount"). Such amount represents 10% of the sum of the Cut-Off
Date Principal Balances of the FHA Loans.
First Trust of New York, National Association holds the Title I contract
of insurance (the "Contract of Insurance") for the benefit of the Trust, as
well as the Mego Mortgage FHA Title I Loan Trust 1996-1, the Mego Mortgage
FHA Title I Loan Trust 1996-2, the Mego Mortgage Home Loan Trust 1996-3 and
the Mego Mortgage Home Loan Owner Trust 1997-1 and any other subsequently
created trust of which First Trust of New York, National Association is the
trustee and to which Title I Loans are sold directly or indirectly by the
Seller and the related senior securities of which are insured by a guaranty
insurance policy issued by the Securities Insurer (each, a "Related Series
Trust"). As of the Cut-Off Date, the aggregate amount of insurance
transferred or to be transferred by the FHA pursuant to the Title I Program
to an insurance coverage reserve account maintained by the FHA in the name of
the Contract of Insurance Holder (the "FHA Reserve Account") is approximately
$19,440,100 (the "Combined FHA Insurance Amount"), and for any date of
determination thereafter, the Combined FHA Insurance Amount will equal such
amount plus all amounts subsequently transferred by the FHA to the Contract
of Insurance Holder's FHA Reserve Account less the amount of FHA Insurance
proceeds received by the Contract of Insurance Holder under the Contract of
Insurance with respect to the FHA Loans and loans in other Related Series
Trusts. Based on information provided by the Seller, as of April 30, 1997,
approximately $4,252,273 in claims under the Contract of Insurance have been
paid, filed or are pending filing against the Combined FHA Insurance Amount
for other Related Series Trusts. All proceeds received under the Contract of
Insurance in respect of claims relating to the FHA Loans shall be deposited
into the Note Distribution Account.
With respect to those FHA Loans for which FHA Insurance coverage
reserves have not been transferred to the FHA Reserve Account by the Closing
Date, the Seller will be required to take appropriate steps to cause the FHA
to transfer the appropriate amounts of FHA Insurance coverage reserves from
the Seller's insurance coverage reserve account to the FHA Reserve Account.
To accomplish this transfer, on or after the date on which the Seller
receives the FHA Title I case numbers for such FHA Loans, the Seller will be
required to submit a transfer of note report to the Secretary of HUD
regarding the conveyance of such FHA Loans to the Contract of Insurance
Holder.
The Secretary of HUD will not earmark the insurance coverage in the FHA
Reserve Account for the benefit of the Trust or any other Related Series
Trust; however, each of the Contract of Insurance Holder and the Claims
Administrator has agreed in the Agreement to earmark the Trust Designated
Insurance Amount exclusively for the benefit of the Trust. The Trust
Designated Insurance Amount and any trust designated insurance amount for any
Related Series Trust may be increased up to the Combined FHA Insurance Amount
with the consent of the Securities Insurer. In the event that any portion of
the Combined FHA Insurance Amount is applied to loans in a Related Series
Trust other than the Trust in excess of the trust designated insurance amount
for such Related Series Trust, the Combined FHA Insurance Amount available to
cover defaults on the FHA Loans may be reduced below the remaining Trust
Designated Insurance Amount for the Trust.
THE MASTER SERVICER
NORWEST BANK MINNESOTA, N.A.
The information set forth below has been provided by Norwest Bank
Minnesota, N.A. (the "Master Servicer") and the Depositor does not make any
representations or warranties as to the accuracy or completeness of such
information.
The Master Servicer is a national banking association, with executive
offices located at Sixth Street and Marquette Avenue, Minneapolis, Minnesota
55479 and its master servicing offices are located at 11000 Broken Land
Parkway, Columbia, Maryland 21044.
The Master Servicer will enter into the Servicing Agreement with the
Servicer, pursuant to which the Servicer will service all of the Loans.
However, the Servicing Agreement will not relieve the Master Servicer of any
of its duties and obligations to the Indenture Trustee under the Sale and
Servicing Agreement. The Master Servicer will be obligated with respect
thereto as if it alone were performing all duties and obligations in
connection with the collection and servicing in respect of the Loans.
DELINQUENCY AND LOSSES
The Master Servicer is engaged in the business of master servicing, on
behalf of third party investors, residential single family mortgage loans
secured by properties located in all 50 states and the District of Columbia.
As of February 28, 1997, the Master Servicer was master servicing more than
185,000 mortgage loans representing an aggregate outstanding principal
balance of approximately $22.9 billion. No specific delinquency or
foreclosure data relating to the Master Servicer's master servicing portfolio
is provided because the Master Servicer has limited master servicing
experience with Title I Loans and conventional loans of the type included in
the Trust.
THE POOL
GENERAL
The Pool will consist of the collective pool of Loans conveyed to the
Trust on the Closing Date. As of the Cut-Off Date, Loans representing
approximately 95.7% of the Original Pool Principal Balance consist of closed-
end fixed-rate home improvement loans, retail installment sale contracts and
debt consolidation loans secured by first- and junior-lien mortgages, deeds
of trust and security deeds on residential properties (which are primarily
condominiums, townhouses and one- to four-family residences) that are not
insured or guaranteed by any government agency (the "Conventional Loans").
The residential properties securing the Conventional Loans, together with the
residential properties securing the Secured FHA Loans, are referred to herein
as the "Mortgaged Properties". A substantial majority of the Conventional
Loans are debt consolidation loans. In addition, as of the Cut-Off Date,
Loans representing 4.3% of the Original Pool Principal Balance consist of
either (i) closed-end fixed-rate home improvement loans and retail
installment sale contracts that are partially insured by the FHA under the
Title I Program and are secured by first- and junior-lien mortgages, deeds of
trust and security deeds on residential properties (including investment
properties) (the "Secured FHA Loans") or (ii) closed-end fixed rate home
improvement loans and retail installment sale contracts that are partially
insured by the FHA under the Title I Program but that are unsecured general
obligations of the related obligors (the "Unsecured FHA Loans", and together
with the Secured FHA Loans, the "FHA Loans"). The Conventional Loans and the
FHA Loans are referred to collectively herein as the "Loans", and the
Conventional Loans and the Secured FHA Loans are collectively referred to
herein as the "Mortgage Loans."
Interest on each Loan is payable monthly on the outstanding Principal
Balance thereof at a fixed rate per annum (the "Loan Rate"). The Loans are
actuarial loans which provide that interest is charged to the obligors
thereunder (the "Obligors"), and payments are due from such Obligors, as of a
scheduled day of each month which is fixed at the time or origination. Each
payment made by the Obligor is, therefor, treated as containing a
predetermined amount of interest and principal. Scheduled monthly payments
made by the Obligors on the Loans either earlier or later than the scheduled
due dates thereof will not affect the amortization schedule or the relative
application of such payments to principal and interest. Interest accrued on
the Loans will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
The statistical information presented herein with respect to the Loans
describes the Loans as of the Cut-Off Date. In addition, all weighted
averages specified herein are weighted based on the Cut-Off Date Principal
Balances of the Loans.
Approximately 95.7% of the Loans are Conventional Loans, approximately
3.6% of the Loans are Secured FHA Loans and approximately 0.7% of the Loans
are Unsecured FHA Loans. See "The Title I Loan Program and the Contract of
Insurance" herein. Loans that are not insured under the Title I Program were
originated by Mego pursuant to its conventional loan underwriting guidelines
and are secured by first and junior-lien mortgages, deeds of trust and
security deeds on Mortgaged Properties. See "Mego Mortgage Corporation--
Conventional Loans" herein. As of the Cut-Off Date, the Combined Loan-To-
Value Ratios (as defined below) for the Conventional Loans ranged from
approximately 22.0% to 125.0%, with approximately 86.8% of the Conventional
Loans having Combined Loan-To-Value Ratios in excess of 100%. As of the Cut-
Off Date, the weighted average Combined Loan-To-Value Ratio of such
Conventional Loans was approximately 113.5%. The "Combined Loan-to-Value
Ratio" for any Conventional Mortgage Loan is the fraction, expressed as a
percentage, the numerator of which is the principal balance of such Mortgage
Loan as of the Cut-Off Date plus, in the case of a Mortgage Loan secured by a
junior lien, the outstanding principal balance of each related senior lien on
the date of origination of such Mortgage Loan, and the denominator of which
is the appraised or stated value, as applicable, of the related Mortgaged
Property at the time of origination of such Mortgage Loan.
The sum of the percentages set forth in the following tables may not
equal 100.00% due to rounding.
CUT-OFF DATE PRINCIPAL BALANCES
RANGE OF Number Aggregate
CUT-OFF DATE of Cut-Off Date % of Original Pool
PRINCIPAL BALANCES Loans Principal Balance Principal Balance
---------------------- ---------- -------------------- ------------------
$ 0.01 - 5,000.00 66 $ 239,967.58 0.38%
5,000.01 - 10,000.00 89 657,437.16 1.04
10,000.01 - 15,000.00 111 1,469,279.94 2.32
15,000.01 - 20,000.00 183 3,372,599.64 5.31
20,000.01 - 25,000.00 488 11,768,434.39 18.54
25,000.01 - 30,000.00 274 7,787,058.90 12.27
30,000.01 - 35,000.00 362 12,267,360.63 19.33
35,000.01 - 40,000.00 151 5,835,792.37 9.20
40,000.01 - 45,000.00 184 8,113,301.77 12.79
45,000.01 - 50,000.00 118 5,757,601.87 9.07
50,000.01 - 55,000.00 44 2,367,955.03 3.73
55,000.01 - 60,000.00 20 1,166,053.89 1.84
60,000.01 - 65,000.00 20 1,270,106.47 2.00
65,000.01 - 70,000.00 7 486,683.54 0.77
70,000.01 - 75,000.00 11 819,749.33 1.29
75,000.01 - 80,000.00 1 79,701.26 0.13
- -------------------------------------- --------- ------------------- --------------
TOTAL 2,129 $63,459,083.77 100.00%
======================================= ========= ==================== ==============
The average Principal Balance of the Loans as of the Cut-Off Date was
approximately $29,807.
RANGE OF LOAN RATES
Aggregate
Range of Number of Cut-Off Date % of Original Pool
Loan Rates Loans Principal Balance Principal Balance
----------------- ---------- ------------------- ------------------
9.990 - 9.999% 4 $68,705.32 0.11%
10.500 - 10.999 18 478,507.21 0.75
11.000 - 11.499 16 470,905.66 0.74
11.500 - 11.999 122 4,222,616.78 6.65
12.000 - 12.499 50 1,881,516.13 2.96
12.500 - 12.999 309 10,174,512.39 16.03
13.000 - 13.499 54 1,861,746.41 2.93
13.500 - 13.999 542 15,403,739.59 24.27
14.000 - 14.499 113 3,869,777.22 6.10
14.500 - 14.999 504 14,524,117.05 22.89
15.000 - 15.499 87 2,562,118.45 4.04
15.500 - 15.999 213 5,413,109.82 8.53
16.000 - 16.499 18 458,903.27 0.72
16.500 - 16.999 72 1,907,828.76 3.01
17.000 - 17.499 7 160,979.71 0.25
- ----------------------- ---------- ----------------- -----------------
TOTAL 2,129 $63,459,083.77 100.00%
======================= ========== ================== ==================
The weighted average Loan Rate of the Loans as of the Cut-Off Date was
approximately 14.0% per annum.
NUMBER OF MONTHS SINCE ORIGINATION
Aggregate
Number of Months Number of Cut-Off Date % of Original Pool
Since Origination Loans Principal Balance Principal Balance
--------------------- ---------- ------------------- ----------------------
0 months 618 $20,391,944.54 32.13%
1 619 19,058,888.27 30.03
2 445 12,879,707.09 20.30
3 109 3,313,374.35 5.22
4 144 3,862,405.66 6.09
5 125 2,867,090.38 4.52
6 14 370,269.04 0.58
7 13 199,411.40 0.31
8 17 273,086.87 0.43
9 2 59,150.34 0.09
11 3 23,404.71 0.04
12 5 53,576.35 0.08
13 4 23,949.68 0.04
14 4 22,221.79 0.04
15 3 45,592.73 0.07
16 3 10,216.48 0.02
22 1 4,794.09 0.01
- ------------------------- ---------- ---------------- --------
TOTAL 2,129 $63,459,083.77 100.00%
========================== =========== ================ =========
The weighted average age of the Loans as of the Cut-Off Date was
approximately 1.5 months.
MONTHS REMAINING TO SCHEDULED MATURITY
Range of Aggregate
Months Remaining Number of Cut-Off Date % of Original Pool
To Scheduled Maturity Loans Principal Balance Principal Balance
--------------------------- ------------ ------------------- --------------------
22 - 24 months 3 $ 6,883.85 0.01%
25 - 36 13 42,614.52 0.07
37 - 48 17 93,631.21 0.15
49 - 60 53 580,987.00 0.92
61 - 72 11 142,677.59 0.22
73 - 84 34 398,130.48 0.63
85 - 96 4 46,882.42 0.07
97 - 108 5 30,638.75 0.05
109 - 120 162 3,685,964.14 5.81
121 - 144 8 131,094.62 0.21
145 - 168 2 28,433.32 0.04
169 - 180 593 17,253,425.45 27.19
181 - 228 1 19,707.75 0.03
229 - 240 597 18,771,984.30 29.58
241 - 276 1 27,127.00 0.04
277 - 288 1 34,958.40 0.06
289 - 300 624 22,163,942.97 34.93
__________________________ --------- ---------------- ----------
TOTAL 2,129 $63,459,083.77 100.00%
========================== ========== ================= ===========
The weighted average remaining term to maturity of the Loans as of the Cut-
Off Date was approximately 232.4 months.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES BY STATE/(1)/
Aggregate
Number of Cut-Off Date % of Original Pool
State Loans Principal Balance Principal Balance
- --------------------------- ------------------ ----------------------- --------------------
Alaska 11 $ 398,500.00 0.63%
Arizona 66 2,095,317.45 3.30
Arkansas 16 120,611.91 0.19
California 453 15,784,115.75 24.87
Colorado 69 2,287,451.15 3.60
Connecticut 11 337,376.29 0.53
Delaware 2 64,941.60 0.10
District of Columbia 1 35,600.00 0.06
Florida 393 11,557,563.23 18.21
Georgia 101 2,803,523.98 4.42
Idaho 12 385,238.85 0.61
Illinois 86 2,504,866.31 3.95
Indiana 25 659,599.37 1.04
Iowa 7 205,301.24 0.32
Kansas 7 115,288.10 0.18
Kentucky 15 497,902.33 0.78
Louisiana 16 443,748.82 0.70
Maryland 36 1,260,562.00 1.99
Massachusetts 2 49,843.64 0.08
Michigan 15 367,586.26 0.58
Minnesota 55 1,986,992.00 3.13
Missouri 22 485,724.89 0.77
Nebraska 11 290,676.59 0.46
Nevada 125 4,098,725.99 6.46
New Jersey 33 675,198.02 1.06
New Mexico 9 261,117.90 0.41
New York 63 1,707,722.34 2.69
North Carolina 43 806,709.08 1.27
Ohio 63 1,840,835.65 2.90
Oklahoma 27 561,035.96 0.88
Oregon 20 619,949.43 0.98
Pennsylvania 64 1,179,907.04 1.86
South Carolina 3 17,093.03 0.03
Tennessee 25 705,985.41 1.11
Texas 22 214,407.72 0.34
Utah 35 1,156,170.61 1.82
Virginia 56 1,554,570.99 2.45
Washington 100 3,084,008.47 4.86
Wisconsin 9 237,314.37 0.37
- ---------------------- ----------- ------------------ -----------
Total 2,129 $63,459,083.77 100.00%
====================== =========== =================== ============
(1) Determined by mailing address of the related Obligor. The mailing
address is not always the same as the address of the related Mortgaged
Property.
REPURCHASE OR SUBSTITUTION OF LOANS
The Seller may, at its option, either repurchase any Defaulted Loan (as
defined herein) or remove such Defaulted Loan and substitute therefor a
Qualified Substitute Loan in accordance with the procedure set forth below,
provided that the aggregate of the Loan Balances of such Defaulted Loans
repurchased or substituted by the Seller may not exceed 10% of the Original
Pool Principal Balance. See "Loan Program--Representations by Sellers;
Repurchases or Substitutions" in the Prospectus.
Unless waived by the Securities Insurer, the Seller is required (i)
within 60 days after discovery or notice thereof to cure in all material
respects any breach of the representations or warranties made with respect to
a Defective Loan to the extent that such breach has a materially adverse
effect on the interests of the Noteholders or the Securities Insurer in such
Loan, or (ii) on or before the Determination Date next succeeding the end of
such 60-day period, to repurchase such Defective Loan at a price (the
"Purchase Price") equal to the Principal Balance of such Defective Loan as of
the date of repurchase, plus all accrued and unpaid interest on such
Defective Loan to and including the last day of the month in which such
repurchase occurs, computed at the Loan Rate. In lieu of repurchasing a
Defective Loan, the Seller may replace such Defective Loan with one or more
Qualified Substitute Loans. If the aggregate outstanding principal balance
of the Qualified Substitute Loan(s) plus accrued interest is less than the
Principal Balance(s) of the Defective Loan(s) plus accrued interest thereon,
the Seller will also remit for distribution to the holders of the Notes an
amount equal to such shortfall, which will result in a prepayment of
principal on the Notes for the amount of such shortfall. As used herein, a
"Qualified Substitute Loan" is a home loan that (i) has an interest rate
which is at least equal to the Loan Rate for the Defective Loan, (ii) matures
no later than the Defective Loan, (iii) has a principal balance (after
application of all payments received on or prior to the date of such
substitution) equal to or less than (but no more than 1% less than) the
Principal Balance of the Defective Loan as of such date, (iv) has a monthly
payment greater than or equal to that of the Defective Loan, (v) complies as
of the date of substitution with each representation and warranty set forth
in the Sale and Servicing Agreement with respect to the Loans and certain
other conditions set forth in the Sale and Servicing Agreement, and (vi) has
a FICO score not be more than ten points lower than the FICO score for the
Defective Loan. See "Loan Program--Representations by Sellers; Repurchases
or Substitutions" in the Prospectus.
No assurance can be given that, at any particular time, the Seller will
be capable, financially or otherwise, of repurchasing Defective Loans or
substituting Qualified Substitute Loans for Defective Loans in the manner
described above. If the Seller repurchases, or is obligated to repurchase,
defective loans from other series of asset backed securities (each, an
"Additional Series"), the financial ability of the Seller to repurchase
Defective Loans from the Trust may be adversely affected. In addition, other
events relating to the Seller and its mortgage lending and consumer finance
operations can occur that would adversely affect the financial ability of the
Seller to repurchase Defective Loans from the Trust, including without
limitation the sale or other disposition of all or any significant portion of
its assets. If the Seller is unable to repurchase or replace a Defective
Loan, the Servicer, on behalf of the Trust, will pursue other customary and
reasonable efforts, if any, to recover the maximum amount possible with
respect to such Defective Loan. If the Servicer is unable to collect all
amounts due to the Trust with respect to such Defective Loan, the resulting
loss will be borne by the holders of the Notes to the extent that such loss
is not otherwise covered by amounts available from the credit enhancement
provided for the Notes, including the Securities Insurance Policy. See "Risk
Factors-Limitations on Repurchase or Replacement of Defective Loans by
Seller" herein.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Notes will be provided by, among
other things, the Securities Insurance Policy. Additional credit enhancement
with respect to the Notes will be provided by (i) FHA Insurance in the case
of the FHA Loans, (ii) the subordination of distributions on the Residual
Certificates to distributions on the Notes and (iii) the
overcollateralization feature described herein.
The information set forth below under the section entitled "--The
Securities Insurance Policy" and "--The Securities Insurer" has been supplied
by MBIA Insurance Corporation (the "Securities Insurer") for inclusion in
this Prospectus Supplement and has not been reviewed or verified by the
Seller, the Servicer, the Depositor, the Indenture Trustee, the Owner Trustee
or the Underwriter.
THE SECURITIES INSURANCE POLICY
The Securities Insurer, in consideration of the payment of the premium
and subject to the terms of the financial guaranty insurance policy (the
"Securities Insurance Policy"), unconditionally and irrevocably guarantees to
any Owner that an amount equal to each full and complete Insured Payment will
be received by the Indenture Trustee, on behalf of the Owners, from the
Securities Insurer, for distribution by the Indenture Trustee to each Owner
of each Owner's proportionate share of the Insured Payment. The Securities
Insurer's obligations under the Securities Insurance Policy with respect to a
particular Insured Payment shall be discharged to the extent funds equal to
the applicable Insured Payment are received by the Indenture Trustee, whether
or not such funds are properly applied by the Indenture Trustee. Insured
Payments shall be made only at the time set forth in the Securities Insurance
Policy and no accelerated Insured Payments shall be made regardless of any
acceleration of the Securities, unless such acceleration is at the sole
option of the Securities Insurer.
Notwithstanding the foregoing paragraph, the Securities Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Trust
or the Indenture Trustee for withholding taxes, if any (including interest
and penalties in respect of any such liability).
The Securities Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the Fiscal
Agent (as described below) of (i) a certified copy of the order requiring the
return of a preference payment, (ii) an opinion of counsel satisfactory to
the Securities Insurer that such order is final and not subject to appeal,
(iii) an assignment in such form as is reasonably required by the Securities
Insurer, irrevocably assigning to the Securities Insurer all rights and
claims of the Owner relating to or arising under the Securities against the
debtor which made such preference payment or otherwise with respect to such
preference payment and (iv) appropriate instruments to effect the appointment
of the Securities Insurer as agent for such Owner in any legal proceeding
related to such preference payment, such instruments being in a form
satisfactory to the Securities Insurer, provided that if such documents are
received after 12:00 noon New York City time on such Business Day, they will
be deemed to be received on the following Business Day. Such payments shall
be disbursed to the receiver or trustee in bankruptcy named in the final
order of the court exercising jurisdiction on behalf of the Owner and not to
any Owner directly unless such Owner has returned principal or interest paid
on such Insured Securities to such receiver or trustee in bankruptcy, in
which case such payment shall be disbursed to such Owner.
The Securities Insurer will pay any other amount payable under the
Securities Insurance Policy no later than 12:00 noon New York City time on
the later of the Distribution Date on which the related Noteholders' Interest
Distributable Amount or the Noteholder's Guaranteed Principal Distribution
Amount is due or the second Business Day following receipt in New York, New
York on a Business Day by State Street Bank and Trust Company, N.A., as
Fiscal Agent for the Securities Insurer or any successor fiscal agent
appointed by the Securities Insurer (the "Fiscal Agent") of a Notice (as
described below); provided that if such Notice is received after 12:00 noon
New York City time on such Business Day, it will be deemed to be received on
the following Business Day. If any such Notice received by the Fiscal Agent
is not in proper form or is otherwise insufficient for the purpose of making
claim under the Securities Insurance Policy it shall be deemed not to have
been received by the Fiscal Agent for purposes of this paragraph, and the
Securities Insurer or the Fiscal Agent, as the case may be, shall promptly so
advise the Indenture Trustee and the Indenture Trustee may submit an amended
Notice.
Insured Payments due under the Securities Insurance Policy unless
otherwise stated therein will be disbursed by the Fiscal Agent to the
Indenture Trustee on behalf of the Owners by wire transfer of immediately
available funds in the amount of the Insured Payment less, in respect of
Insured Payments related to Preference Amounts, any amount held by the
Indenture Trustee for the payment of such Insured Payment and legally
available therefor.
The Fiscal Agent is the agent of the Securities Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Securities Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the Securities
Insurance Policy.
Subject to the terms of the Indenture, the Securities Insurer shall be
subrogated to the rights of each Owner to receive payments under the
Securities to the extent of any payment by the Securities Insurer under the
Securities Insurance Policy.
As used in the Securities Insurance Policy, the following terms shall
have the following meanings:
"Business Day" means any day other than a Saturday, a Sunday or a day on
which the Securities Insurer or banking institutions in New York City or in
the city in which the corporate trust office of the Indenture Trustee under
the Indenture is located are authorized or obligated by law or executive
order to close.
"Deficiency Amount" means, as of any Distribution Date, an amount equal
to the sum of (a) the amount by which the Noteholders' Interest Distributable
Amount for such Distribution Date exceeds the amount on deposit in the Note
Distribution Account available therefor and (b) the Noteholder's Guaranteed
Principal Distributable Amount for such Distribution Date.
"Insured Payment" means (i) as of any Distribution Date any Deficiency
Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed
in writing by telecopy substantially in the form of Exhibit A attached to the
Securities Insurance Policy, the original of which is subsequently delivered
by registered or certified mail, from the Indenture Trustee specifying the
Insured Payment which shall be due and owing on the applicable Distribution
Date.
"Owner" means each Noteholder (as defined in the Indenture and other
than the Indenture Trustee, the Seller, Mego Mortgage Home Loan Acceptance
Corporation (the "Affiliated Holder"), the Servicer, the Owner Trustee or the
Depositor) who, on the applicable Distribution Date, is entitled under the
terms of the related Note to distributions thereunder.
"Preference Amount" means any amount previously distributed to an Owner
in respect of the Securities that is recoverable and sought to be recovered
as a voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.), as amended from time to time in
accordance with a final nonappealable order of a court having competent
jurisdiction.
"Securities" means the Notes issued pursuant to the Indenture.
Capitalized terms used in the Securities Insurance Policy and not
otherwise defined in the Securities Insurance Policy shall have the
respective meanings set forth in the Indenture as of the date of execution of
the Securities Insurance Policy, without giving effect to any subsequent
amendment or modification to the Indenture unless such amendment or
modification has been approved in writing by the Securities Insurer.
Any notice under the Securities Insurance Policy or service of process
on the Fiscal Agent may be made at the address listed below for the Fiscal
Agent or such other address as the Securities Insurer shall specify in
writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006 Attention: Municipal Registrar and Paying Agency, or
such other address as the Fiscal Agent shall specify to the Indenture Trustee
in writing.
The Securities Insurance Policy is being issued under and pursuant to,
and shall be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
The insurance provided by the Securities Insurance Policy is not covered
by the Property/Casualty Insurance Security Fund specified in Article 76 of
the New York Insurance Law.
The Securities Insurance Policy is not cancelable for any reason. The
premium on the Securities Insurance Policy is not refundable for any reason
including payment, or provision being made for payment prior to maturity of
the Securities.
THE SECURITIES INSURER
The Securities Insurer is the principal operating subsidiary of MBIA
Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated
to pay the debts of or claims against the Securities Insurer. The Securities
Insurer is domiciled in the State of New York and licensed to do business in
and is subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the territory of
Guam. The Securities Insurer has two European branches, one in the Republic
of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations
of investments and requiring the approval of policy rates and forms. State
laws also regulate the amount of both the aggregate and individual risks that
may be insured, the payment of dividends by the Securities Insurer, changes
in control and transactions among affiliates. Additionally, the Securities
Insurer is required to maintain contingency reserves on its liabilities in
certain amounts and for certain periods of time.
The consolidated financial statements of the Securities Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1996 and December 31, 1995 and for the three years ended December 31, 1996,
prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of MBIA Inc. for the year ended
December 31, 1996, and the consolidated financial statements of the
Securities Insurer and its subsidiaries for the three months ended March 31,
1997 and for the periods ending March 31, 1997 and March 31, 1996 included in
the Quarterly Report on Form 10-Q of MBIA Inc. for the period ending March
31, 1997, are hereby incorporated by reference into this Prospectus
Supplement and shall be deemed to be a part hereof. Any statement contained
in a document incorporated by reference herein shall be modified or
superseded for purposes of this Prospectus Supplement to the extent that a
statement contained herein or in any other subsequently filed document which
also is incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Securities Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to
the date of this Prospectus Supplement and prior to the termination of the
offering of the Notes shall be deemed to be incorporated by reference into
this Prospectus Supplement and to be a part hereof from the respective dates
of filing such documents.
The tables below present selected financial information of the
Securities Insurer determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities ("SAP")
as well as generally accepted accounting principles ("GAAP"):
SAP
------------------------------------------------------
DECEMBER 31, 1996 MARCH 31, 1997
------------------ ---------------
(Audited) (Unaudited)
(in millions)
Admitted Assets . . . . . . . . . . . . . . . . . . $4,476 $4,598
Liabilities . . . . . . . . . . . . . . . . . . . . 3,009 3,067
Capital and Surplus . . . . . . . . . . . . . . . . 1,467 1,531
GAAP
--------------------------------------------------------
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ---------------
(Audited) (Unaudited)
(in millions)
Assets . . . . . . . . . . . . . . . . . . . . . . $5,066 $5,110
Liabilities . . . . . . . . . . . . . . . . . . . 2,262 2,262
Shareholder's Equity . . . . . . . . . . . . . . . 2,804 2,848
Copies of the financial statements of the Securities Insurer
incorporated by reference herein and copies of the Securities Insurer's 1996
year-end audited financial statements prepared in accordance with statutory
accounting practices are available, without charge, from the Securities
Insurer. The address of the Securities Insurer is 113 King Street, Armonk,
New York 10504. The telephone number of the Securities Insurer is (914) 273-
4545.
The Securities Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to
the accuracy of the information regarding the Securities Insurance Policy and
the Securities Insurer set forth under the headings "The Securities Insurance
Policy" and "The Securities Insurer." Additionally, the Securities Insurer
makes no representation regarding the Notes or the advisability of investing
in the Notes.
Moody's Investors Service, Inc. rates the claims paying ability of the
Securities Insurer "Aaa"; Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc., rates the claims paying ability of the
Securities Insurer "AAA"; and Fitch Investors Service, L.P. rates the claims
paying ability of the Securities Insurer "AAA".
Each rating of the Securities Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Securities Insurer and its ability to pay claims on
its policies of insurance. Any further explanation as to the significance of
the above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Notes, and such ratings may be subject to revision or withdrawal at any time
by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Notes.
The Securities Insurer does not guaranty the market price of the Notes nor
does it guaranty that the ratings on the Notes will not be revised or
withdrawn.
SUBORDINATION AND ALLOCATION OF LOSSES
The rights of the holders of the Residual Certificates to receive
distributions from amounts available in the Certificate Distribution Account
on each Distribution Date will be subordinated to the rights of the holders
of the Notes to receive distributions of interest and principal from amounts
available in the Note Distribution Account on each Distribution Date. The
subordination of the Residual Certificates to the Notes is intended to
enhance the likelihood of regular receipt by the holders of the Notes of the
full amount of interest and principal distributions due to such holders and
to afford such holders protection against losses on the Loans. See
"Description of the Securities - Priority of Distributions" herein.
On each Distribution Date, the Principal Balance of Loans that became
Defaulted Loans during the immediately preceding Due Period (the "Net Loan
Losses") to the extent not covered by the Excess Spread will reduce the
Overcollateralization Amount. Following any reduction of the
Overcollateralization Amount to zero, Net Loan Losses during any Due Period
to the extent not covered by the Excess Spread will trigger a draw under the
Securities Insurance Policy.
OVERCOLLATERALIZATION
As of each date of determination, the "Overcollateralization Amount"
will equal the excess of (A) the Pool Principal Balance as of the end of the
preceding Due Period over (B) the aggregate of the sum of the Class Principal
Balances of all Classes of Notes (the "Aggregate Note Principal Balance"). A
limited acceleration of the principal amortization of the Aggregate Note
Principal Balance relative to the Pool Principal Balance has been designed to
increase the Overcollateralization Amount over time by making additional
sequential distributions of principal to the holders of the Notes from the
distribution of Distributable Excess Spread, until the Overcollateralization
Amount is equal to the required level of overcollateralization.
DESCRIPTION OF THE SECURITIES
GENERAL
The Trust will issue five Classes of Home Loan Asset-Backed Notes (the
"Notes") having the designations and aggregate initial principal amounts
specified on the cover hereof. The Notes will be issued pursuant to an
indenture dated as of May 1, 1997 (the "Indenture"), between the Trust and
the Indenture Trustee. The Trust will also issue the Residual Certificates
(which will have no principal balance and will not accrue interest) pursuant
to the terms of a trust agreement dated as of May 1, 1997 (the "Trust
Agreement"), among Mego, the Depositor, the Owner Trustee and the Co-Owner
Trustee. The Notes will be secured by the assets of the Trust pursuant to
the Indenture. The Residual Certificates will represent an undivided
beneficial ownership interest in the Trust.
On the 25th day of each month or, if such day is not a business day, the
first business day immediately following, commencing in June 1997 (each such
date, a "Distribution Date"), the Indenture Trustee or its designee will
distribute to the persons in whose names the Notes are registered on the last
day of the month immediately preceding the month of the related Distribution
Date (the "Record Date") the portion of the aggregate distribution to be made
to each Noteholder as described below. Prior to Book-Entry Termination,
distributions on the Book-Entry Securities will be made to Beneficial Owners
of the Notes only through DTC and its DTC Participants. See "Description of
the Securities--Book-Entry Registration of Securities" in the Prospectus.
Beneficial ownership interests in each Class of Notes will be held in
minimum denominations of $1,000 and integral multiples of $1 in excess
thereof.
DISTRIBUTIONS ON THE NOTES
For the definitions of certain of the defined terms used in the
following subsection, see "--Related Definitions" below.
Payments of Interest. Interest on the Class Principal Balances of the
Classes
------------------
of Notes will accrue at the respective per annum Note Interest Rates
specified below and will be payable to the Noteholders monthly on each
Distribution Date, commencing in June 1997. Interest on each Class of Notes
will be calculated on the basis of a 360-day year of twelve 30-day months.
The Class A-1 Note Interest Rate will be 6.87% per annum.
The Class A-2 Note Interest Rate will be 6.88% per annum.
The Class A-3 Note Interest Rate will be 7.00% per annum.
The Class A-4 Note Interest Rate will be 7.17% per annum.
The Class A-5 Note Interest Rate will be 7.63% per annum.
Interest distributions on the Notes will generally be made from the
Available Amount remaining after the payment of the trust fees and expenses.
Interest payments to all Classes of Noteholders will have the same priority.
Under certain circumstances, including an occurrence and continuation of a
Securities Insurer Default (as defined below), the amount available for
interest payments could be less than the amount of interest payable on the
Notes on any Distribution Date, in which case each Class of Noteholders will
receive their ratable share (based upon the aggregate amount of interest due
to such Class of Noteholders) of the aggregate amount available to be
distributed in respect of interest on the Notes.
The Master Servicer is required to deposit in the Note Distribution
Account with respect to each Distribution Date, an amount equal to the
scheduled installment of interest due on each Loan (other than a Defaulted
Loan) during the related Due Period, but not received as of the related
Determination Date, net of the related Servicing Fee (each, an "Interest
Advance"). The Master Servicer is not required to make any Interest Advance
that it determines would be nonrecoverable. Interest Advances are
reimbursable to the Master Servicer subject to certain conditions and
restrictions, and are intended to provide liquidity for the required
distributions of interest on the Notes.
Payments of Principal. Principal payments will be made to the
-----------------------
Noteholders on
each Distribution Date in an amount generally equal to the sum of (i) the
Noteholders' Principal Distributable Amount for such Distribution Date, (ii)
the Noteholders' Guaranteed Principal Distribution Amount for such
Distribution Date and (iii) the Distributable Excess Spread for such
Distribution Date.
PRIORITY OF DISTRIBUTIONS
For the definitions of certain of the defined terms used in this and the
immediately following subsection, see "--Related Definitions" below.
(a) Subject to paragraphs (b) through (j) below, on each Distribution
Date, the Collected Amount (net of all amounts representing payments by
Obligors on Invoiced Loans in respect of premiums on FHA Insurance) will be
allocated in the following order of priority:
(i) to distribute on such Distribution Date the following amounts
in the following order:
first, for deposit in the FHA Premium Account (defined below),
the FHA Premium Account Deposit (defined below) for such
Distribution Date;
second, concurrently, to (x) the Master Servicer, the Master
Servicer Fee, (y) the Servicer, the Servicer Fee and (z) to the
Indenture Trustee, the Indenture Trustee Fee, in each case for such
Distribution Date;
third, to the Master Servicer or Servicer, any amount in
respect of reimbursement of Interest Advances or Foreclosure
Advances (defined below), to which the Master Servicer or any
Servicer is entitled under the terms of the Sale and Servicing
Agreement with respect to such Distribution Date, and to the Claims
Administrator, amounts in reimbursement of any expenses, of filing
of any FHA Insurance claims pursuant to the FHA Loans;
fourth, to the Owner Trustee, the Owner Trustee Fee, in each
case for such Distribution Date; and
fifth, to the Securities Insurer, the securities insurer
premium for such Distribution Date and any such unpaid premiums for
any preceding Distribution Dates;
(ii) to the holders of each Class of Notes outstanding, an
amount equal to the related Class Interest Distributable Amount for such
Distribution Date (subject to the limitation described in paragraphs (b)
and (j) below);
(iii) to the holders of the applicable Class or Classes of Notes
outstanding (as further described in paragraph (c) below), the
Noteholders' Principal Distributable Amount for such Distribution Date
(subject to the limitation described in paragraph (d) below);
(iv) to the holders of the applicable Class or Classes of Notes
outstanding (as further described in paragraph (c) below), the
Distributable Excess Spread for such Distribution Date;
(v) to the Securities Insurer, any other amounts (including
any Securities Insurer Reimbursement Amounts) owing to the Securities
Insurer under the Insurance Agreement;
(vi) to any successor Master Servicer, such fees and expenses
reimbursable to such Master Servicer pursuant to the Sale and Servicing
Agreement, if any, for such Distribution Date in addition to the Master
Servicer Fee;
(vii) to the party entitled thereto, payments in respect of
Other Fees and certain other amounts as specified in the Sale and
Servicing Agreement; and
(viii) to the holders of the Residual Certificates, any remaining
amount.
(b) Any shortfall in the amount of interest required to be distributed
pursuant to clause (a)(ii) above will be allocated among the Classes of Notes
in proportion to the amount each such Class would have been entitled to
receive in the absence of such shortfall.
(c) As to each Distribution Date, distributions in reduction of the
Class Principal Balances of the Notes pursuant to clauses (a)(iii) and (iv)
above will be made to the Classes of Notes as follows:
(i) prior to the occurrence and continuance of a Securities
Insurer Default, sequentially, to the holders of the Class A-1 Notes,
Class A-2 Notes, Class A-3 Notes, Class A-4 Notes and Class A-5 Notes,
in that order, until their respective Class Principal Balances have been
reduced to zero; and
(ii) upon the occurrence and continuance of a Securities
Insurer Default and upon the first reduction of the Overcollateraliza-
tion Amount to zero after such default, concurrently, to the holders of
each Class of Notes then outstanding, pro rata, based upon their
respective Class Principal Balances immediately prior to such
Distribution Date, until their respective Class Principal Balances are
reduced to zero.
(d) If on any Distribution Date any distribution of the Noteholders'
Principal Distributable Amount would cause the Overcollateralization Amount
to exceed the required level, the amount of the Noteholders' Principal
Distributable Amount distributed on the Notes will be correspondingly reduced
by the amount necessary such that the Overcollateralization Amount will not
exceed the required level of overcollateralization after giving effect to the
distribution in reduction of Class Principal Balances to be made on such
Distribution Date.
(e) All distributions made to each Class of Noteholders on each
Distribution Date will be made on a pro rata basis among the Noteholders of
record with respect to such Class on the immediately preceding Record Date
based on the percentage interest represented by their respective Notes, and
except as otherwise provided herein, will be made through the book-entry
system maintained by DTC.
(f) The Class Principal Balance of each Class of Notes, to the extent
not previously paid, will be due on the Final Maturity Date. The actual date
on which the Class Principal Balance of any Class of Notes is reduced to zero
is anticipated to be earlier, and may be substantially earlier, than the
Final Maturity Date set forth herein based on a variety of factors, including
those described under "Prepayment and Yield Considerations--Weighted Average
Lives of the Notes" herein.
(g) If on any Distribution Date, (i) the Collected Amount, after
payment of the applicable trust fees and expenses, is insufficient to
distribute the Noteholders' Interest Distributable Amount for such
Distribution Date or (ii) a Noteholders' Guaranteed Principal Distribution
Amount is due to the Noteholders, the Indenture Trustee will make a claim
under the Securities Insurance Policy in the amount of any such insufficiency
or the amount of any such Noteholders' Guaranteed Principal Distribution
Amount in accordance with the terms thereof. As described in the preceding
sentence, Insured Payments, if any, for any Insured Securities under the
Securities Insurance Policy will be distributed to holders of the Insured
Securities to compensate for any shortfalls in respect of the Noteholders'
Interest Distributable Amount or to pay the Noteholders' Guaranteed Principal
Distribution Amount, as the case may be.
(h) If on a particular Distribution Date, the Available Amount applied
as described above is not sufficient to make a full distribution of the
applicable Class Interest Distributable Amount on any Class of Notes, then
any such unpaid Class Interest Distributable Amount will be carried forward
as a Class Interest Carry-Forward Amount and will be distributed to holders
of such Class of Notes on the next Distribution Date to the extent that
sufficient funds are available. Such an interest shortfall could occur, for
example, if losses realized on the Loans were exceptionally high or were
concentrated in a particular month and Insured Payments were not timely
received under the Securities Insurance Policy.
(i) The holders of the Residual Certificates will not be required to
refund any amounts previously distributed to such holders pursuant to the
Transfer and Servicing Agreements (as defined herein), regardless of whether
there are sufficient funds on a subsequent Distribution Date to make a full
distribution to holders of the Notes.
(j) The interest entitlement for all Classes of Insured Securities will
be reduced on each Distribution Date in the amount of (i) Prepayment Interest
Shortfalls not covered by the Servicing Fee and (ii) Civil Relief Act
Interest Shortfalls. The amount of such shortfall will be allocated pro rata
among the Classes of Insured Securities based on the amount of interest each
such Class would have been entitled to receive in the absence of such
shortfall and such shortfalls will not be covered by the Securities Insurance
Policy.
RELATED DEFINITIONS
For purposes hereof, the following terms shall have the following
meanings:
"Available Amount" means, with respect to any Distribution Date, the sum
----------------
of (i) the Collected Amount for such Distribution Date and (ii) the amount of
the Insured Payments, if any, for such Distribution Date.
"Class Interest Carry-Forward Amount" means, with respect to any
--------------------------------------
Distribution Date and any Class of Notes, the excess of the related Class
Monthly Interest Distributable Amount for the preceding Distribution Date
and any outstanding related Class Interest Carry-Forward Amount on such
preceding Distribution Date, over the amount in respect of interest
that is actually paid as interest on such Class of Notes on such
preceding Distribution Date, plus interest on such excess, to the extent
permitted by law, at the applicable Note Interest Rate from such preceding
Distribution Date through the current Distribution Date.
"Class Interest Distributable Amount" means, with respect to any
--------------------------------
Distribution Date and any Class of Notes, the related Class Monthly Interest
Distributable Amount for such Distribution Date and the related Class
Interest Carry- Forward Amount, if any, for such Distribution Date.
"Class Monthly Interest Distributable Amount" means, with respect to any
--------------------------------------------
Distribution Date and any Class of Notes, the interest accrued for the
related Due Period on such Class of Notes at the Note Interest Rate for such
Class on the outstanding principal balance of the Notes of such Class
immediately preceding such Distribution Date (or, in the case of the first
Distribution Date, on the Closing Date).
"Collected Amount" means with respect to any Distribution Date, the sum
----------------
of (i) (A) all payments of interest in respect of the Loans due during the
related Due Period and received prior to the related Determination Date and
(B) all payments of principal in respect of the Loans received during
such Due Period; (ii) FHA Insurance premiums in respect of FHA Loans
received during the related Due Period; (iii) the Purchase Price for
repurchased Loans and additional cash adjustments (described in the Sale
and Servicing Agreement) in respect of substitutions of Loans during such
Due Period; (iv) Insurance Proceeds received by the Master Servicer
during such Due Period; (v) FHA Insurance claims payments received in
respect of FHA Loans during such Due Period; (vi) payments received
during such Due Period from the Securities Insurer, Mego or Master
Servicer in connection with the termination of the Trust as provided in
the Sale and Servicing Agreement; and (vii) Interest Advances for the
Loans in respect of such Distribution Date.
"Defaulted Loan" means any Loan with respect to which: (i) a claim has
--------------
been paid or finally rejected pursuant to the Contract of Insurance, (ii) the
Property has been repossessed and sold, or (iii) any portion of a scheduled
monthly payment of principal and interest is in excess of 180 days past due.
"Distributable Excess Spread" means, with respect to any Distribution
----------------------------
Date. the lesser of (i) the amount of Excess Spread for such Distribution
Date and (ii) the portion (not greater than 100%) of such Excess Spread,
if any, required to be distributed on such Distribution Date
to satisfy the overcollateralization requirement in effect for such
Distribution Date as specified in the Sale and Servicing Agreement.
"Excess Spread" means, with respect to any Distribution Date, the
-----------
positive excess, if any, of (x) the Collected Amount with respect to such
Distribution Date over (y) the amount required to be distributed pursuant
to clauses (a) (i) through (iii) above under "--Priority of Distributions."
"Insurance Proceeds" means, with respect to any Distribution Date and
----------------
with respect to any Loan, all amounts collected in respect of related insurance
policies (other than the Securities Insurance Policy and the Contract of
Insurance) that are not applied to the restoration or repair of the Mortgaged
Property or released to the borrower in accordance with customary loan
servicing procedures.
"Noteholders' Guaranteed Principal Distribution Amount" means with
---------------------------------------------------------
respect to any Distribution Date, the excess, if any, of (i) the
Aggregate Note Principal Balance as of such Distribution Date (taking
into account the Noteholders' Principal Distributable Amount and
Distributable Excess Spread distributed to Noteholders on such
Distribution Date) over (ii) the Pool Principal Balance as of the end of
the related Due Period; provided, that on
-------- ----
the Final Maturity Date, the Noteholders' Guaranteed Principal Distribution
Amount for any Class of Notes shall equal the amount necessary to reduce
the Class Principal Balance thereof to zero (taking into account the
Noteholders' Principal Distributable Amount and the Distributable Excess
Spread distributed to Noteholders on such Final Maturity Date).
"Noteholders' Interest Distributable Amount" means the sum of the Class
------------------------------------------
Interest Distributable Amounts for such Distribution Date.
"Noteholders' Principal Distributable Amount" means, with respect to
---------------------------------------
each Distribution Date, the amount equal to the sum of the following amounts
(without duplication) with respect to the immediately preceding Due Period:
(i) that portion of all payments received on Loans allocable to principal,
including all full and partial principal prepayments (including such payments
in respect of such Loans that became Defaulted Loans during the preceding Due
Period), (ii) the portion of the Purchase Price allocable to principal of all
repurchased Loans with respect to such Due Period and the portion of the
Termination Price (defined herein), if any, allocable to principal with
respect to the Loans, and (iii) any additional cash adjustments (described in
the Sale and Servicing Agreement) deposited to the related Note Distribution
Account on the previous Determination Date provided, however, that the
Noteholders' Principal Distributable Amount shall not exceed the outstanding
Class Principal Balance of the Notes; and provided, further, that the
Noteholders' Principal Distributable Amount on the Final Maturity Date shall
not be less than the amount that is necessary (after giving effect to other
amounts to be deposited in the Note Distribution Account on such Distribution
Date and allocable to principal) to reduce the outstanding Class Principal
Balance of each of the Class A-1, Class A-2, Class A-3, Class A-4 and Class
A-5 Notes to zero.
"Other Fees" means, with respect to any Distribution Date, the sum of
----------
(i) amounts in respect of fees and expenses due to any provider of services to
the Trust, except the Indenture Trustee, the Master Servicer, the Servicer,
the Claims Administrator, the Contract of Insurance Holder and any Person,
the fees of which are required by the Sale and Servicing Agreement to be paid
by the Master Servicer, the Servicer, the Claims Administrator, the Contract
of Insurance Holder or the Trustee; (ii) any taxes assessed against the
Trust; and (iii) the reasonable transition expenses of a successor Master
Servicer incurred in acting as successor Master Servicer.
SECURITIES INSURER REIMBURSEMENT AMOUNT
On each Distribution Date, the Securities Insurer will be entitled to be
reimbursed for any unreimbursed Insured Payments in respect of the Insured
Securities not previously reimbursed and any other amounts owed to the
Securities Insurer under the Insurance Agreement together with interest
thereon at the rate specified in the Insurance Agreement (the "Securities
Insurer Reimbursement Amount") and any accrued and unpaid Premiums as set
forth above under "--Priority of Distributions". The "Insurance Agreement"
means the Insurance Agreement dated as of May 1, 1997 among the Securities
Insurer, the Depositor, Mego, as the Servicer and Seller, the Master
Servicer, the Trust and the Indenture Trustee.
In connection with each Insured Payment, the Indenture Trustee, as
attorney-in-fact for the holder thereof, will be required to assign to the
Securities Insurer the rights of the Noteholders with respect to the Notes,
to the extent of such Insured Payments. In the event that any Securities
Insurer Reimbursement Amount is outstanding, the holders of the Residual
Certificates will not be entitled to receive distributions of any amounts
until the Securities Insurer has been distributed such Securities Insurer
Reimbursement Amount in full.
OVERCOLLATERALIZATION PROVISIONS
The provisions of the Sale and Servicing Agreement provide for limited
overcollateralization as of the Closing Date and for a limited acceleration
of the Aggregate Note Principal Balance relative to the amortization of the
Pool Principal Balance. The acceleration of principal payments on the Notes
is achieved by distributing Distributable Excess Spread as principal thereon.
This acceleration feature creates overcollateralization (i.e., the excess of
the Pool Principal Balance over the Aggregate Note Principal Balance) in
addition to the overcollateralization in effect on the Closing Date. Once
the required level of overcollateralization is reached and subject to the
provisions described in the next paragraph, the acceleration feature will
cease, unless necessary to maintain the required level of
overcollateralization specified in the Sale and Servicing Agreement.
The Sale and Servicing Agreement provides that, subject to certain
floors, caps and triggers, the required level of overcollateralization may
increase or decrease over time. Any decrease in the required level of
overcollateralization beyond that which is specified in the Sale and
Servicing Agreement will only occur at the sole discretion of the Securities
Insurer. Any such decrease will have the effect of reducing the rate of
principal payments on the Notes relative to the rate that would otherwise
have occurred.
FHA PREMIUM ACCOUNT
An account (the "FHA Premium Account") will be established by the
Indenture Trustee into which an initial deposit of approximately $1,019.55
will be made on the Closing Date. No later than the second business day
preceding each Distribution Date, the Indenture Trustee will deposit into the
applicable FHA Premium Account, FHA insurance premiums received from Obligors
on the Invoiced Loans (as defined below). The Indenture Trustee will also
deposit into the applicable FHA Premium Account, to the extent of funds
available therefor in the Note Distribution Account, an amount equal to the
greater of (i) 0.75% of the Principal Balance of each outstanding FHA Loan
(determined without including the Principal Balances of any Invoiced Loans),
divided by 12 and (ii) the positive excess, if any, of (A) the amount of
premium and other charges due under the Contract of Insurance in respect of
the FHA Loans (other than Invoiced Loans) for the next succeeding Due Period
over (B) the balance in the related FHA Premium Account as of the related
Determination Date (each a "FHA Premium Account Deposit"). "Invoiced Loans"
are FHA Loans with respect to which the related Obligor is required to pay
the premium onFHA Insurance as aseparate amount with respect tosuch FHA Loan.
REPORTS TO NOTEHOLDERS
Concurrently with each distribution to Noteholders, the Indenture
Trustee will forward to each Noteholder and the Securities Insurer a
statement setting forth as to each Class of Notes, among other items:
(i) the aggregate amount of the distribution to each Class of
Noteholders on the Distribution Date;
(ii) the amount of distribution set forth in paragraph (i) above in
respect of interest and the amount thereof in respect of any Class
Interest Carry-Forward Amount for each Class, and the amount of any
Class Interest Carry-Forward Amount remaining for each Class;
(iii) the distribution amount set forth in paragraph (i) above in
respect of principal;
(iv) the amount of Distributable Excess Spread paid as principal in
respect of the Notes;
(v) the Noteholders' Principal Distributable Amount;
(vi) the amount paid in respect of the Insured Securities under the
Securities Guarantee Policy for such Distribution Date on account of the
Noteholders' Guaranteed Principal Distribution Amount and related Class
Interest Distributable Amount of each such Class;
(vii) the related Master Servicing Fee and the related Servicing
Fee;
(viii) the Pool Principal Balance as of the close of business on
the last day of the preceding Due Period;
(ix) the Aggregate Note Principal Balance after giving effect to
payments allocated to principal in clause (iii) above;
(x) the amount of overcollateralization required by the Sale and
Servicing Agreement for such Distribution Date and the amount of
overcollateralization as of the close of business on the Distribution
Date, after giving effect to distributions of principal on such
Distribution Date;
(xi) the aggregate amount of claims filed, paid and rejected under
the FHA Insurance for the related Due Period and the cumulative amount
of such claims as of the date of the statement;
(xii) the Principal Balance of each Defaulted Loan and delinquent
Loan and the aggregate amount of Defaulted Loans and delinquent Loans
for the related Due Period; and
(xiii) the number and aggregate Principal Balance of Loans that
have been repurchased by the Seller for the related Due Period.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Note with a
$1,000 denomination.
OPTIONAL REDEMPTION OF THE NOTES
On or after any Distribution Date on which the Pool Principal Balance
declines to 10% or less of the Original Pool Principal Balance, Mego, the
Master Servicer or the Securities Insurer may purchase the then outstanding
Loans at a price equal to the Termination Price, thereby causing an early
redemption of the Notes. The Termination Price will be equal to the sum of
(i) the aggregate of the Principal Balances of the Loans and accrued and
unpaid interest thereon at the weighted average of the Loan Rates through the
end of the preceding calendar month, (ii) the appraised value of pending FHA
claims with respect to any Loans and the appraised value of any foreclosed
Mortgaged Properties that have not been liquidated in each case as of a date
not more than 30 days prior to the end of the preceding calendar month, and
(iii) all amounts due and owing to the Securities Insurer (including any
amounts that may be paid by the Securities Insurer under the Securities
Insurance Policy in connection with the final distribution on the Notes).
The Owner Trustee shall cause the Indenture Trustee to effect such early
redemption of the Notes by paying to the Noteholders, an amount in respect of
the Notes equal to the then outstanding Class Principal Balances of the
Notes, plus accrued interest thereon at the applicable Note Interest Rates,
(ii) to the Securities Insurer, an amount equal to any amounts owed to the
Securities Insurer under the Insurance Agreement and (iii) any unpaid trust
fees and expenses.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, Sale and
Servicing Agreement, the Administration Agreement and the Trust Agreement
(collectively, the "Transfer and Servicing Agreements"). Copies of the
Transfer and Servicing Agreements will be filed with the Commission following
the issuance of the 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 headings "Description of the Transfer and
Servicing Agreements" herein, to which description reference is hereby made.
SALE AND ASSIGNMENT OF THE LOANS
On the Closing Date, the Seller will sell, convey, transfer and assign
all of its right, title and interest in and to the Loans to the Depositor,
and the Depositor will sell, convey, transfer and assign the Loans to the
Trust. The Trust will, concurrently with the sale, conveyance, transfer and
assignment of the Loans deliver or cause to be delivered the Securities to
the Depositor in exchange for the Loans. The Trust will pledge and assign
the Loans to the Indenture Trustee as security for the Notes. Each Loan will
be identified in a schedule appearing as an exhibit to the Sale and Servicing
Agreement delivered to the Indenture Trustee (the "Loan Schedule").
In addition, the Seller will deliver or cause to be delivered, as to
each Loan to the Indenture Trustee or the Custodian the related note endorsed
to the order of the Indenture Trustee and Co-Owner Trustee without recourse,
any assumption and modification agreements and the Mortgage, if any, with
evidence of recording indicated thereon (except for any Mortgage not returned
from the public recording office), an assignment of the Mortgage, if any, in
the name of the Co-Owner Trustee and the Indenture Trustee in recordable
form, and any intervening assignments of the Mortgage (each, an "Indenture
Trustee's Loan File"). Within 60 days of the Closing Date, the Seller will
cause the Indenture Trustee to record the assignments of the Mortgages. In
the event that, with respect to each Mortgage Loan, the Seller cannot deliver
the Mortgage or any assignment of Mortgage with evidence of recording thereon
concurrently with the conveyance thereof under the Sale and Servicing
Agreement because they have not yet been returned by the public recording
office, the Seller will deliver or cause to be delivered to the Indenture
Trustee or the Custodian a certified true photocopy of such Mortgage or
assignment of Mortgage. The Seller will deliver or cause to be delivered to
the Indenture Trustee or the Custodian any such Mortgage or assignment of
Mortgage with evidence of recording indicated thereon upon receipt thereof
from the public recording office. The Indenture Trustee or the Custodian
will agree, for the benefit of the holders of the Securities, to review (or
cause to be reviewed) each Indenture Trustee's Loan File within 45 days after
the conveyance of the related Loan to the Trust to ascertain that all
required documents have been executed and received, subject to the applicable
cure period in the Transfer and Servicing Agreements.
TRUST FEES AND EXPENSES
As compensation for their services pursuant to the applicable Transfer
and Servicing Agreements, the Indenture Trustee is entitled to the Indenture
Trustee Fee and the Owner Trustee is entitled to the Owner Trustee Fee. As
compensation for its services pursuant to the Sale and Servicing Agreement,
the Master Servicer is entitled to the Master Servicer Fee, and the Servicer
is entitled to the Servicing Fee and additional servicing compensation and
reimbursement as described under the "Servicing Compensation and Payment of
Expenses" subheading below. As compensation for issuing the Securities
Insurance Policy, the Securities Insurer is entitled to the Premium.
COLLECTION ACCOUNT, NOTE DISTRIBUTION ACCOUNT AND CERTIFICATE DISTRIBUTION
ACCOUNT
The Master Servicer will cause the Servicer to deposit in an Eligible
Account (the "Collection Account"), within two business days of receipt, all
payments received on or after the Cut-Off Date on account of principal on the
Loans, all payments due on or after the Cut-Off Date on account of interest
on the Loans, all net liquidation proceeds, insurance proceeds, and any other
amounts in respect of the Loans. 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 which satisfies the requirements set forth in the definition of
Eligible Account in the Sale and Servicing Agreement. Initially, the
Collection Account will be maintained with The First National Bank of Boston.
The Indenture Trustee will establish and maintain an account, in the
name of the Indenture Trustee on behalf of the Noteholders, into which
amounts released from the Collection Account, and any proceeds from the
Securities Insurance Policy for distribution to the Noteholders will be
deposited and from which all distributions to the Noteholders will be made
(the "Note Distribution Account"). The Indenture Trustee will also establish
and maintain an account, in the name of the Owner Trustee on behalf of the
Residual Certificateholders, into which amounts released from the Note
Distribution Account for distribution to the Residual Certificateholders will
be deposited and from which all distributions to the Residual
Certificateholders will be made (the "Certificate Distribution Account" and,
together with the Note Distribution Account, the "Distribution Accounts").
No later than the second business day prior to each Distribution Date,
the Indenture Trustee will deposit into the Note Distribution Account the
portion of the Collected Amount on deposit in the Collection Account by
making the appropriate withdrawals from the Collection Account. On each
Distribution Date, the Indenture Trustee will make withdrawals from the
Distribution Accounts for application of the amounts specified above under "-
- -Priority of Distributions."
INCOME FROM ACCOUNTS
Amounts on deposit in the Note Distribution Account and the Collection
Account (sometimes referred to herein, together with the Certificate
Distribution Account, as an "Account") will be invested, as directed by Mego,
in one or more Permitted Investments (as defined in the Sale and Servicing
Agreement) bearing interest or sold at a discount. No such investment of
amounts in the Collection Account will mature later than three business days
immediately preceding the next Distribution Date. All income or other gain
from investments of amounts in any such Account will be deposited in such
Account immediately on receipt, unless otherwise specified herein. All net
investment earnings will be distributed to Mego.
COLLECTION AND OTHER SERVICING PROCEDURES ON LOANS; CLAIMS ADMINISTRATION
The Master Servicer has agreed to manage, service, administer and make
collections on the Loans, and perform the other actions required by the
Master Servicer under the Sale and Servicing Agreement. In performing such
obligations, the Master Servicer is required to act in good faith in a
commercially reasonable manner and in accordance with all requirements of the
FHA applicable to the servicing of the FHA Loans, and to service and
administer such FHA Loans in accordance with the Title I Program, the terms
of the Sale and Servicing Agreement and the respective FHA Loans. The
obligations of the Master Servicer under the Sale and Servicing Agreement are
expected to be performed by the Servicer pursuant to the Servicing Agreement.
The Master Servicer has full power and authority, acting alone and/or through
the Servicer subject only to the specific requirements and prohibitions of
the Title I Program with respect to the FHA Loans, the Sale and Servicing
Agreement and the respective Loans, to do any and all things in connection
with such servicing and administration which are consistent with the ordinary
practices of prudent mortgage lending institutions and, with respect to the
FHA Title I home loans, prudent FHA Title I home loan servicers.
If any payment due under any Loan is not paid when the same becomes due
and payable, or if the related Obligor fails to perform any other covenant or
obligation under the Loan and such failure continues beyond any applicable
grace period, the Master Servicer must take such action (consistent with
Title I, in the case of the FHA Loans, including efforts to cure the default
of such FHA Loan) as it shall deem to be in the best interest of the Trust.
With respect to the FHA Loans, if the maturity of the related note or
obligation has been accelerated pursuant to the requirements of Title I
following the Master Servicer's efforts to cure the default of such FHA Loan
(and such FHA Loan is not required to be purchased pursuant to the Sale and
Servicing Agreement) and (i) if the Trust Designated Insurance Amount has not
been depleted at that time, the Claims Administrator shall initiate, on
behalf of the Trust and the Contract of Insurance Holder, a claim under the
Contract of Insurance for reimbursement for loss on such FHA Loan pursuant to
Title I or, (ii) if the Trust Designated Insurance Amount has been depleted
at that time (an "FHA Insurance Coverage Insufficiency"), the Master Servicer
shall determine within 90 days whether or not to proceed against the property
securing the FHA Loan if such FHA Loan is a Mortgage Loan or against the
Obligor if the FHA Loan is unsecured pursuant to the provisions of the Sale
and Servicing Agreement. Thereafter, if an FHA Insurance Coverage
Insufficiency does not exist and the claim period has not expired, the Master
Servicer may notify the Claims Administrator to seek approval of the
Secretary of HUD to submit a claim under the Contract of Insurance with
respect to such FHA Loan.
If the FHA rejects or refuses to pay any claim made under the Contract
of Insurance (including a rejection of a previously paid claim and a demand
by the FHA of a previously paid claim amount for such FHA Loan) for an FHA
Loan (other than a refusal or rejection for clerical error in computing the
claim amount or due to an exhaustion of the Combined FHA Insurance Amount),
upon receipt of the FHA's rejection notice or demand and determination by the
Claims Administrator that the rejection or demand was not due to clerical
error, then (i) the Claims Administrator must promptly notify the Indenture
Trustee (if the Indenture Trustee shall not initially have received such
notice) and the Securities Insurer of such fact, and (ii) if the FHA
indicates rejection for other than a failure to service such FHA Loan in
accordance with Title I or the exhaustion of the Combined FHA Insurance
Amount, the Seller shall be liable on or before the last day of the calendar
month next following the date of such notice from the Claims Administrator to
repurchase such FHA Loan for the Purchase Price thereof. In connection with
its rejection or refusal to pay a claim or demand for payment related to a
previously paid but rejected claim, if the FHA shall have indicated in
writing, or if the FHA does not indicate in writing the reason for its
rejection or refusal or demand and it is otherwise evident that such
rejection or refusal or demand is due to a failure to service such FHA Loan
in accordance with Title I, the Claims Administrator shall notify the Seller,
the Master Servicer and the Securities Insurer of such determination, and the
Master Servicer or the Servicer shall on or before the later to occur of (i)
the last day of the calendar month next succeeding the date of such rejection
or demand and (ii) ten business days from the date on which notice of such
rejection is received by the Claims Administrator from the FHA, either
directly or from the FHA or the Indenture Trustee, repurchase such FHA Loan
from the Trust or the FHA, as applicable, for the Purchase Price.
The Indenture Trustee will deposit in the Note Distribution Account on
the day of receipt all amounts received from the FHA or any other Person with
respect to the FHA Loans or any other assets of the Trust.
In addition, with respect to any Mortgage Loan, the Master Servicer is
required to advance funds for the payment of certain expenses in connection
with the foreclosure of a Mortgaged Property (the "Foreclosed Property")
relating to insurance, taxes, property protection, maintenance, third party
expenses and similar expenses ("Foreclosure Advances"). The Master Servicer
must advance the Foreclosure Advances but only if it has approved the
foreclosure in writing and the Master Servicer would make such an advance if
it or an affiliate held the affected Mortgage Loan or Foreclosed Property for
its own account and, in the Master Servicer's good faith judgment, such
amounts will be recoverable from the related proceeds. In making such
assessment with respect to the institution of foreclosure proceedings, the
Master Servicer shall not advance funds with respect to a Mortgage Loan
unless the appraised value of the related Mortgaged Property exceeds the sum
of (i) the amount necessary to satisfy any liens prior to the Mortgage and
(ii) the reasonably anticipated costs of foreclosure or similar proceedings.
The Master Servicer may modify, waive or amend any provision of any Loan
if, in the Master Servicer's good faith judgment, such modification (i) would
minimize the loss that might otherwise be experienced with respect to such
Loan and (ii) with respect to FHA Loans, complies with the requirements of
Title I and, in either case, only in the event of a payment default with
respect to such Loan or in the event that a payment default with respect to
such Loan is reasonably foreseeable by the Master Servicer. The Master
Servicer may agree to subordinate the position of the security interest in
the Mortgaged Property which secures any Loan provided such subordination (i)
would permit the borrower to refinance a senior lien to take advantage of a
lower interest rate or (ii) would permit the borrower to extend the term of
the senior lien and, with respect to any FHA Loan, the Master Servicer
receives written approval of HUD to such subordination or written
certification by the Servicer that such proposed subordination complies with
current published HUD requirements.
INSURANCE
With respect to each Conventional Loan, the Master Servicer shall cause
to be maintained fire and hazard insurance naming Mego as loss payee and
providing extended coverage in an amount which is at least equal to the
lesser of (i) the maximum insurable value of the improvements securing such
Conventional Loan from time to time, (ii) the combined principal balance
owing on such Conventional Loan and any mortgage loan senior to such
Conventional Loan and (iii) the minimum amount required to compensate for
damage or loss on a replacement cost basis. In cases in which any Mortgaged
Property securing a Conventional Loan is located in a federally designated
flood area, the hazard insurance to be maintained for the related Loan shall
include flood insurance to the extent such flood insurance is available and
the Master Servicer has determined such insurance to be necessary in
accordance with accepted mortgage loan servicing standards for mortgage loans
similar to the Mortgage Loans. All such flood insurance shall be in amounts
equal to the least of (A) the maximum insurable value of the improvement
securing such Conventional Loan, (B) the combined principal balance owing on
such Conventional Loan and any mortgage loan senior to such Conventional Loan
and (C) the maximum amount of insurance available under the National Flood
Insurance Act of 1968, as amended.
With respect to the Secured FHA Loans, FHA Regulations do not require
hazard insurance to be maintained on the related Mortgaged Properties and the
Master Servicer will not require such insurance to be maintained on such
Mortgaged Properties. FHA regulations require borrowers to maintain flood
insurance with respect to the Mortgaged Property securing an FHA Loan where
the Mortgaged Property securing the Loan is located in an area that has been
identified by the Federal Emergency Management Agency ("FEMA") as having
special flood hazards in accordance with FHA regulations. Such insurance
must be maintained by the borrower for the full term of such FHA Loan or
until the Mortgaged Property is either repossessed or foreclosed by the
Master Servicer. The Master Servicer will cause to be maintained flood
insurance with respect to each Mortgaged Property located in any such area as
having been identified by FEMA as having special flood hazards in accordance
with FHA regulations in an amount equal to the outstanding Principal Balance
of the related FHA Loan.
REALIZATION UPON DEFAULTED LOANS
With respect to any Mortgage Loan, the Master Servicer may institute
foreclosure proceedings, exercise any power of sale to the extent permitted
by law, obtain a deed in lieu of foreclosure, or otherwise acquire possession
of or title to any Mortgaged Property, by operation of law or otherwise, and
only in the event that in the Master Servicer's reasonable judgment such
action is likely to result in a positive economic benefit to the Trust by
creating net liquidation proceeds (after reimbursement of all amounts owed
with respect to such Mortgage Loan to the Master Servicer or the Servicer)
and provided that prior to taking title to any Mortgaged Property, the Master
Servicer has requested that the Indenture Trustee obtain, and the Indenture
Trustee shall have obtained, an environmental review to be performed on the
Mortgaged Property by a company having appropriate experience and otherwise
reasonably acceptable to the Indenture Trustee and the Securities Insurer,
the scope of which is limited to the review of public records and documents
for information regarding whether such Mortgaged Property has on it, under it
or is near, hazardous or toxic material or waste. If such review reveals that
the Mortgaged Property has on it, under it or is near hazardous or toxic
material or waste or reveals any other environmental problem, the Indenture
Trustee shall provide a copy of the related report to the Master Servicer and
the Securities Insurer and title shall be taken to such Mortgaged Property
only after obtaining the written consent of the Master Servicer and the
Securities Insurer. In general, with respect to the FHA Loans, the Master
Servicer will only institute such foreclosure proceedings if the Trust
Designated Insurance Amount is depleted and the other considerations set
forth in this paragraph are satisfied.
In connection with any such foreclosure proceeding, power of sale, deed
in lieu of foreclosure or other acquisition of a Mortgaged Property, the
Master Servicer shall comply with the requirements under Title I, if such
Mortgage Loan is an FHA Loan, and the Sale and Servicing Agreement, and shall
follow such practices and procedures in a manner which is consistent with the
Master Servicer's procedure for foreclosure and operation of the foreclosed
property with respect to similar loans held in the Master Servicer's
portfolio for its own account or, if there are no such loans, such loans
serviced by the Master Servicer for others, giving due consideration to
accepted servicing practices of prudent lending institutions.
Notwithstanding the foregoing with respect to any Defaulted Loan that is an
FHA Loan assuming the Trust Designated Insurance Amount has not been
depleted, the Claims Administrator will make a claim under the Contract of
Insurance prior to initiating any foreclosure proceedings on the related
Mortgaged Property. Concurrently with the filing of any such insurance
claim, the Trust will assign its entire interest in the Loan to the United
States of America.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
On each Distribution Date, the Master Servicer will receive from the
Collected Amount a monthly master servicing fee (the "Master Servicing Fee")
in the amount equal to 0.08% per annum ("Master Servicing Fee Rate") on the
Pool Principal Balance as of the first day of the immediately preceding Due
Period (or as of the Cut-Off Date, with respect to the first Due Period).
The Servicer will receive from the Collected Amount a monthly servicing fee
(the "Servicing Fee") in the amount equal to 1.00% per annum (the "Servicing
Fee Rate") on the Pool Principal Balance as of the first day of the
immediately preceding Due Period (or as of the Cut Off-Date, with respect to
the first Distribution Date), subject to reduction as described below. All
assumption fees, late payment charges, prepayment penalties and other fees
and charges, to the extent collected from borrowers, will be retained by the
Servicer as additional servicing compensation.
The Servicer will be required to fund in respect of each Distribution
Date, without any right of reimbursement, an amount equal to the lesser of
(a) the excess, if any, of (x) a full month's interest on the amount of each
principal prepayment in full of any Loan at the related Loan Rate (or such
lower rate as may be in effect for a Loan because of application of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Civil
Relief Act")) minus the Servicing Fee Rate over (y) the amount of interest
actually paid by the Obligor in connection with such principal prepayment
during the related Due Period (a "Prepayment Interest Shortfall") and (b) the
aggregate of the Servicing Fee to be received by the Servicer in the related
Due Period (without giving effect to any such reduction). Any Prepayment
Interest Shortfall not covered by such Servicing Fee will not be covered by
the application of any Excess Spread or by the Securities Insurance Policy.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement provides for delivery to the Indenture
Trustee, the Securities Insurer and the Rating Agencies of an annual
statement signed by two officers of the Master Servicer to the effect that
the Master Servicer has fulfilled its obligations under the Sale and
Servicing Agreement throughout the preceding year, except as specified in
such statement.
Each year (within 150 days following the end of the Master Servicer's
fiscal year), beginning in 1998, the Master Servicer will furnish a report
prepared by a firm of nationally recognized independent public accountants
(who may also render other services to the Master Servicer or the Depositor)
to the Indenture Trustee and the Securities Insurer to the effect that such
firm has examined certain documents and the records relating to servicing of
the Loans as specified in the Sale and Servicing Agreement and such firm's
conclusion that the Master Servicer is in compliance with respect thereto.
The Master Servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND SERVICER
The Sale and Servicing Agreement provides that the Master Servicer may
not resign from its obligations and duties thereunder except (i) with the
consent of the Securities Insurer and the Rating Agencies or (ii) upon
determination that by reason of a change in legal requirements the
performance of its duties under the Sale and Servicing Agreement would cause
it to be in violation of such legal requirements in a manner which would
result in a material adverse effect on the Master Servicer, and the
Securities Insurer (so long as an Insurer Default shall not have occurred and
be continuing) does not elect to waive the obligations of the Master Servicer
to perform the duties which render it legally unable to act or to delegate
those duties. Any such determination permitting the resignation of the Master
Servicer by reason of a change in such legal requirements shall be evidenced
by an opinion of counsel to such effect delivered and acceptable to the
Indenture Trustee and the Securities Insurer (unless a Securities Insurer
Default shall have occurred and be continuing). No resignation of the Master
Servicer shall become effective until the Indenture Trustee or a successor
master servicer acceptable to the Securities Insurer shall have assumed the
Master Servicer's servicing responsibilities and obligations.
The Master Servicer has agreed not to merge or consolidate with any
other company or permit any other company to become the successor to the
Master Servicer's business unless, after the merger or consolidation, the
successor or surviving entity (i) shall be an Eligible Servicer (as defined
in the Sale and Servicing Agreement), (ii) shall be capable of fulfilling the
duties of the Master Servicer contained in the Sale and Servicing Agreement
and (iii) shall have a long-term debt rating which is at least investment
grade from each of the Rating Agencies. Any company into which the Master
Servicer may be merged or consolidated, shall execute an agreement of
assumption to perform every obligation of the Master Servicer under the Sale
and Servicing Agreement and, shall be the successor to the Master Servicer
under the Sale and Servicing Agreement.
The Master Servicer will enter into the Servicing Agreement with the
Servicer, the Indenture Trustee and the Trust. The Servicing Agreement will
not relieve the Master Servicer of any of its duties and obligations to the
Indenture Trustee on behalf of Noteholders and Residual Certificateholders
with respect to the servicing and administration of the Loans. The Master
Servicer will be obligated with respect thereto to the same extent and under
the same terms and conditions as if it alone were performing all duties and
obligations in connection with the servicing and administration of such
Loans.
The Master Servicer will review the servicing reports prepared by the
Servicer in order to verify the accuracy thereof, monitor the performance by
the Servicer under the Servicing Agreement and will be obligated to ensure
that the Servicer deposits payments on the Loans into the Collection Account.
The Securities Insurer and the Master Servicer have various rights to
terminate the Servicing Agreement upon the occurrence of a Servicer
Termination Event, as defined in the Servicing Agreement. The Master Servicer
is required to perform the obligations of the Servicer in the event the
Servicer fails to perform its duties and obligations under the Servicing
Agreement.
The Sale and Servicing Agreement provides that neither the Master
Servicer nor any of its directors, officers, employees or agents shall be
under any liability to the Trust or to the Residual Certificateholders for
any action taken or for refraining from the taking of any action in good
faith pursuant to the Sale and Servicing Agreement, or for errors in
judgment, unless liability would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in performing or failing to perform
duties.
EVENTS OF MASTER SERVICING TERMINATION
"Events of Master Servicing Termination" will consist of, among other
things: (i) (A) any failure by the Master Servicer to make any required
interest advance, which failure continues beyond the grace period specified
in the Sale and Servicing Agreement, or (B) any other failure of the Master
Servicer to deposit or cause the Servicer to deposit in the Collection
Account any amount required to be deposited under the Sale and Servicing
Agreement, which failure continues unremedied for two business days or (C)
any failure by the Master Servicer to pay when due any amount payable by it
under the Sale and Servicing Agreement and such failure results in a drawing
under the Securities Insurance Policy or (D) any failure by the Master
Servicer to pay when due any amount payable by it under the Insurance
Agreement, which failure continues unremedied for two business days; (ii) any
failure by the Master 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 thirty business days after
notice; (iii) the Master Servicer's failure to maintain a long-term debt
rating of at least BBB and Baa2 by Standard & Poor's and Moody's
respectively; (iv) the loss and delinquency experience with respect to the
Loans exceeds certain levels as specified in the Sale and Servicing
Agreement; or (v) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings relating to the
Master Servicer and certain actions by the Master Servicer indicating
insolvency, reorganization or inability to pay its obligations (an
"Insolvency Event") or the Master Servicer shall dissolve or liquidate, in
whole or part, in any material respect.
If an Event of Master Servicing Termination shall occur and be
continuing, the Securities Insurer (or, if a Securities Insurer Default shall
have occurred and be continuing, the Indenture Trustee at the direction of
the Securityholders), by notice given in writing to the Master Servicer (and
to the Indenture Trustee if given by the Securities Insurer or the
Securityholders) may terminate all of the rights and obligations of the
Master Servicer under the Sale and Servicing Agreement. On or after the
receipt by the Master Servicer of such written notice, and the appointment of
and acceptance by a successor Master Servicer, all authority, power,
obligations and responsibilities of the Master Servicer under the Sale and
Servicing Agreement shall become obligations and responsibilities of the
successor Master Servicer. After the Master Servicer receives a notice of
termination or upon the resignation of the Master Servicer, the Indenture
Trustee shall be the successor in all respects to the Master Servicer in its
capacity as master servicer under the Sale and Servicing Agreement.
Any successor Master Servicer shall be entitled to such compensation
(whether payable out of the Distribution Amount or otherwise) as the Master
Servicer would have been entitled to under the Sale and Servicing Agreement
if the Master Servicer had not resigned or been terminated hereunder. The
Securities Insurer and a successor Master Servicer may agree on additional
compensation to be paid to such successor Master Servicer. In addition, any
successor Master Servicer shall be entitled to reasonable transition expenses
incurred in acting as successor Master Servicer.
An Event of Master Servicing Termination with respect to the Master
Servicer under the applicable pooling and servicing agreement and an event of
servicing termination under the applicable servicing agreement with respect
to the Servicer has occurred and is continuing for each of Mego Mortgage FHA
Title I Loan Trust 1996-1 and Mego Mortgage FHA Title I Loan Trust 1996-2.
See "Mego Mortgage Corporation - Delinquency Experience."
RESTRICTIONS ON SECURITYHOLDER RIGHTS
So long as (i) there does not exist a continuing failure by the
Securities Insurer to make a required payment under the Securities Insurance
Policy and (ii) certain bankruptcy-related events specified in the Sale and
Servicing Agreement have not occurred with respect to the Securities Insurer
(any of the events described in (i) and (ii), a "Securities Insurer
Default"), the Securities Insurer will have the right to exercise all rights,
including voting rights, which the Insured Securityholders are entitled to
exercise pursuant to the Indenture and the Trust Agreement (the "Insured
Securityholder Rights"), without any consent of such Insured Securityholders;
provided, however, that without the consent of each holder of a Class of
Notes or Residual Certificates affected thereby, the Securities Insurer shall
not exercise such Insured Securityholder Rights to amend the Indenture in any
manner that would (i) reduce the amount of, or delay the timing of,
collections of payments on Loans or distributions which are required to be
made on any Security, (ii) adversely affect in any material respect the
interests of the holders of any Class of Notes or the Residual Certificates,
or (iii) alter the rights of any such Insured Securityholder to consent to
any such amendment.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Securities in their own names or as pledgees. For the
purpose of meeting the legal requirements of certain jurisdictions, the
Servicer, 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 with the prior written consent of the Securities Insurer. In
the event of such an appointment, all rights, powers, duties and obligations
conferred or imposed upon the Owner Trustee by the Sale and Servicing
Agreement and the Trust Agreement and 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 who will exercise and perform
such rights, powers, duties and obligations solely at the direction of the
Owner Trustee or the Indenture Trustee, respectively.
The Indenture Trustee may resign at any time, in which event the Owner
Trustee will be obligated to appoint a successor thereto. The Owner Trustee
may resign at any time, in which event the Co-Owner Trustee will be obligated
to appoint a successor thereto. The Servicer, with the prior written consent
of the Securities Insurer, or the Securities Insurer may also remove the
Owner Trustee or the Indenture Trustee if either ceases to be eligible to
continue as such under the Trust Agreement or the Indenture, as the case may
be, becomes legally unable to act or becomes insolvent. In such
circumstances, the Servicer will be obligated to appoint a successor Owner
Trustee or a successor Indenture Trustee, as applicable, that is acceptable
to the Securities Insurer. Any resignation or removal of the Owner Trustee
or Indenture Trustee and appointment of a successor thereto will not become
effective until acceptance of the appointment by such successor and approval
by the Securities Insurer.
The Trust Agreement and Indenture will further provide that the Owner
Trustee and Indenture Trustee will be entitled to indemnification by the
Seller for, and will be held harmless against, any loss, liability or expense
incurred by the Owner Trustee, Co-Owner Trustee or Indenture Trustee not
resulting from its own willful misfeasance, bad faith or negligence (other
than by reason of a breach of any of its representations or warranties to be
set forth in the Trust Agreement or Indenture, as the case may be).
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Residual Certificates (other than the
execution and authentication thereof), the Notes or of any Loans or related
documents, and will not be accountable for the use or application by the
Depositor or the Master Servicer of any funds paid to the Depositor or the
Master Servicer in respect of the Notes, the Residual Certificates or the
Loans, or the investment of any monies by the Master Servicer before such
monies are deposited into the Collection Account, the Note Distribution
Account or the Certificate Distribution 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
Trust Agreement or Sale and Servicing Agreement which failure constitutes an
Event of Default unless the Owner Trustee obtains actual knowledge of such
failure as will be specified in the Trust Agreement.
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 of the Residual Certificateholders, unless such Residual
Certificateholders have offered to the Owner Trustee reasonable security or
indemnity against the costs, expenses and liabilities that may be incurred
therein or thereby. Subject to the rights or consent of the Noteholders,
Securities Insurer and Indenture Trustee, no Residual 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 Master Servicer's or the Servicer's
failure to remit payments when due or (ii) the holders of Residual
Certificates evidencing not less than 25% of the voting interests of each
Class of the Residual Certificates have made 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 Residual Certificates, the Notes (other
than the execution and authentication thereof) or of any Loans or related
documents, and will not be accountable for the use or application by the
Depositor, the Master Servicer or the Servicer of any funds paid to the
Depositor, the Master Servicer or the Servicer in respect of the Notes, the
Residual Certificates or the Loans, or the use or investment of any monies by
the Master Servicer or the Servicer before such monies are deposited into the
Collection Account or any Distribution Account. So long as no Indenture
Event of Default has occurred and is continuing, the Indenture Trustee will
be required to perform only those duties specifically required of it under
the Indenture. 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 Master Servicer or the Servicer to perform
its duties under the Trust Agreement, Sale and Servicing Agreement or
Administration Agreement which failure constitutes an Indenture Event of
Default unless the Indenture Trustee obtains actual knowledge of such failure
as will be specified in the Indenture.
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. Subject to
the rights or consent of the Securities Insurer, 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 Master Servicer's or the Servicer's failure to remit
payments when due or (ii) the holders of Class A-1 Notes, Class A-2 Notes,
Class A-3 Notes, Class A-4 Notes and Class A-5 Notes evidencing not less than
25% of the voting interests 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.
PREPAYMENT AND YIELD CONSIDERATIONS
Except as otherwise provided herein, no principal payments will be made
on any Class of Notes until each Class of Notes with a lower numerical
designation has been paid in full. See "Description of the Securities--
Priority of Distributions" herein. As the rate of payment of principal of
each Class of Notes depends primarily on the rate of payment (including
prepayments) of the Principal Balances of the Loans, final payment of any
Class of Notes could occur significantly earlier than Final Maturity Date.
Holders of the Notes 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 of prepayments on
the Loans in either stable or changing interest rate environments. Any
reinvestment risk resulting from the rate of prepayment of the Loans and the
distribution of such payments to the holders of the Notes will be borne
entirely by the holders of the Notes.
The effective yield to the holders of the Notes of any Class will be
lower than the yield otherwise produced by the applicable Note Interest Rate
because the distribution of the interest accrued during each Due Period (a
calendar month consisting of thirty days) will not be made until the
Distribution Date occurring in the month following such Due Period. See
"Description of the Securities--Priority of Distributions" herein. This
delay will result in funds being distributed to the holders of the Notes
approximately 25 days after the end of the monthly accrual period, during
which 25-day period no interest will accrue on such funds. As discussed in
greater detail below, greater than anticipated distributions of principal can
also affect the yield on Notes purchased at a price greater or less than par.
The rate of principal payments on the Notes, the aggregate amount of
each interest payment on the Notes and the yield to maturity on the Notes
will be directly related to and affected by the rate and timing of principal
reductions on the Loans. The principal reductions on such Loans 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 dispositions. On or
after any Distribution Date on which the Pool Principal Balance declines to
10% or less of the Original Pool Principal Balance, Mego, the Master Servicer
or the Securities Insurer may effect a redemption of the Notes as described
herein. See "Description of the Securities--Optional Redemption of the
Notes" herein.
The "Weighted Average Life" of a Note refers to the average amount of
time that will elapse from May 28, 1997 (the "Settlement Date") to the date
each dollar in respect of principal of such Note is repaid. The Weighted
Average Life of a Note will be influenced by, among other factors, the rate
at which principal reductions occur on the Loans and the rate at which
Distributable Excess Spread is distributed to holders of the Notes as
described herein. If substantial principal prepayments on the Loans are
received from unscheduled prepayments, liquidations or repurchases, then the
distributions to the holders of the Notes resulting from such prepayments may
significantly shorten the Weighted Average Lives of the Notes than would
otherwise be the case. If the Loans experience delinquencies and defaults in
the payment of principal, then the holders of the Notes will similarly
experience a delay in the receipt of principal distributions attributable to
such delinquencies and default which in certain instances may result in a
longer Weighted Average Lives of the Notes than would otherwise be the case;
however, the Pool Principal Balance will be reduced by the Principal Balance
of Defaulted Loans, thereby reducing the Overcollateralization Amount. This
may result in Distributable Excess Spread being included in principal
distributions on the Notes until the required level of overcollateralization
is achieved. As a result, the holders of the Notes will experience an
acceleration in the receipt of principal distributions which in certain
instances may result in a shorter Weighted Average Lives of the Notes than
would otherwise be the case.
The rate and timing of principal reductions on the 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. Each of the
Loans may be assumed at the Master Servicer's option upon the sale of the
Mortgaged Property. A majority of the Loans are not subject to prepayment
penalties and may be prepaid at any time. As with fixed rate obligations
generally, the rate of prepayment on a pool of loans is affected by
prevailing market interest rates for similar types of loans of a comparable
term and risk level. If prevailing interest rates were to fall significantly
below the respective Loan Rates on the Loans, the rate of prepayment (and
refinancing) would be expected to increase. Conversely, if prevailing
interest rates were to rise significantly above the respective Loan Rates on
the Loans, the rate of prepayment on the Loans would be expected to decrease.
In addition, depending on prevailing market interest rates, the future
outlook for market interest rates and economic conditions generally, some
borrowers may sell or refinance mortgaged properties in order to realize
their equity in the mortgaged properties, to meet cash flow needs or to make
other investments. In addition, any future limitations on the rights of
borrowers to deduct interest payments on mortgage loans for federal income
tax purposes may result in a higher rate of prepayment on the Loans. The
Depositor and the Seller make no representations as to the particular factors
that will affect the prepayment of the Loans, as to the relative importance
of such factors, or as to the percentage of the Principal Balances of the
Loans that will be paid as of any date.
Distributions of principal to holders of the Notes at a faster rate than
anticipated will increase the yield on Notes purchased at a discount but will
decrease the yield on Notes purchased at a premium, which distributions of
principal may be attributable to scheduled payments and prepayments of
principal on the Loans and to Distributable Excess Spread. The effect on an
investor's yield due to distributions of principal to the holders of the
Notes (including without limitation prepayments on the Loans) 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 such
distributions of principal during any subsequent period.
The rate of delinquencies and defaults on the Loans, and the recoveries,
if any, on defaulted Loans and foreclosed properties, will also affect the
rate and timing of principal payments on the Loans, and accordingly, the
Weighted Average Lives of the Notes, and could cause a delay in the payment
of principal or a slower rate of principal amortization to the holders of
Notes. Alternatively, the occurrence of delinquencies and defaults on the
Loans could result in an increase in principal payments or more rapid rate of
principal amortization of the Notes as a result of the inclusion of Net Loan
Losses from Defaulted Loans in the amounts distributable to the holders of
the Notes as described herein. Certain factors may influence such
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 Loans with high loan-to-
value ratios, secured by junior liens or unsecured may be higher than that of
home loans with lower loan-to-value ratios or secured by first liens on
comparable properties. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Loans will be affected by the general
economic condition of the region of the country in which the related
Mortgaged Properties are located or the related borrower is residing. See
"The Pool" herein. The risk of delinquencies and loss 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.
Because principal distributions are paid to certain Classes of Notes
before other Classes, holders of the Classes of Notes having a later priority
of principal distribution bear a greater risk of losses from delinquencies
and defaults on the Loans than holders of the Classes of Notes having earlier
priorities for payment of principal. See "Description of Credit Enhancement-
- -Subordination and Allocation of Losses" herein. Nevertheless, the holders
of such Class will be distributed the full amount of the interest and
principal distributions due such holders to the extent that Insured Payments
therefor are made under the Securities Insurance Policy.
Although certain data have been published with respect to the historical
prepayment experience of certain residential mortgage loans, such mortgage
loans may differ in material respects from the Loans and such data may not be
reflective of conditions applicable to the Loans. No prepayment history is
generally available with respect to any of the Loans or similar types of
loans, and there can be no assurance that the Loans will achieve or fail to
achieve any particular rate of principal prepayment. A number of factors
suggest that the prepayment experience of the 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 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 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 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 Pool include general economic conditions,
the amounts of and interest rates on the underlying senior mortgage loans,
and the tendency of borrowers to use real property mortgage loans as long-
term financing for home purchase and junior liens as shorter-term financing
for a variety of purposes, which may include the direct or indirect financing
of home improvement, education expenses, debt consolidation, purchases of
consumer durables such as automobiles, appliances and furnishings and other
consumer purposes. Furthermore, because at origination the majority of the
Loans had combined loan-to-value ratios that exceeded 100%, the related
borrowers for these Loans will generally have significantly less opportunity
to refinance the indebtedness secured by the related Mortgaged Properties
including these Loans, and, therefore, a lower prepayment rate may result for
the Pool than for a pool of mortgage (including first or junior lien) loans
that have combined loan-to-value ratios less than 100%. Given these
characteristics, the Loans may experience a higher or lower rate of
prepayment than first-lien mortgage loans.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the Notes will be
affected by the rate and timing of principal payments (including prepayments)
in relation to the prevailing interest rates at the time of receipt of such
principal payments. For example, during periods of falling interest rates,
holders of the Notes are likely to receive an increased amount of principal
payments from the Loans 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, holders of the
Notes are likely to receive a decreased amount of principal prepayments from
the Loans at a time when such holders may have an opportunity to reinvest
such payments in investments having a higher yield than, and a comparable
rating to, the Notes.
FINAL MATURITY DATE
The Final Maturity Date for the Classes of Notes as set forth in the
"Summary of Terms" herein has been calculated by adding 12 months to the
Distribution Date in the month following the latest maturity date on any
Loan. The actual maturity of any Class of Notes is anticipated to be
earlier, and may be substantially earlier, than the Final Maturity Date set
forth herein under "Summary of Terms".
WEIGHTED AVERAGE LIVES OF THE NOTES
The Weighted Average Lives of the Notes will be influenced by the rate
at which principal of the Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes reductions of principal, including without limitation
those resulting from unscheduled full or partial prepayments, refinancings,
liquidations and write-offs due to defaults, casualties or other
dispositions, substitutions and repurchases by or on behalf of the Seller),
the rate at which Distributable Excess Spread is distributed to holders of
the Notes as described herein and the extent to which any amounts in respect
of principal received on the Loans is not distributed as principal to the
holders of the Notes as described herein.
Prepayments on loans such as the Loans are commonly measured relative to
a prepayment standard or model. The model used in this Prospectus Supplement
is the prepayment assumption (the "Prepayment Assumption"), which 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 3.0% per
annum of the outstanding principal balance of such loans in the first month
of the life of the loans and an additional 1.0% (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 14.0% 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), which would include a CPR of 0%.
Correspondingly, a 75% Prepayment Assumption assumes prepayment rates equal
to 75% 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 Loans. Neither the Seller nor the Depositor make any
representations about the appropriateness of the Prepayment Assumption or the
CPR.
MODELING ASSUMPTIONS. For purposes of preparing the tables below, the
following assumptions (the "Modeling Assumptions") have been made:
(i) the Loans consist of 16 pools of loans with the characteristics
set forth below,
(ii) scheduled monthly payments of principal and interest on
the Loans are assumed to be received on the last day of each month,
commencing in May 1997,
(iii) prepayments represent payment in full of individual Loans
and are assumed to be received on the last day of each month, commencing
in May 1997, and include 30 days' interest thereon,
(iv) the scheduled monthly payment for each Loan below has been
calculated based on the characteristics set forth below such that the
Loans will fully amortize by their respective remaining term to
maturity,
(v) no defaults or delinquencies in, or modifications of the
payment of a Loan occur and no substitutions or repurchase of any Loan
occurs,
(vi) the Loans prepay at the indicated percentage of the
Prepayment Assumption,
(vii) no optional repurchase of the Loans occurs (other than for
"Weighted Average Life to Call"),
(viii) distributions on the Notes are received in cash on the
25th day of each month commencing in June 1997,
(ix) the Settlement Date is May 28, 1997,
(x) no reinvestment income from any Account is earned (and
therefore none is available for distribution),
(xi) the amount of interest accrued on the Loans is reduced by
the applicable trust fees and expenses, and
(xii) the overcollateralization provisions are as set forth in
the Sale and Servicing Agreement.
ASSUMED LOAN CHARACTERISTICS
Original Remaining Term to
Aggregate Term to Maturity Maturity
Pool Cut-Off Date (in months) (in months)
Number Principal Balance Loan Rate
--------- ------------------- ------------ --------------- ----------------
1 $ 457,740.31 13.3397% 59 58
2 357,592.72 13.7219 80 80
3 3,396,992.12 13.9232 120 119
4 16,504,297.96 14.0109 180 179
5 17,780,651.04 14.0021 240 239
6 22,226,028.37 14.0297 300 299
7 18,507.81 12.5291 60 52
8 4,457.99 14.0000 84 77
9 46,636.87 14.4128 120 115
10 396,679.67 14.4184 179 174
11 638,211.37 14.3264 240 235
12 243,608.67 14.0544 53 50
13 174,144.58 14.2217 81 78
14 328,728.89 13.9583 119 114
15 511,975.76 13.6904 178 173
16 372,829.64 14.0538 240 235
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
Class A-1 Notes Class A-2 Notes
------------------------------------ --------------------------------------
Distribution Date 0% 50% 75% 100% 150% 200% 0% 50% 75% 100% 150% 200%
----------------- -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
Initial Percentage 100 100 100 100 100 100 100 100 100 100 100 100
May 1998 71 52 43 33 14 0 100 100 100 100 100 91
May 1999 63 19 0 0 0 0 100 100 97 56 0 0
May 2000 55 0 0 0 0 0 100 77 18 0 0 0
May 2001 45 0 0 0 0 0 100 20 0 0 0 0
May 2002 34 0 0 0 0 0 100 0 0 0 0 0
May 2003 23 0 0 0 0 0 100 0 0 0 0 0
May 2004 10 0 0 0 0 0 100 0 0 0 0 0
May 2005 0 0 0 0 0 0 91 0 0 0 0 0
May 2006 0 0 0 0 0 0 59 0 0 0 0 0
May 2007 0 0 0 0 0 0 23 0 0 0 0 0
May 2008 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life to Maturity (2): 3.52 1.22 0.97 0.83 0.67 0.58 9.26 3.51 2.62 2.10 1.53 1.23
Weighted Average Life to Call (2): 3.52 1.22 0.97 0.83 0.67 0.58 9.26 3.51 2.62 2.10 1.53 1.23
- --------------------------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The Weighted Average Life of a Class of Notes is determined by (a)
multiplying the amount of each distribution of principal thereof by the
number of years from the Settlement Date to the related Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a), and rounding to
two decimal places.
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of
the Loans which may differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
Class A-3 Notes Class A-4 Notes
-------------------------------------- --------------------------------------
Distribution Date 0% 50% 75% 100% 150% 200% 0% 50% 75% 100% 150% 200%
- ----------------- -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
Initial Percentage 100 100 100 100 100 100 100 100 100 100 100 100
May 1998 100 100 100 100 100 100 100 100 100 100 100 100
May 1999 100 100 100 100 75 0 100 100 100 100 100 95
May 2000 100 100 100 55 0 0 100 100 100 100 68 23
May 2001 100 100 37 0 0 0 100 100 100 80 28 0
May 2002 100 59 0 0 0 0 100 100 81 46 0 0
May 2003 100 0 0 0 0 0 100 100 53 21 0 0
May 2004 100 0 0 0 0 0 100 72 31 0 0 0
May 2005 100 0 0 0 0 0 100 51 11 0 0 0
May 2006 100 0 0 0 0 0 100 32 0 0 0 0
May 2007 100 0 0 0 0 0 100 15 0 0 0 0
May 2008 88 0 0 0 0 0 100 0 0 0 0 0
May 2009 42 0 0 0 0 0 100 0 0 0 0 0
May 2010 0 0 0 0 0 0 95 0 0 0 0 0
May 2011 0 0 0 0 0 0 65 0 0 0 0 0
May 2012 0 0 0 0 0 0 41 0 0 0 0 0
May 2013 0 0 0 0 0 0 28 0 0 0 0 0
May 2014 0 0 0 0 0 0 13 0 0 0 0 0
May 2015 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life to Maturity (2): 11.84 5.19 3.88 3.09 2.20 1.72 14.97 8.22 6.29 5.02 3.54 2.67
Weighted Average Life to Call (2): 11.84 5.19 3.88 3.09 2.20 1.72 14.97 8.22 6.29 5.02 3.54 2.67
- --------------------------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The Weighted Average Life of a Class of Notes is determined by (a)
multiplying the amount of each distribution of principal thereof by the
number of years from the Settlement Date to the related Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a), and rounding to
two decimal places.
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of
the Loans which may differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
Class A-5 Notes
----------------------------------------------------------
Distribution Date 0% 50% 75% 100% 150% 200%
- ------------------ -- --- --- ---- ---- ----
Initial Percentage 100 100 100 100 100 100
May 1998 100 100 100 100 100 100
May 1999 100 100 100 100 100 100
May 2000 100 100 100 100 100 100
May 2001 100 100 100 100 100 90
May 2002 100 100 100 100 97 63
May 2003 100 100 100 100 74 44
May 2004 100 100 100 99 56 30
May 2005 100 100 100 81 43 21
May 2006 100 100 94 66 32 14
May 2007 100 100 79 54 24 9
May 2008 100 100 66 43 18 4
May 2009 100 86 55 35 13 2
May 2010 100 73 45 27 8 0
May 2011 100 60 35 21 4 0
May 2012 100 48 27 15 2 0
May 2013 100 41 22 12 0 0
May 2014 100 34 18 8 0 0
May 2015 97 27 14 5 0 0
May 2016 78 20 9 2 0 0
May 2017 58 14 5 0 0 0
May 2018 49 11 2 0 0 0
May 2019 39 7 0 0 0 0
May 2020 28 3 0 0 0 0
May 2021 14 0 0 0 0 0
May 2022 0 0 0 0 0 0
Weighted Average Life to Maturity (2): 21.17 15.74 13.25 11.20 8.22 6.31
Weighted Average Life to Call (2): 20.79 14.81 12.24 10.24 7.37 5.61
- --------------------------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The Weighted Average Life of a Class of Notes is determined by (a)
multiplying the amount of each distribution of principal thereof by the
number of years from the Settlement Date to the related Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
distributions of principal referred to in clause (a), and rounding to
two decimal places.
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of
the Loans which may differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
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 be accurate or
that the actual Weighted Average Lives of the Notes will not vary 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 unlikely that the Loans will prepay at a constant rate or
that all of the Loans will prepay at the same rate. Moreover, the Loans
actually included in the Pool, the payment experience of such Loans and
certain other factors affecting the distributions 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 Loans will differ in
many respects from such Modeling Assumptions. See "The Pool" herein. To the
extent that the Loans actually included in the 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.
In light of the uncertainties inherent in the foregoing paydown
scenarios, the inclusion of the Weighted Average Lives of the Notes in the
foregoing tables should not be regarded as a representation by the Master
Servicer, the Servicer, the Depositor, the Underwriter or any other person
that such Weighted Average Lives will be achieved or that any of the
foregoing paydown scenarios will be experienced.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Brown & Wood LLP ("Tax Counsel"), counsel to the
Issuer and counsel to the Underwriter, for federal income tax purposes, the
Notes will be characterized as debt and the Trust will not be characterized
as an association (or a publicly traded partnership) taxable as a corporation
or as a taxable mortgage pool. Each Noteholder, by the acceptance of a Note,
will agree to treat the Notes as indebtedness. See "Certain Material Federal
Income Tax Considerations" in the Prospectus for additional information
concerning the application of federal income tax laws to the Trust and the
Securities.
The Notes, depending on their issue prices, may be treated as having
been issued with original issue discount. As a result, holders of the Notes
may be required to recognize income with respect to the Notes somewhat in
advance of the receipt of cash attributable to that income. The prepayment
assumption that will be used for purpose of computing original issue discount
for federal income tax purposes is 100% of the Prepayment Assumption (as
defined herein under "Prepayment and Yield Considerations--Weighted Average
Lives of the Notes").
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences" herein, potential investors should consider
the state income tax consequences of the acquisition, ownership, and
disposition of the Notes offered hereunder. State income tax law may differ
substantially from the corresponding federal tax law, and this discussion
does not purport to describe any aspect of the income tax laws of any state.
Therefore, potential investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Notes offered
hereunder.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") and Section 4975 of the Code impose certain restrictions on
employee benefit plans subject to ERISA or plans or arrangements subject to
Section 4975 of the Code ("Plans") and on persons who are parties in interest
or disqualified persons ("parties in interest") with respect to such Plans.
Certain employee benefit plans, such as governmental plans and church plans
(if no election has been made under section 410(d) of the Code), are not
subject to the restrictions of ERISA, and assets of such plans may be
invested in the Securities without regard to the ERISA considerations
described below, subject to other applicable federal and state law. However,
any such governmental or church plan which is qualified under section 401(a)
of the Code and exempt from taxation under section 501(a) of the Code is
subject to the prohibited transaction rules set forth in section 503 of the
Code. Any Plan fiduciary which proposes to cause a Plan to acquire any of
the Securities should consult with its counsel with respect to the potential
consequences under ERISA, and the Code, of the Plan's acquisition and
ownership of the Securities. See "ERISA CONSIDERATIONS" in the Prospectus.
Investments by Plans are also subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions (including loans) involving a Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of
ERISA) on parties in interest which engage in non-exempt prohibited
transactions.
PLAN ASSET REGULATION
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a
Plan for purposes of ERISA and the prohibited transaction provisions of the
Code (the "Plan Asset Regulation"). The Plan Asset Regulation describes the
circumstances under which the assets of an entity in which a Plan invests
will be considered to be "plan assets" such that any person who exercises
control over such assets would be subject to ERISA's fiduciary standards.
Under the Plan Asset Regulation, generally when a Plan invests in another
entity, the Plan's assets do not include, solely by reason of such
investment, any of the underlying assets of the entity. However, the Plan
Asset Regulation provides that, if a Plan acquires an "equity interest" in an
entity that is neither a "publicly-offered security" (as defined therein) nor
a security issued by an investment company registered under the Investment
Company Act of 1940, the assets of the entity will be treated as assets of
the Plan investor unless certain exceptions apply. If the Notes were deemed
to be equity interests and no statutory, regulatory or administrative
exemption applies, the Trust could be considered to hold plan assets by
reason of a Plan's investment in the Notes. Such plan assets would include
an undivided interest in any assets held by the Trust. In such an event, the
Trustee and other persons, in providing services with respect to the Trust's
assets, may be parties in interest with respect to such Plans, subject to the
fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA, and Section 4975
of the Code with respect to transactions involving the Trust's assets. 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." Although the Plan Assets Regulation is silent with respect
to the question of which law constitutes "applicable local law" for this
purpose, Labor has stated that these determinations should be made under the
state law governing interpretation of the instrument in question. In the
preamble to the Plan Assets Regulation, Labor declined to provide a precise
definition of what features are equity features or the circumstances under
which such features would be considered "substantial," noting that the
question of whether a plan's interest has substantial equity features is an
inherently factual one, but that in making a determination it would be
appropriate to take into account whether the equity features are such that a
Plan's investment would be a practical vehicle for the indirect provision of
investment management services. Brown & Wood LLP ("ERISA Counsel") has
rendered its opinion that the Notes will be classified as indebtedness
without substantial equity features for ERISA purposes. ERISA Counsel's
opinion is based upon the terms of the Notes, the opinion of Tax Counsel that
the Notes will be classified as debt instruments for federal income tax
purposes and the ratings which have been assigned to the Notes. However, if
contrary to ERISA Counsel's opinion the Notes are deemed to be equity
interests in the Trust and no statutory, regulatory or administrative
exemption applies, the Trust could be considered to hold plan assets by
reason of a Plan's investment in the Notes.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Notes on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any
Notes, a fiduciary of a Plan should make its own determination as to whether
the Trust, as obligor on the Notes, is a party in interest with respect to
the Plan, the availability of the exemptive relief provided in the Plan Asset
Regulations and the availability of any other prohibited transaction
exemptions. Purchasers should analyze whether the decision may have an
impact with respect to purchases of the Notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter (an affiliate of the
Depositor), the Depositor has agreed to sell the Notes to the Underwriter,
and the Underwriter has agreed to purchase the Notes from the Depositor.
Distribution of the Notes will be made by the Underwriter from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. In connection with the sale of the Notes, the Underwriter
may be deemed to have received compensation from the Depositor in the form of
underwriting discounts.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Notes but has no obligation to do so. There can be no
assurance that a secondary market for the Notes will develop or, if it does
develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
The Underwriter and one of its affiliated companies maintain significant
contractual agreements with Mego relating to, among other things, the Loans.
In addition, the Underwriter holds warrants to acquire the common stock of
the parent of Mego, Mego Financial Corp.
LEGAL INVESTMENT CONSIDERATIONS
The Notes will not constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because a
substantial number of the Loans are either unsecured or secured by liens on
real estate that are not first liens. 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.
LEGAL MATTERS
Certain legal matters will be passed upon on behalf of the Seller by
Brown & Wood LLP, New York, New York and by Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, Miami, Florida; on behalf of the Depositor and the
Underwriter by Brown & Wood LLP, New York, New York; and on behalf of the
Securities Insurer by Kutak Rock, Omaha, Nebraska.
RATINGS
It is a condition to the issuance of the Notes that each of the Class A-
1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes and Class A-5
Notes be rated "AAA" by Standard & Poor's and "Aaa" by Moody's. The ratings
assigned to the Notes will be based primarily on the claims-paying ability of
the Securities Insurer.
The ratings on the Notes address the likelihood of the receipt by the
holders of the Notes of all distributions on the 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
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 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 holders of the Notes might
suffer a lower than anticipated yield in the event that the Trust is
terminated prior to the Final Maturity Dates of each Class of Notes.
The Depositor has not solicited ratings on the Notes with any rating
agency other than the Rating Agencies. However, there can be no assurance as
to whether any other rating agency will rate the Notes, or, if it does, what
rating would be assigned by any such other rating agency. Any rating on the
Notes by another rating agency, if assigned at all, may be lower than the
ratings assigned to the Notes by the Rating Agencies.
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.
REPORT OF EXPERTS
The consolidated financial statements of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1996 and 1995 and for each of the three years
in the period ended December 31, 1996 incorporated by reference into this
Prospectus Supplement have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their report thereon incorporated by
reference herein in reliance upon the authority of such firm as experts in
accounting and auditing.
No dealer, salesman or other person
has been authorized to give any
information or to make any
representation not contained in
this Prospectus Supplement or the MEGO MORTGAGE HOME
Prospectus and, if given or made, LOAN OWNER TRUST 1997-2
such information or representation
must not be relied upon as having
been authorized by the depositor or
the underwriter. This Prospectus
Supplement and the Prospectus do $58,794,841
not constitute an offer of any
securities other than those to $15,950,000 CLASS A-1 6.87%
which they relate or an offer to $8,100,000 CLASS A-2 6.88%
sell or a solicitation of an offer $6,750,000 CLASS A-3 7.00%
to buy, to any person in any $13,600,000 CLASS A-4 7.17%
jurisdiction where such an offer or $14,394,841 CLASS A-5 7.63%
solicitation would be unlawful.
Neither the delivery of this Home Loan Asset-Backed Notes,
Prospectus Supplement and the Series 1997-2
Prospectus nor any sale made
hereunder shall, under any FINANCIAL ASSET
circumstances, create any SECURITIES CORP.
implication that the information (DEPOSITOR)
contained herein is correct as of
any time subsequent to their
respective date.
_________________
-----------------
TABLE OF CONTENTS PROSPECTUS SUPPLEMENT
Page -----------------
---
PROSPECTUS SUPPLEMENT
Summary . . . . . . . . . . . . S-4 GREENWICH CAPITAL
Risk Factors . . . . . . . . S-17 M A R K E T S, I N C.
The Trust . . . . . . . . . . S-23
Mego Mortgage Corporation . . S-24
The Title I Loan Program and the
Contract of Insurance . . . . S-31
The Master Servicer . . . . . S-36
The Pool . . . . . . . . . . S-36
Description of Credit Enhancement
S-43
Description of the Securities S-48
Description of the Transfer and
Servicing Agreements . . . . S-57
Prepayment and Yield Considerations
S-66 MAY 21, 1997
Certain Federal Income Tax
Consequences . . . . . . . . S-74
State Tax Consequences . . . S-74
ERISA Considerations . . . . S-75
Method of Distribution . . . S-76
Legal Investment Considerations S-76
Legal Matters . . . . . . . . S-77
Ratings . . . . . . . . . . . S-77
Reports of Experts . . . . . S-77
PROSPECTUS
Prospectus Supplement or Current
Report on Form 8-K . . . . . . . 2
Incorporation of Certain Documents
by Reference . . . . . . . . . . 2
Available Information . . . . . . 2
Reports to Securityholders . . . 3
Summary of Terms . . . . . . . . 4
Risk Factors . . . . . . . . . 12
The Trust Fund . . . . . . . . 17
Use of Proceeds . . . . . . . . 22
The Depositor . . . . . . . . . 22
Loan Program . . . . . . . . . 23
Description of the Securities . 25
Credit Enhancement . . . . . . 35
Yield and Prepayment Considerations
41
The Agreements . . . . . . . . 43
Certain Legal Aspects of the Loans
56
Certain Material Federal Income Tax
Considerations . . . . . . . . 68
State Tax Considerations . . . 88
ERISA Considerations . . . . . 88
Legal Investment . . . . . . . 91
Method of Distribution . . . . 92
Legal Matters . . . . . . . . . 92
Financial Information . . . . . 93
Rating . . . . . . . . . . . . 93
PROSPECTUS
Asset Backed Securities
(Issuable in Series)
FINANCIAL ASSET SECURITIES CORP.
Depositor
This Prospectus relates to the issuance of Asset Backed Certificates
(the "Certificates") and the Asset Backed Notes (the "Notes" and, together
with the Certificates, the "Securities"), which may be sold from time to time
in one or more series (each, a "Series") by Financial Asset Securities Corp.
(the "Depositor") on terms determined at the time of sale and described in
this Prospectus and the related Prospectus Supplement. The Securities of a
Series will evidence beneficial ownership of a trust fund (a "Trust Fund").
As specified in the related Prospectus Supplement, the Trust Fund for a
Series of Securities will include certain assets (the "Trust Fund Assets")
which will primarily consist of (i) closed-end and/or revolving home equity
loans (the "Home Equity Loans") secured primarily by subordinate liens onone-
to four-family residential properties, (ii) home improvement installment
sales contracts and installment loan agreements (the "Home Improvement
Contracts") that are either unsecured or secured primarily by subordinate
liens on one- to four-family residential properties, or by purchase money
security interests in the home improvements financed thereby (the "Home
Improvements") and/or (iii) Private Asset Backed Securities (as defined
herein). The Home Equity Loans and the Home Improvement Contracts are
collectively referred to herein as the "Loans". The Trust Fund Assets will
be acquired by the Depositor, either directly or indirectly, from one or more
institutions (each, a "Seller"), which may be affiliates of the Depositor,
and conveyed by the Depositor to the related Trust Fund. A Trust Fund also
may include insurance policies, reserve accounts, reinvestment income,
guaranties, obligations, agreements, letters of credit or other assets to the
extent described in the related Prospectus Supplement.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right of
payment to one or more other classes of Securities of such Series. One or
more classes of Securities of a Series may be entitled to receive
distributions of principal, interest or any combination thereof prior to one
or more other classes of Securities of such Series or after the occurrence of
specified events, in each case as specified in the related Prospectus
Supplement.
Distributions to Securityholders will be made monthly, quarterly, semi-
annually or at such other intervals and on the dates specified in the related
Prospectus Supplement. Distributions on the Securities of a Series will be
made from the assets of the related Trust Fund or Funds or other assets
pledged for the benefit of the Securityholders as specified in the related
Prospectus Supplement.
The related Prospectus Supplement will describe any insurance or
guarantee provided with respect to the related Series of Securities
including, without limitation, any insurance or guarantee provided by the
Department of Housing and Urban Development, the United States Department of
Veterans' Affairs or any private insurer or guarantor. The only obligations
of the Depositor with respect to a Series of Securities will be to obtain
certain representations and warranties from each Seller and to assign to the
Trustee for the related Series of Securities the Depositor's rights with
respect to such representations and warranties. The principal obligations of
the Master Servicer named in the related Prospectus Supplement with respect
to the related Series of Securities will be limited to obligations pursuant
to certain representations and warranties and to its contractual servicing
obligations, including any obligation it may have to advance delinquent
payments on the Trust Fund Assets in the related Trust Fund.
The yield on each class of Securities of a Series will be affected by,
among other things, the rate of payments of principal (including prepayments)
on the Trust Fund Assets in the related Trust Fund and the timing of receipt
of such payments as described herein and in the related Prospectus
Supplement. A Trust Fund may be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more elections may be
made to treat the related Trust Fund or specified portions thereof as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax
purposes. See "Certain Material Federal Income Tax Consequences."
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 11.
THE CERTIFICATES OF A GIVEN SERIES REPRESENT BENEFICIAL INTERESTS IN, AND THE
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, THE RELATED TRUST FUND
ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR,
ANY SELLER OR ANY AFFILIATES THEREOF, EXCEPT TO THE EXTENT DESCRIBED
IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE SECURITIES NOR
THE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY,
EXCEPT TO THE EXTENT DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prior to issuance there will have been no market for the Securities of
any Series and there can be no assurance that a secondary market for any
Securities will develop, or if it does develop, that it will continue. This
Prospectus may not be used to consummate sales of Securities of any Series
unless accompanied by a Prospectus Supplement. Offers of the Securities may
be made through one or more different methods, including offerings through
underwriters, as more fully described under "Method of Distribution" herein
and in the related Prospectus Supplement. All Securities will be distributed
by, or sold by underwriters managed by:
GREENWICH CAPITAL MARKETS, INC.
May 21, 1997
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is
in addition to the obligation of dealers to deliver a Prospectus and
Prospectus Supplement when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things,
set forth with respect to such Securities, as appropriate: (i) a description
of the class or classes of Securities and the Pass-Through Rate or method of
determining the rate or the amount of interest, if any, to be passed through
to each such class; (ii) the aggregate principal amount and Distribution
Dates relating to such Series and, if applicable, the initial and final
scheduled Distribution Dates for each class; (iii) information as to the
assets comprising the Trust Fund, including the general characteristics of
the Trust Fund Assets included therein and, if applicable, the insurance
policies, surety bonds, guaranties, letters of credit or other instruments or
agreements included in the Trust Fund or otherwise, and the amount and source
of any reserve account; (iv) the circumstances, if any, under which the Trust
Fund may be subject to early termination; (v) the method used to calculate
the amount of principal to be distributed with respect to each class of
Securities; (vi) the order of application of distributions to each of the
classes within such Series, whether sequential, pro rata, or otherwise; (vii)
the Distribution Dates with respect to such Series; (viii) additional
information with respect to the method of distribution of such Securities;
(ix) whether one or more REMIC elections will be made and designation of the
regular interests and residual interests; (x) the aggregate original
percentage ownership interest in the Trust Fund to be evidenced by each class
of Securities; (xi) information as to the Trustee; (xii) information as to
the nature and extent of subordination with respect to any class of
Securities that is subordinate in right of payment to any other class; and
(xiii) information as to the Master Servicer.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 14 or 15(d) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act") prior to the termination of the
offering of Securities evidencing interests therein. Upon request by any
person to whom this Prospectus is delivered in connection with the offering
of one or more classes of Securities, the Depositor will provide or cause to
be provided without charge a copy of any such documents and/or reports
incorporated herein by reference, in each case to the extent such documents
or reports relate to such classes of Securities, other than the exhibits to
such documents (unless such exhibits are specifically incorporated by
reference in such documents). Requests to the Depositor should be directed
in writing to: Paul D. Stevelman, Assistant Secretary, Financial Asset
Securities Corp., 600 Steamboat Road, Greenwich, Connecticut 06830, telephone
number (203) 625-2756. The Depositor has determined that its financial
statements are not material to the offering of any Securities.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part
of the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of
the Commission. For further information, reference is made to such
Registration Statement and the exhibits thereto. Such Registration Statement
and exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
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
Securities and Exchange Commission (the "Commission") 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.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Securities offered hereby and thereby nor an offer of the Securities to any
person in any state or other jurisdiction in which such offer would be
unlawful. The delivery of this Prospectus at any time does not imply that
information herein is correct as of any time subsequent to its date.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund for a
Series of Securities are required under an Agreement to be forwarded to
Securityholders. However, such reports will neither be examined nor reported
on by an independent public accountant. See "Description of the Securities--
Reports to Securityholders".
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement with respect to the Series offered thereby and to the
related Agreement (as such term is defined below) which will be prepared in
connection with each Series of Securities. Unless otherwise specified,
capitalized terms used and not defined in this Summary of Terms have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement.
Title of Securities Asset Backed Certificates (the "Certificates")
and Asset Backed Notes (the "Notes" and,
together with the Certificates, the
"Securities"), which are issuable in Series.
Depositor Financial Asset Securities Corp., a Delaware
corporation, an indirect limited purpose
finance subsidiary of National Westminster Bank
Plc and an affiliate of Greenwich Capital
Markets, Inc. See "The Depositor" herein.
Trustee The trustee (the "Trustee") for each Series of
Securities will be specified in the related
Prospectus Supplement. See "The Agreements" herein
for a description of the Trustee's rights and
obligations.
Master Servicer The entity or entities named as Master Servicer (the
"Master Servicer") will be specified in the related
Prospectus Supplement. See "The Agreements--Certain
Matters Regarding the Master Servicer and the
Depositor".
Trust Fund Assets Assets of the Trust Fund for a Series of
Securities will include certain assets (the
"Trust Fund Assets") which will primarily
consist of (a) Loans or (b) Private Asset
Backed Securities, together with payments in
respect of such Trust Fund Assets and certain
other accounts, obligations or agreements, in
each case as specified in the related
Prospectus Supplement. The Loans will be
collected in a pool (each, a "Pool") as of the
first day of the month of the issuance of the
related Series of Securities or such other date
specified in the Prospectus Supplement (the
"Cut-off Date"). Trust Fund assets also may
include insurance policies, cash accounts,
reinvestment income, guaranties, letters of
credit or other assets to the extent described
in the related Prospectus Supplement. See
"Credit Enhancement". In addition, if the
related Prospectus Supplement so provides, the
related Trust Funds' assets will include the
funds on deposit in an account (a "Pre-Funding
Account") which will be used to purchase
additional Loans during the period specified in
the related Prospectus Supplement. See "The
Agreements--Pre-Funding Accounts".
A. Loans The Loans will consist of (i) closed-end loans
(the "Closed-End Loans") and/or revolving home
equity loans or certain balances therein (the
"Revolving Credit Line Loans", together with
the Closed-End Loans, the "Home Equity Loans"),
and (ii) home improvement installment sales
contracts and installment loan agreements (the
"Home Improvement Contracts"). The Home Equity
Loans and the Home Improvement Contracts are
collectively referred to herein as the "Loans".
All Loans will have been purchased by the
Depositor, either directly or through an
affiliate, from one or more Sellers.
As specified in the related Prospectus Supplement,
the Home Equity Loans will, and the Home Improvement
Contracts may, be secured by mortgages or deeds of
trust or other similar security instruments creating
a lien on a mortgaged property (the "Mortgaged
Property"), which may be subordinated to one or more
senior liens on the Mortgaged Property, as described
in the related Prospectus Supplement. As specified
in the related Prospectus Supplement, Home
Improvement Contracts may be unsecured or secured by
purchase money security interests in the Home
Improvements financed thereby. The Mortgaged
Properties and the Home Improvements are
collectively referred to herein as the "Properties".
B. Private Asset-
Backed Securities Private Asset Backed Securities may include (a)
pass-through certificates representing
beneficial interests in certain loans and/or
(b) collateralized obligations secured by such
loans. Private Asset Backed Securities may
include stripped securities representing an
undivided interest in all or a part of either
the principal distributions (but not the
interest distributions) or the interest
distributions (but not the principal
distributions) or in some specified portion of
the principal and interest distributions (but
not all of such distributions) on certain
loans. Although individual loans underlying a
Private Asset Backed Security may be insured or
guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and
the Private Asset Backed Securities themselves
will not be so insured or guaranteed. Payments
on the Private Asset Backed Securities will be
distributed directly to the Trustee as
registered owner of such Private Asset Backed
Securities. See "The Trust Fund--Private Asset
Backed Securities".
Description of
the Securities Each Security will represent a beneficial
ownership interest in, or will be secured by
the assets of, a Trust Fund created by the
Depositor pursuant to an Agreement among the
Depositor, the Master Servicer and the Trustee
for the related Series. The Securities of any
Series may be issued in one or more classes as
specified in the related Prospectus Supplement.
A Series of Securities may include one or more
classes of senior Securities (collectively, the
"Senior Securities") and one or more classes of
subordinate Securities (collectively, the
"Subordinated Securities"). Certain Series or
classes of Securities may be covered by
insurance policies or other forms of credit
enhancement, in each case as described herein
and in the related Prospectus Supplement.
One or more classes of Securities of each Series (i)
may be entitled to receive distributions allocable
only to principal, only to interest or to any
combination thereof; (ii) may be entitled to receive
distributions only of prepayments of principal
throughout the lives of the Securities or during
specified periods; (iii) may be subordinated in the
right to receive distributions of scheduled payments
of principal, prepayments of principal, interest or
any combination thereof to one or more other classes
of Securities of such Series throughout the lives of
the Securities or during specified periods; (iv) may
be entitled to receive such distributions only after
the occurrence of events specified in the related
Prospectus Supplement; (v) may be entitled to
receive distributions in accordance with a schedule
or formula or on the basis of collections from
designated portions of the assets in the related
Trust Fund; (vi) as to Securities entitled to
distributions allocable to interest, may be entitled
to receive interest at a fixed rate or a rate that
is subject to change from time to time; and (vii) as
to Securities entitled to distributions allocable to
interest, may be entitled to distributions allocable
to interest only after the occurrence of events
specified in the related Prospectus Supplement and
may accrue interest until such events occur, in each
case as specified in the related Prospectus
Supplement. The timing and amounts of such
distributions may vary among classes, over time, or
otherwise as specified in the related Prospectus
Supplement.
Distributions on
the Securities Distributions on the Securities entitled
thereto will be made monthly or at such other
intervals and on the dates specified in the
related Prospectus Supplement (each, a
"Distribution Date") out of the payments
received in respect of the assets of the
related Trust Fund or Funds or other assets
pledged for the benefit of the Securities as
specified in the related Prospectus Supplement.
The amount allocable to payments of principal
and interest on any Distribution Date will be
determined as specified in the related
Prospectus Supplement. Allocations of
distributions among Securityholders of a single
class shall be set forth in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus
Supplement, the aggregate original principal balance
of the Securities will not exceed the aggregate
distributions allocable to principal that such
Securities will be entitled to receive. If
specified in the related Prospectus Supplement, the
Securities will have an aggregate original principal
balance equal to the aggregate unpaid principal
balance of the Trust Fund Assets as of the first day
of the month of creation of the Trust Fund and will
bear interest in the aggregate at a rate equal to
the interest rate borne by the underlying Loans (the
"Loan Rate") and/or Private Asset Backed Securities,
net of the aggregate servicing fees and any other
amounts specified in the related Prospectus
Supplement (the "Pass-Through Rate"). If specified
in the related Prospectus Supplement, the aggregate
original principal balance of the Securities and
interest rates on the classes of Securities will be
determined based on the cash flow on the Trust Fund
Assets.
The rate at which interest will be passed through to
holders of each class of Securities entitled thereto
may be a fixed rate or a rate that is subject to
change from time to time from the time and for the
periods, in each case as specified in the related
Prospectus Supplement. Any such rate may be
calculated on a loan-by-loan, weighted average,
notional amount or other basis, in each case as
described in the related Prospectus Supplement.
Compensating
Interest If so specified in the related Prospectus
Supplement, the Master Servicer will be required to
remit to the Trustee, with respect to each Loan in
the related Trust Fund as to which a principal
prepayment in full or a principal payment which is
in excess of the scheduled monthly payment and is
not intended to cure a delinquency was received
during any Due Period, an amount, from and to the
extent of amounts otherwise payable to the Master
Servicer as servicing compensation, equal to (i) the
excess, if any, of (a) 30 days' interest on the
principal balance of the related Loan at the Loan
Rate net of the per annum rate at which the Master
Servicer's servicing fee accrues, over (b) the
amount of interest actually received on such Loan
during such Due Period, net of the Master Servicer's
servicing fee or (ii) such other amount as described
in the related Prospectus Supplement. See
"Description of the Securities--Compensating
Interest".
Credit Enhancement The assets in a Trust Fund or the Securities of
one or more classes in the related Series may
have the benefit of one or more types of credit
enhancement as described in the related
Prospectus Supplement. The protection against
losses afforded by any such credit support may
be limited. The type, characteristics and
amount of credit enhancement will be determined
based on the characteristics of the Loans
and/or Private Asset Backed Securities
underlying or comprising the Trust Fund Assets
and other factors and will be established on
the basis of requirements of each Rating Agency
rating the Securities of such Series. See
"Credit Enhancement."
A. Subordination The rights of the holders of the Subordinated
Securities of a Series to receive distributions
with respect to the assets in the related Trust
Fund will be subordinated to such rights of the
holders of the Senior Securities of the same
Series to the extent described in the related
Prospectus Supplement. This subordination is
intended to enhance the likelihood of regular
receipt by holders of Senior Securities of the
full amount of monthly payments of principal
and interest due them. The protection afforded
to the holders of Senior Securities of a Series
by means of the subordination feature will be
accomplished by (i) the preferential right of
such holders to receive, prior to any
distribution being made in respect of the
related Subordinated Securities, the amounts of
interest and/or principal due them on each
Distribution Date out of the funds available
for distribution on such date in the related
Security Account and, to the extent described
in the related Prospectus Supplement, by the
right of such holders to receive future
distributions on the assets in the related
Trust Fund that would otherwise have been
payable to the holders of Subordinated
Securities; (ii) reducing the ownership
interest of the related Subordinated
Securities; (iii) a combination of clauses (i)
and (ii) above; or (iv) as otherwise described
in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement,
subordination may apply only in the event of
certain types of losses not covered by other
forms of credit support, such as hazard losses
not covered by standard hazard insurance
policies, losses due to the bankruptcy or fraud
of the borrower. The related Prospectus
Supplement will set forth information
concerning, among other things, the amount of
subordination of a class or classes of
Subordinated Securities in a Series, the
circumstances in which such subordination will
be applicable, and the manner, if any, in which
the amount of subordination will decrease over
time.
B. Reserve Account One or more reserve accounts (each, a "Reserve
Account") may be established and maintained for
each Series. The related Prospectus Supplement
will specify whether or not such Reserve
Accounts will be included in the corpus of the
Trust Fund for such Series and will also
specify the manner of funding the related
Reserve Accounts and the conditions under which
the amounts in any such Reserve Accounts will
be used to make distributions to holders of
Securities of a particular class or released
from the related Reserve Account.
C. Special Hazard Insurance
Policy Certain classes of Securities may have the benefit
of a Special Hazard Insurance Policy. Certain
physical risks that are not otherwise insured
against by standard hazard insurance policies may be
covered by a Special Hazard Insurance Policy or
Policies. Each Special Hazard Insurance Policy will
be limited in scope and will cover losses pursuant
to the provisions of each such Special Hazard
Insurance Policy as described in the related
Prospectus Supplement.
D. Bankruptcy Bond One or more bankruptcy bonds (each a
"Bankruptcy Bond") may be obtained covering
certain losses resulting from action which may
be taken by a bankruptcy court in connection
with a Loan. The level of coverage and the
limitations in scope of each Bankruptcy Bond
will be specified in the related Prospectus
Supplement.
E. Loan Pool
Insurance Policy A mortgage pool insurance policy or policies
may be obtained and maintained for Loans
relating to any Series, which shall be limited
in scope, covering defaults on the related
Loans in an initial amount equal to a specified
percentage of the aggregate principal balance
of all Loans included in the Pool as of the
Cut-off Date.
F. FHA Insurance If specified in the related Prospectus
Supplement, (i) all or a portion of the Loans
in a Pool may be insured by the Federal Housing
Administration (the "FHA") and/or (ii) all or a
portion of the Loans may be partially
guaranteed by the Department of Veterans'
Affairs (the "VA"). See "Certain Legal
Considerations--Title I Program".
G. Cross-Support If specified in the related Prospectus
Supplement, the beneficial ownership of
separate groups of assets included in a Trust
Fund may be evidenced by separate classes of
the related Series of Securities. In such
case, credit support may be provided by a
cross-support feature which requires that
distributions be made with respect to
Securities evidencing beneficial ownership of
one or more asset groups prior to distributions
to Subordinated Securities evidencing a
beneficial ownership interest in, or secured
by, other asset groups within the same Trust
Fund.
If specified in the related Prospectus Supplement,
the coverage provided by one or more forms of credit
support may apply concurrently to two or more
separate Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds
to which such credit support relates and the manner
of determining the amount of the coverage provided
thereby and of the application of such coverage to
the identified Trust Funds.
H. Other Arrangements Other arrangements as described in the related
Prospectus Supplement including, but not
limited to, one or more letters of credit,
surety bonds, other insurance or third-party
guarantees may be used to provide coverage for
certain risks of defaults or various types of
losses.
Advances The Master Servicer and, if applicable, each
mortgage servicing institution that services a
Loan in a Pool on behalf of the Master Servicer
(a "Sub-Servicer") may be obligated to advance
amounts (each, an "Advance") corresponding to
delinquent interest and/or principal payments
on such Loan until the date, as specified in
the related Prospectus Supplement, following
the date on which the related Property is sold
at a foreclosure sale or the related Loan is
otherwise liquidated. Any obligation to make
Advances may be subject to limitations as
specified in the related Prospectus Supplement.
If so specified in the related Prospectus
Supplement, Advances may be drawn from a cash
account available for such purpose as described
in such Prospectus Supplement.
Any such obligation of the Master Servicer or a
Sub-Servicer to make Advances may be supported by
the delivery to the Trustee of a support letter from
an affiliate of the Master Servicer or such
Sub-Servicer or an unaffiliated third party (a
"Support Servicer") guaranteeing the payment of such
Advances by the Master Servicer or Sub-Servicer, as
the case may be, as specified in the related
Prospectus Supplement.
In the event the Master Servicer, Support Servicer
or Sub-Servicer fails to make a required Advance,
the Trustee may be obligated to advance such amounts
otherwise required to be advanced by the Master
Servicer, Support Servicer or Sub-Servicer. See
"Description of the Securities--Advances."
Optional Termination The Master Servicer or the party specified in
the related Prospectus Supplement, including
the holder of the residual interest in a REMIC,
may have the option to effect early retirement
of a Series of Securities through the purchase
of the Trust Fund Assets and other assets in
the related Trust Fund under the circumstances
and in the manner described in "The Agreements-
-Termination; Optional Termination" herein and
in the related Prospectus Supplement.
Legal Investment The Prospectus Supplement for each series of
Securities will specify which, if any, of the
classes of Securities offered thereby
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of
Securities that qualify as "mortgage related
securities" will be legal investments for
certain types of institutional investors to the
extent provided in SMMEA, subject, in any case,
to any other regulations which may govern
investments by such institutional investors.
Institutions whose investment activities are
subject to review by federal or state
authorities should consult with their counsel
or the applicable authorities to determine
whether an investment in a particular class of
Securities (whether or not such class
constitutes a "mortgage related security")
complies with applicable guidelines, policy
statements or restrictions. See "Legal
Investment."
Certain Material
Federal Income Tax
Consequences The material federal income tax consequences to
Securityholders will vary depending on whether
one or more elections are made to treat the
Trust Fund or specified portions thereof as a
real estate mortgage investment conduit
("REMIC") under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code").
The Prospectus Supplement for each Series of
Securities will specify whether such an
election will be made. See "Certain Material
Federal Income Tax Consequences".
ERISA Considerations A fiduciary of any employee benefit plan or
other retirement plan or arrangement subject to
the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code should
carefully review with its legal advisors
whether the purchase or holding of Securities
could give rise to a transaction prohibited or
not otherwise permissible under ERISA or the
Code. See "ERISA Considerations". Certain
classes of Securities may not be transferred
unless the Trustee and the Depositor are
furnished with a letter of representation or an
opinion of counsel to the effect that such
transfer will not result in a violation of the
prohibited transaction provisions of ERISA and
the Code and will not subject the Trustee, the
Depositor or the Master Servicer to additional
obligations. See "Description of the
Securities-General" and "ERISA Considerations".
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
LIMITED LIQUIDITY
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or will continue for the life of the Securities of
such Series.
LIMITED ASSETS
The Depositor does not have, nor is it expected to have, any significant
assets. Unless otherwise specified in the related Prospectus Supplement, the
Securities of a Series will be payable solely from the Trust Fund for such
Securities and will not have any claim against or security interest in the
Trust Fund for any other Series. There will be no recourse to the Depositor
or any other person for any failure to receive distributions on the
Securities. Further, at the times set forth in the related Prospectus
Supplement, certain Trust Fund Assets and/or any balance remaining in the
Security Account immediately after making all payments due on the Securities
of such Series, after making adequate provision for future payments on
certain classes of Securities and after making any other payments specified
in the related Prospectus Supplement, may be promptly released or remitted to
the Depositor, the Servicer, any credit enhancement provider or any other
person entitled thereto and will no longer be available for making payments
to Securityholders. Consequently, holders of Securities of each Series must
rely solely upon payments with respect to the Trust Fund Assets and the other
assets constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of
such Series.
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their respective affiliates. The
only obligations, if any, of the Depositor with respect to the Trust Fund
Assets or the Securities of any Series will be pursuant to certain
representations and warranties. The Depositor does not have, and is not
expected in the future to have, any significant assets with which to meet any
obligation to repurchase Trust Fund Assets with respect to which there has
been a breach of any representation or warranty. If, for example, the
Depositor were required to repurchase a Loan, its only sources of funds to
make such repurchase would be from funds obtained (i) from the enforcement of
a corresponding obligation, if any, on the part of the Seller or originator
of such Loan, or (ii) from a Reserve Account or similar credit enhancement
established to provide funds for such repurchases. The Master Servicer's
servicing obligations under the related Agreement may include its limited
obligation to make certain advances in the event of delinquencies on the
Loans, but only to the extent deemed recoverable. To the extent described in
the related Prospectus Supplement, the Depositor or Master Servicer will be
obligated under certain limited circumstances to purchase or act as a
remarketing agent with respect to a convertible Loan upon conversion to a
fixed rate.
CREDIT ENHANCEMENT
Although credit enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof,
the amount of such credit enhancement will be limited, as set forth in the
related Prospectus Supplement, and may decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Securityholders may suffer losses. Moreover,
such credit enhancement may not cover all potential losses or risks. For
example, credit enhancement may or may not cover fraud or negligence by a
loan originator or other parties. See "Credit Enhancement".
PREPAYMENT AND YIELD CONSIDERATIONS
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments of the Loans and, in the case of Private Asset Backed Securities,
the underlying loans related thereto, comprising the Trust Fund, which
prepayments may be influenced by a variety of factors, (ii) the manner of
allocating principal and/or payments among the classes of Securities of a
Series as specified in the related Prospectus Supplement, (iii) the exercise
by the party entitled thereto of any right of optional termination and (iv)
the rate and timing of payment defaults and losses incurred with respect to
the Trust Fund Assets. Prepayments of principal may also result from
repurchases of Trust Fund Assets due to material breaches of the Depositor's
or the Master Servicer's representations and warranties, as applicable. The
yield to maturity experienced by a holder of Securities may be affected by
the rate of prepayment of the Loans comprising or underlying the Trust Fund
Assets. See "Yield and Prepayment Considerations".
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending
two or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at
par) to Securityholders will be less than the indicated coupon rate. See
"Description of the Securities - Distributions of Interest".
BALLOON PAYMENTS
Certain of the Loans as of the Cut-off Date may not be fully amortizing
over their terms to maturity and, thus, will require substantial principal
payments (i.e., balloon payments) at their stated maturity. Loans with
balloon payments involve a greater degree of risk because the ability of a
borrower to make a balloon payment typically will depend upon its ability
either to timely refinance the loan or to timely sell the related Property.
The ability of a borrower to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage
rates at the time of sale or refinancing, the borrower's equity in the
related Property, the financial condition of the borrower and tax laws.
NATURE OF MORTGAGES
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loans, together
with any senior financing on the Properties, if applicable, would equal or
exceed the value of the Properties. Among the factors that could adversely
affect the value of the Properties are an overall decline in the residential
real estate market in the areas in which the Properties are located or a
decline in the general condition of the Properties as a result of failure of
borrowers to maintain adequately the Properties or of natural disasters that
are not necessarily covered by insurance, such as earthquakes and floods. In
the case of Home Equity Loans, such decline could extinguish the value of the
interest of a junior mortgagee in the Property before having any effect on
the interest of the related senior mortgagee. If such a decline occurs, the
actual rates of delinquencies, foreclosures and losses on all Loans could be
higher than those currently experienced in the mortgage lending industry in
general.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a Property. In the event of a
default by a borrower, these restrictions, among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts due on the
related Loan. In addition, the Master Servicer will be entitled to deduct
from related liquidation proceeds all expenses reasonably incurred in
attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted loan having a small remaining principal balance as
it would in the case of a defaulted loan having a large remaining principal
balance, the amount realized after expenses of liquidation would be smaller
as a percentage of the outstanding principal balance of the small loan than
would be the case with the defaulted loan having a large remaining principal
balance. Since the mortgages and deeds of trust securing the Home Equity
Loans will be primarily junior liens subordinate to the rights of the
mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from any liquidation, insurance or condemnation proceeds will be
available to satisfy the outstanding balance of such junior lien only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to any senior mortgage, in which case it must either pay the entire
amount due on any senior mortgage to the related senior mortgagee at or prior
to the foreclosure sale or undertake the obligation to make payments on any
such senior mortgage in the event the mortgagor is in default thereunder.
The Trust Fund will not have any source of funds to satisfy any senior
mortgages or make payments due to any senior mortgagees.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most states have other
laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which
may apply to the origination, servicing and collection of the Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Master Servicer to collect all or part of the
principal of or interest on the Loans, may entitle the borrower to a refund
of amounts previously paid and, in addition, could subject the Master
Servicer to damages and administrative sanctions. See "Certain Legal Aspects
of the Loans".
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and
safety. In certain circumstances, these laws and regulations impose
obligations on owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations
may result in fines and penalties.
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of addressing hazardous
substances on, in or beneath such property and related costs. Such liability
could exceed the value of the property and the aggregate assets of the owner
or operator. In addition, persons who transport or dispose of hazardous
substances, or arrange for the transportation, disposal or treatment of
hazardous substances, at off-site locations may also be held liable if there
are releases or threatened releases of hazardous substances at such off-site
locations.
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 the laws of some states, and under CERCLA and the federal Solid
Waste Disposal Act, there is a possibility that a lender may be held liable
as an "owner" or "operator" for costs of addressing releases or threatened
releases of hazardous substances at a property, or releases of petroleum from
an underground storage tank, under certain circumstances. See "Certain Legal
Aspects of the Loans--Environmental Risks."
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE LOANS
The Loans may also be subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience;
and
(iv) for Loans that were originated or closed after November 7,
1989, the Home Equity Loan Consumer Protection Act of 1988, which
requires additional application disclosures, limits changes that may be
made to the loan documents without the borrower's consent and restricts
a lender's ability to declare a default or to suspend or reduce a
borrower's credit limit to certain enumerated events.
The Riegle Act. Certain mortgage loans are subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of
1994. These provisions impose additional disclosure and other requirements
on creditors with respect to non-purchase money mortgage loans with high
interest rates or high up-front fees and charges. The provisions of the
Riegle Act apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of
the creditor would generally be subject to all claims and defenses that the
consumer could assert against the creditor, including, without limitation,
the right to rescind the mortgage loan.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission
and other similar federal and state statutes and regulations (collectively,
the "Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the
obligor to withhold payment if the work does not meet the quality and
durability standards agreed to by the homeowner and the contractor. The
Holder in Due Course Rules have the effect of subjecting any assignee of the
seller in a consumer credit transaction to all claims and defenses which the
obligor in the credit sale transaction could assert against the seller of the
goods.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans and in addition could subject the Trust Fund to damages
and administrative enforcement. See "Certain Legal Aspects of the Loans".
RATING OF THE SECURITIES
It will be a condition to the issuance of a class of Securities that
they be rated in one of the four highest rating categories by the Rating
Agency identified in the related Prospectus Supplement. Any such rating
would be based on among other things, the adequacy of the value of the Trust
Fund Assets and any credit enhancement with respect to such class and will
respect such Rating Agency's assessment solely of the likelihood that holders
of a class of Securities will receive payments to which such Securityholders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ
from that originally anticipated or the likelihood of early optional
termination of the Series of Securities. Such rating shall not be deemed a
recommendation to purchase, hold or sell Securities, inasmuch as it does not
address market price or suitability for a particular investor. Such rating
will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund Assets or any
credit enhancement with respect to a Series, such rating might also be
lowered or withdrawn, among other reasons, because of an adverse change in
the financial or other condition of a credit enhancement provider or a change
in the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a class 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 similar 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 similar loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance can be
given that the values of any Properties have remained or will remain at their
levels on the respective dates of origination of the related Loans. If the
residential real estate markets should experience an overall decline in
property values such that the outstanding principal balances of the Loans in
a particular Trust Fund and any secondary financing on the related Properties
become equal to or greater than the value of the Properties, the rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by mortgagors of scheduled payments of principal
and interest on the Loans and, accordingly, the rates of delinquencies,
foreclosures and losses with respect to any Trust Fund. To the extent that
such losses are not covered by credit enhancement, such losses will be borne,
at least in part, by the holders of one or more classes of the Securities of
the related Series. See "Rating".
BOOK-ENTRY REGISTRATION
If issued in book-entry form, such registration may reduce the liquidity
of the Securities in the secondary trading market since investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates. Since transactions in Securities can be effected only through
the Depository Trust Company ("DTC"), participating organizations
("Participants"), Financial Intermediaries and certain banks, the ability of
a Securityholder to pledge a Security to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of
such Securities, may be limited due to lack of a physical certificate
representing the Securities.
In addition, Securityholders may experience some delay in their receipt
of distributions of interest and principal on the Securities since
distributions are required to be forwarded by the Trustee to DTC and DTC will
then be required to credit such distributions to the accounts of Participants
which thereafter will be required to credit them to the accounts of
Securityholders either directly or indirectly through Financial
Intermediaries. See "Description of the Securities--Book-Entry Registration
of Securities".
PRE-FUNDING ACCOUNTS
If so provided in the related Prospectus Supplement, on the Closing Date
the Depositor will deposit an amount (the "Pre-Funded Amount") specified in
such Prospectus Supplement into the Pre-Funding Account. In no event shall
the Pre-Funded Amount exceed 25% of the initial aggregate principal amount of
the Certificates and/or Notes of the related Series of Securities. The Pre-
Funded Amount will be used to purchase Loans ("Subsequent Loans") in a period
from the Closing Date to a date not more than three months after the Closing
Date (such period, the "Funding Period") from the Depositor (which, in turn,
will acquire such Subsequent Loans from the Seller or Sellers specified in
the related Prospectus Supplement). To the extent that the entire Pre-Funded
Amount has not been applied to the purchase of Subsequent Loans by the end of
the related Funding Period, any amounts remaining in the Pre-Funding Account
will be distributed as a prepayment of principal to Certificateholders and/or
Noteholders on the Distribution Date immediately following the end of the
Funding Period, in the amounts and pursuant to the priorities set forth in
the related Prospectus Supplement.
LOWER CREDIT QUALITY TRUST FUND ASSETS
Certain of the Trust Fund Assets underlying or securing, as the case may
be, a Series of Securities may have been made to lower credit quality
borrowers who have marginal credit and fall into one of two categories:
customers with moderate income, limited assets and other income
characteristics which cause difficulty in borrowing from banks and other
traditional sources of lenders, and customers with a derogatory credit report
including a history of irregular employment, previous bankruptcy filings,
repossession of property, charged-off loans and garnishment of wages. The
average interest rate charged on such Trust Fund Assets made to these types
of borrowers is generally higher than that charged by lenders that typically
impose more stringent credit requirements. The payment experience on loans
made to these types of borrowers is likely to be different (i.e., greater
likelihood of later payments or defaults, less likelihood of prepayments)
from that on loans made to borrowers with higher credit quality, and is
likely to be more sensitive to changes in the economic climate in the areas
in which such borrowers reside. See "The Mortgage Pool" in the related
Prospectus Supplement.
DELINQUENT TRUST FUND ASSETS
No more than 5% (by principal balance) of the Trust Fund Assets for any
particular Series of Securities will be between 30 and 59 days past due as of
the related Cut-off Date.
OTHER CONSIDERATIONS
There is no assurance that the market value of the Trust Fund Assets or
any other assets of a Series will at any time be equal to or greater than the
principal amount of the Securities of such Series then outstanding, plus
accrued interest thereon. Moreover, upon an event of default under the
Agreement for a Series and a sale of the assets in the Trust Fund or upon a
sale of the assets of a Trust Fund for a Series of Securities, the Trustee,
the Master Servicer, the credit enhancer, if any, and any other service
provider specified in the related Prospectus Supplement generally will be
entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement
prior to distributions to Securityholders. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on
the Securities of such Series.
THE TRUST FUND
The Certificates of each Series will represent interests in the assets
of the related Trust Fund, and the Notes of each Series will be secured by
the pledge of the assets of the related Trust Fund. The Trust Fund for each
Series will be held by the Trustee for the benefit of the related
Securityholders. Each Trust Fund will consist of certain assets (the "Trust
Fund Assets") consisting of a pool (each, a "Pool") comprised of Loans or
Private Asset Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Trust Fund
Assets and certain other accounts, obligations or agreements, in each case as
specified in the related Prospectus Supplement./F1/ The Pool will be created
on the first day of the month of the issuance of the related Series of
Securities or such other date specified in the Prospectus Supplement (the
"Cut-off Date"). The Securities will be entitled to payment from the assets
of the related Trust Fund or Funds or other assets pledged for the benefit of
the Securityholders as specified in the related Prospectus Supplement and
will not be entitled to payments in respect of the assets of any other trust
fund established by the Depositor.
- --------------------
/F1/ Whenever the terms "Pool", "Certificates" and "Notes" are used
in this Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Pool and the Certificates representing
certain undivided interests in, or Notes secured by the assets of, a single
trust fund (the "Trust Fund") consisting primarily of the Loans in such Pool.
Similarly, the term "Pass-Through Rate" will refer to the Pass-Through Rate
borne by the Certificates or Notes of one specific Series and the term "Trust
Fund" will refer to one specific Trust Fund.
The Trust Fund Assets will be acquired by the Depositor, either directly
or through affiliates, from originators or sellers which may be affiliates of
the Depositor (the "Sellers"), and conveyed by the Depositor to the related
Trust Fund. Loans acquired by the Depositor will have been originated in
accordance with the underwriting criteria specified below under "Loan
Program-Underwriting Standards" or as otherwise described in a related
Prospectus Supplement. See "Loan Program--Underwriting Standards".
The Depositor will cause the Trust Fund Assets to be assigned to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Master Servicer named
in the related Prospectus Supplement will service the Trust Fund Assets,
either directly or through other servicing institutions ("Sub-Servicers"),
pursuant to a Pooling and Servicing Agreement among the Depositor, the Master
Servicer and the Trustee with respect to a Series of Certificates, or a
servicing agreement (each, a "Servicing Agreement") between the Trustee and
the Servicer with respect to a Series of Notes, and will receive a fee for
such services. See "Loan Program" and "The Pooling and Servicing Agreement".
With respect to Loans serviced by the Master Servicer through a Sub-Servicer,
the Master Servicer will remain liable for its servicing obligations under
the related Agreement as if the Master Servicer alone were servicing such
Loans.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and
with respect to a Series of Notes, the Indenture and the Servicing Agreement,
as the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the
laws of the state specified in the related Prospectus Supplement pursuant to
a trust agreement (each, a "Trust Agreement") between the Depositor and the
trustee of such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or
liabilities. No Trust Fund is expected to engage in any activities other
than acquiring, managing and holding of the related Trust Fund Assets and
other assets contemplated herein and in the related Prospectus Supplement and
the proceeds thereof, issuing Securities and making payments and
distributions thereon and certain related activities. No Trust Fund is
expected to have any source of capital other than its assets and any related
credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Depositor with respect to a Series of Securities will
be to obtain certain representations and warranties from the Sellers and to
assign to the Trustee for such Series of Securities the Depositor's rights
with respect to such representations and warranties. See "The Agreements--
Assignment of Trust Fund Assets". The obligations of the Master Servicer
with respect to the Loans will consist principally of its contractual
servicing obligations under the related Agreement (including its obligation
to enforce the obligations of the Sub-Servicers or Sellers, or both, as more
fully described herein under "Loan Program--Representations by Sellers;
Repurchases" and "The Agreements--Sub-Servicing of Loans", "--Assignment of
Trust Fund Assets") and its obligation, if any, to make certain cash advances
in the event of delinquencies in payments on or with respect to the Loans in
the amounts described herein under "Description of the Securities--Advances".
The obligations of the Master Servicer to make advances may be subject to
limitations, tothe extentprovidedherein andinthe relatedProspectusSupplement.
The following is a brief description of the assets expected to be
included in the Trust Funds. If specific information respecting the Trust
Fund Assets is not known at the time the related Series of Securities
initially is offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific
information will be set forth in a report on Form 8-K to be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of such Securities (the "Detailed Description"). A copy of the
Agreement with respect to each Series of Securities will be attached to the
Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement. A schedule of
the Trust Fund Assets relating to such Series will be attached to the
Agreement delivered to the Trustee upon delivery of the Securities.
THE LOANS
General. For purposes hereof, "Home Equity Loans" includes "Closed-End
Loans" and "Revolving Credit Line Loans". The real property which secures
repayment of the Loans is referred to as "Properties". Unless otherwise
specified in the related Prospectus Supplement, the Loans will be secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on a Property, which may be subordinated to one or more senior liens on
the related Properties, each as described in the related Prospectus
Supplement. As more fully described in the related Prospectus Supplement,
the Loans may be "conventional" loans or loans that are insured or guaranteed
by a governmental agency such as the FHA or VA.
The Properties relating to Loans will consist primarily of detached or
semi-detached one- to four-family dwelling units, townhouses, rowhouses,
individual condominium units, individual units in planned unit developments,
and certain other dwelling units ("Single Family Properties") or Small Mixed-
Used Properties (as defined herein) which consist of structures of not more
than three stories which include one- to four-family residential dwelling
units and space used for retail, professional or other commercial uses. Such
Properties may include vacation and second homes, investment properties and
leasehold interests. The Properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory of
the United States.
The payment terms of the Loans to be included in a Trust Fund will be
described in the related Prospectus Supplement and may include any of the
following features (or combination thereof) or other features,
all as described above or in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of
time or under certain circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations. Accrued interest
may be deferred and added to the principal of a loan for such periods
and under such circumstances as may be specified in the related
Prospectus Supplement. Loans may provide for the payment of interest at
a rate lower than the specified interest rate borne by such Mortgage
(the "Loan Rate") for a period of time or for the life of the Loan, and
the amount of any difference may be contributed from funds supplied by
the Seller of the Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from
the interest rate on the Loan or may not be amortized during all or a
portion of the original term. Payment of all or a substantial portion
of the principal may be due on maturity ("balloon payment"). Principal
may include interest that has been deferred and added to the principal
balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the loan or may decline over time,
and may be prohibited for the life of the loan or for certain periods
("lockout periods"). Certain loans may permit prepayments after
expiration of the applicable lockout period and may require the payment
of a prepayment fee in connection with any such subsequent prepayment.
Other loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The loans may include
"due on sale" clauses which permit the mortgagee to demand payment of
the entire loan in connection with the sale or certain transfers of the
related Property. Other loans may be assumable by persons meeting the
then applicable underwriting standards of the Seller.
As more fully described in the related Prospectus Supplement, interest
on each Revolving Credit Line Loan, excluding introduction rates offered from
time to time during promotional periods, is computed and payable monthly on
the average daily outstanding principal balance of such Loan. Principal
amounts on a Revolving Credit Line Loan may be drawn down (up to a maximum
amount as set forth in the related Prospectus Supplement) or repaid under
each Revolving Credit Line Loan from time to time, but may be subject to a
minimum periodic payment. Except to the extent provided in the related
Prospectus Supplement, the Trust Fund will not include any amounts borrowed
under a Revolving Credit Line Loan after the Cut-off Date. The full amount
of a Closed-End Loan is advanced at the inception of the loan and generally
is repayable in equal (or substantially equal) installments of an amount to
fully amortize such loan at its stated maturity. Except to the extent
provided in the related Prospectus Supplement, the original terms to stated
maturity of Closed-End Loan will not exceed 360 months. Under certain
circumstances, under either a Revolving Credit Line Loan or a Closed-End
Loan, a borrower may choose an interest only payment option and is obligated
to pay only the amount of interest which accrues on the loan during the
billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance
of the loan.
The aggregate principal balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the sole
basis for a representation that a given percentage of the Loans is secured by
Single Family Property that is owner-occupied will be either (i) the making
of a representation by the borrower at origination of the Loan either that
the underlying Property will be used by the borrower for a period of at least
six months every year or that the borrower intends to use the Property as a
primary residence or (ii) a finding that the address of the underlying
Property is the borrower's mailing address.
The Loans may include fixed-rate, closed-end mortgage loans having terms
to maturity of up to 30 years and secured by first-lien mortgages originated
on Properties containing one to four residential units and no more than three
income producing non-residential units ("Small Mixed-Use Properties"). At
least 50% of the units contained in a Small Mixed-Use Property will consist
of residential units. Income from such non-residential units will not exceed
40% of the adjusted gross income of the related borrower. The maximum Loan-
to-Value Ratio on Small Mixed-Use Properties will not exceed 65%. Small
Mixed-Use Properties may be owner occupied or investor properties and the
loan purpose may be a refinancing or a purchase.
Home Improvement Contracts. The Trust Fund Assets for a Series may
consist, in whole or part, of home improvement installment sales contracts
and installment loan agreements (the "Home Improvement Contracts") originated
by a home improvement contractor, a thrift or a commercial mortgage banker in
the ordinary course of business. As specified in the related Prospectus
Supplement, the Home Improvement Contracts will either be unsecured or
secured by the Mortgages primarily on Single Family Properties which are
generally subordinate to other mortgages on the same Property, or secured by
purchase money security interest in the Home Improvements financed thereby.
Except as otherwise specified in the related Prospectus Supplement, the Home
Improvement Contracts will be fully amortizing and may have fixed interest
rates or adjustable interest rates and may provide for other payment
characteristics as described below and in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the
home improvements (the "Home Improvements") securing the Home Improvement
Contracts will include, but are not limited to, replacement windows, house
siding, new roofs, swimming pools, satellite dishes, kitchen and bathroom
remodeling goods and solar heating panels.
The initial Loan-to-Value Ratio of a Home Improvement Contract is
computed in the manner described in the related Prospectus Supplement.
Additional Information. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent
then specifically known to the Depositor, with respect to the Loans contained
in the related Pool, including (i) the aggregate outstanding principal
balance and the average outstanding principal balance of the Loans as of the
applicable Cut-off Date, (ii) the type of property securing the Loan (e.g.,
one- to four-family houses, individual units in condominium apartment
buildings, vacation and second homes or other real property), (iii) the
original terms to maturity of the Loans, (iv) the largest principal balance
and the smallest principal balance of any of the Loans, (v) the earliest
origination date and latest maturity date of any of the Loans, (vi) the
Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as applicable, of the
Loans, (vii) the Loan Rates or annual percentage rates ("APR") or range of
Loan Rates or APR's borne by the Loans, and (viii) the geographical location
of the Loans on a state-by-state basis. If specific information respecting
the Loans is not known to the Depositor at the time the related Securities
are initially offered, more general information of the nature described above
will be provided in the related Prospectus Supplement, and specific
information will be set forth in the Detailed Description.
Except as otherwise specified in the related Prospectus Supplement, the
"Combined Loan-to-Value Ratio" of a Loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal
balance of the Loan (or, in the case of a Revolving Credit Line Loan, the
maximum amount thereof available) and (b) the outstanding principal balance
at the date of origination of the Loan of any senior mortgage loan(s) or, in
the case of any open-ended senior mortgage loan, the maximum available line
of credit with respect to such mortgage loan, regardless of any lesser amount
actually outstanding at the date of origination of the Loan, to (ii) the
Collateral Value of the related Property. Except as otherwise specified in
the related Prospectus Supplement, the "Collateral Value" of the Property,
other than with respect to certain Loans the proceeds of which were used to
refinance an existing mortgage loan (each, a "Refinance Loan"), is the lesser
of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such Loan and (b) the sales price for such
Property. In the case of Refinance Loans, the "Collateral Value" of the
related Property is the appraised value thereof determined in an appraisal
obtained at the time of refinancing.
PRIVATE ASSET BACKED SECURITIES
General. Private Asset Backed Securities may consist of (a) pass-
through certificates or participation certificates evidencing an undivided
interest in a pool of home equity or home improvement loans, or (b)
collateralized mortgage obligations secured by home equity or home
improvement loans. Private Asset Backed Securities may include stripped
asset backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain home equity or home improvement loans.
Private Asset Backed Securities will have been issued pursuant to a pooling
and servicing agreement, an indenture or similar agreement (a "PABS
Agreement"). The seller/servicer of the underlying Loans will have entered
into the PABS Agreement with the trustee under such PABS Agreement (the "PABS
Trustee"). The PABS Trustee or its agent, or a custodian, will possess the
loans underlying such Private Asset Backed Security. Loans underlying a
Private Asset Backed Security will be serviced by a servicer (the "PABS
Servicer") directly or by one or more subservicers who may be subject to the
supervision of the PABS Servicer. Except as otherwise specified in the
related Prospectus Supplement, the PABS Servicer will be a FNMA or FHLMC
approved servicer and, if FHA Loans underlie the Private Asset Backed
Securities, approved by HUD as an FHA mortgagee.
The issuer of the Private Asset Backed Securities (the "PABS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for
the purpose of, among other things, establishing trusts and acquiring and
selling housing loans to such trusts and selling beneficial interests in such
trusts. The PABS Issuer shall not be an affiliate of the Depositor. The
obligations of the PABS Issuer will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to
the related trust. Except as otherwise specified in the related Prospectus
Supplement, the PABS Issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Asset Backed Securities
issued under the PABS Agreement. Additionally, although the loans underlying
the Private Asset Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Asset Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Asset Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Asset Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest
distributions. Principal and interest distributions will be made on the
Private Asset Backed Securities by the PABS Trustee or the PABS Servicer.
The PABS Issuer or the PABS Servicer may have the right to repurchase assets
underlying the Private Asset Backed Securities after a certain date or under
other circumstances as specified in the related Prospectus Supplement.
Underlying Loans. The home equity or home improvement loans underlying
the Private Asset Backed Securities may consist of fixed rate, level payment,
fully amortizing loans or graduated payment loans, buydown loans, adjustable
rate loans, or loans having balloon or other special payment features. Such
loans may be secured by single family property, multifamily property,
manufactured homes or by an assignment of the proprietary lease or occupancy
agreement relating to a specific dwelling within a cooperative and the
related shares issued by such cooperative. Except as otherwise specified in
the related Prospectus Supplement, the underlying loans will have the
following characterizations: (i) no loan will have had a Loan-to-Value Ratio
at origination in excess of 95%, (ii) each single family loan secured by a
mortgaged property that had a Loan-to-Value ratio in excess of 80% at
origination will be covered by a primary mortgage insurance policy, (iii)
each loan will have had an original term to stated maturity of not less than
5 years and not more than 40 years, (iv) no loan that was more than 89 days
delinquent as to the payment of principal or interest will have been eligible
for inclusion in the assets under the related PABS Agreement, (v) each loan
(other than a cooperative loan) will be required to be covered by a standard
hazard insurance policy (which may be a blanket policy), and (vi) each loan
(other than a cooperative loan or a contract secured by a manufactured home)
will be covered by a title insurance policy.
Credit Support Relating to Private Asset Backed Securities. Credit
support in the form of reserve funds, subordination of other private
certificates issued under the PABS Agreement, letters of credit, surety
bonds, insurance policies or other types of credit support may be provided
with respect to the loans underlying the Private Asset Backed Securities
themselves.
Rating of Private Asset Backed Securities. The PABS upon their issuance
will have been assigned a rating in one of the four highest rating categories
by at least one nationally recognized statistical rating agency.
Additional Information. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Asset Backed Securities will specify
(i) the aggregate approximate principal amount and type of the Private Asset
Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the loans which comprise the underlying assets for the
Private Asset Backed Securities including (A) the payment features of such
loans, (B) the approximate aggregate principal balance, if known, of
underlying loans insured or guaranteed by a governmental entity, (C) the
servicing fee or range of servicing fees with respect to the loans, and (D)
the minimum and maximum stated maturities of the underlying loans at
origination, (iii) the maximum original term-to-stated maturity of the
Private Asset Backed Securities, (iv) the weighted average term-to-stated
maturity of the Private Asset Backed Securities, (v) the pass-through or
certificate rate of the Private Asset Backed Securities, (vi) the weighted
average pass-through or certificate rate of the Private Asset Backed
Securities, (vii) the PABS Issuer, the PABS Servicer (if other than the PABS
Issuer) and the PABS Trustee for such Private Asset Backed Securities, (viii)
certain characteristics of credit support, if any, such as reserve funds,
insurance policies, surety bonds, letters of credit or guaranties relating to
the loans underlying the Private Asset Backed Securities or to such Private
Asset Backed Securities themselves, (ix) the term on which the underlying
loans for such Private Asset Backed Securities may, or are required to, be
purchased prior to their stated maturity or the stated maturity of the
Private Asset Backed Securities, (x) the terms on which loans may be
substituted for those originally underlying the Private Asset Backed
Securities and (xi) to the extent provided in a periodic report to the
Trustee in its capacity as holder of the PABS, certain information regarding
the status of the credit support, if any, relating to the PABS.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used
by the Depositor for general corporate purposes. The Depositor expects to
sell Securities in Series from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the
volume of Trust Fund Assets acquired by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
THE DEPOSITOR
Financial Asset Securities Corp., the Depositor, is a Delaware
corporation organized on August 2, 1995 for the limited purpose of acquiring,
owning and transferring Trust Fund Assets and selling interests therein or
bonds secured thereby. It is an indirect limited purpose finance subsidiary
of National Westminster Bank Plc and an affiliate of Greenwich Capital
Markets, Inc., a registered securities broker-dealer. The Depositor
maintains its principal office at 600 Steamboat Road, Greenwich, Connecticut
06830. Its telephone number is (203) 625-2700.
Neither the Depositor nor any of the Depositor's affiliates will insure
or guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly or
through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards".
UNDERWRITING STANDARDS
Each Seller will represent and warrant that all Loans originated and/or
sold by it to the Depositor or one of its affiliates will have been
underwritten in accordance with standards consistent with those utilized by
mortgage lenders generally during the period of origination for similar types
of loans. As to any Loan insured by the FHA or partially guaranteed by the
VA, the Seller will represent that it has complied with underwriting policies
of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value
and adequacy of the Property as collateral. In general, a prospective
borrower applying for a Loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information,
including the principal balance and payment history with respect to any
senior mortgage, if any, which, unless otherwise specified in the related
Prospectus Supplement, the borrower's income will be verified by the Seller.
As part of the description of the borrower's financial condition, the
borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy.
In most cases, an employment verification is obtained from an independent
source (typically the borrower's employer) which verification reports the
length of employment with that organization, the current salary, and whether
it is expected that the borrower will continue such employment in the future.
If a prospective borrower is self-employed, the borrower may be required to
submit copies of signed tax returns. The borrower may also be required to
authorize verification of deposits at financial institutions where the
borrower has demand or savings accounts.
In determining the adequacy of the property to be used as collateral, an
appraisal will generally be made of each property considered for financing.
The appraiser is generally required to inspect the property, issue a report
on its condition and, if applicable, verify that construction, if new, has
been completed. The appraisal is based on the market value of comparable
homes, the estimated rental income (if considered applicable by the
appraiser) and the cost of replacing the home. The value of the property
being financed, as indicated by the appraisal, must be such that it currently
supports, and is anticipated to support in the future, the outstanding loan
balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on
the basis of the monthly payments due in the year of origination) and other
expenses related to the property (such as property taxes and hazard
insurance) and (ii) to meet monthly housing expenses and other financial
obligations and monthly living expenses. The underwriting standards applied
by Sellers, particularly with respect to the level of loan documentation and
the mortgagor's income and credit history, may be varied in appropriate cases
where factors such as low Combined Loan-to-Value Ratios or other favorable
credit exist.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing loans
of the type contained in the related Pool in accordance with accepted
practices and prudent guidelines, and must maintain satisfactory facilities
to originate and service those loans. Unless otherwise specified in the
related Prospectus Supplement, each Seller will be a seller/servicer approved
by either FNMA or FHLMC.
REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each Seller will have made representations and warranties in respect of
the Loans sold by such Seller and evidenced by all, or a part, of a Series of
Securities. Except as otherwise specified in the related Prospectus
Supplement, such representations and warranties include, among other things:
(i) that title insurance (or in the case of Properties located in areas where
such policies are generally not available, an attorney's certificate of
title) and any required hazard insurance policy (or certificate of title as
applicable) remained in effect on the date of purchase of the Loan from the
Seller by or on behalf of the Depositor; (ii) that the Seller had good title
to each such Loan and such Loan was subject to no offsets, defenses,
counterclaims or rights of rescission except to the extent that any buydown
agreement described herein may forgive certain indebtedness of a borrower;
(iii) that each Loan constituted a valid lien on the Property (subject only
to permissible liens disclosed, if applicable, title insurance exceptions, if
applicable, and certain other exceptions described in the Agreement) and that
the Property was free from damage and was in acceptable condition; (iv) that
there were no delinquent tax or assessment liens against the Property;
(v) that no required payment on a Loan was more than thirty days' delinquent;
and (vi) that each Loan was made in compliance with, and is enforceable
under, all applicable local, state and federal laws and regulations in all
material respects.
If so specified in the related Prospectus Supplement, the
representations and warranties of a Seller in respect of a Loan will be made
not as of the Cut-off Date but as of the date on which such Seller sold the
Loan to the Depositor or one of its affiliates. Under such circumstances, a
substantial period of time may have elapsed between such date and the date of
initial issuance of the Series of Securities evidencing an interest in such
Loan. Since the representations and warranties of a Seller do not address
events that may occur following the sale of a Loan by such Seller, its
repurchase obligation described below will not arise if the relevant event
that would otherwise have given rise to such an obligation with respect to a
Loan occurs after the date of sale of such Loan by such Seller to the
Depositor or its affiliates. However, the Depositor will not include any
Loan in the Trust Fund for any Series of Securities if anything has come to
the Depositor's attention that would cause it to believe that the
representationes and warranties of a Seller will not be accurate and complete
in all material respects in respect of such Loan as of the date of initial
issuance of the related Series of Securities. If the Master Servicer is also
a Seller of Loans with respect to a particular Series, such representations
will be in addition to the representations and warranties made by the Master
Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the
Seller, will promptly notify the relevant Seller of any breach of any
representation or warranty made by it in respect of a Loan which materially
and adversely affects the interests of the Securityholders in such Loan.
Unless otherwise specified in the related Prospectus Supplement, if such
Seller cannot cure such breach within 90 days following notice from the
Master Servicer or the Trustee, as the case may be, then such Seller will be
obligated either (i) to repurchase such Loan from the Trust Fund at a price
(the "Purchase Price") equal to 100% of the unpaid principal balance thereof
as of the date of the repurchase plus accrued interest thereon to the first
day of the month following the month of repurchase at the Loan Rate (less any
Advances or amount payable as related servicing compensation if the Seller is
the Master Servicer) or (ii) to substitute for such Loan a replacement loan
that satisfies certain requirements set forth in the Agreement. If a REMIC
election is to be made with respect to a Trust Fund, unless otherwise
specified in the related Prospectus Supplement, the Master Servicer or a
holder of the related residual certificate generally will be obligated to pay
any prohibited transaction tax which may arise in connection with any such
repurchase or substitution and the Trustee must have received a satisfactory
opinion of counsel that such repurchase or substitution will not cause the
Trust Fund to lose its status as a REMIC or otherwise subject the Trust Fund
to a prohibited transaction tax. The Master Servicer may be entitled to
reimbursement for any such payment from the assets of the related Trust Fund
or from any holder of the related residual certificate. See "Description of
the Securities--General". Except in those cases in which the Master Servicer
is the Seller, the Master Servicer will be required under the applicable
Agreement to enforce this obligation for the benefit of the Trustee and the
holders of the Securities, following the practices it would employ in its
good faith business judgment were it the owner of such Loan. This repurchase
or substitution obligation will constitute the sole remedy available to
holders of Securities or the Trustee for a breach of representation by a
Seller.
Neither the Depositor nor the Master Servicer (unless the Master
Servicer is the Seller) will be obligated to purchase or substitute a Loan if
a Seller defaults on its obligation to do so, and no assurance can be given
that Sellers will carry out their respective repurchase or substitution
obligations with respect to Loans. However, to the extent that a breach of a
representation and warranty of a Seller may also constitute a breach of a
representation made by the Master Servicer, the Master Servicer may have a
repurchase or substitution obligation as described below under "The
Agreements--Assignment of Trust Fund Assets".
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to separate
agreements (each, a "Pooling and Servicing Agreement" or a "Trust Agreement")
among the Depositor, the Servicer, if the Series relates to Loans, and the
Trustee. A form of Pooling and Servicing Agreement and Trust Agreement has
been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. Each Series of Notes will be issued pursuant to an
indenture (the "Indenture") between the related Trust Fund and the entity
named in the related Prospectus Supplement as trustee (the "Trustee") with
respect to such Series. A form of Indenture has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. A Series
may consist of both Notes and Certificates. Each Agreement, dated as of the
related Cut-off Date, will be among the Depositor, the Master Servicer and
the Trustee for the benefit of the holders of the Securities of such Series.
The provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain provisions which may appear in each
Agreement. The Prospectus Supplement for a Series of Securities will
describe any provision of the Agreement relating to such Series that mainly
differs from the description thereof contained in this Prospectus. The
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Agreement for
each Series of Securities and the applicable Prospectus Supplement. The
Depositor will provide a copy of the Agreement (without exhibits) relating to
any Series without charge upon written request of a holder of record of a
Security of such Series addressed to Financial Asset Securities Corp., 600
Steamboat Road, Greenwich, Connecticut 06830, Attention: Asset Backed Finance
Group.
GENERAL
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be
entitled to payments in respect of the assets included in any other Trust
Fund established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Notes of each Series will be issued in book-entry
or fully registered form, in the authorized denominations specified in the
related Prospectus Supplement, will be secured by the pledge of the assets of
the related Trust Fund and will not be entitled to payments in respect of the
assets included in any other Trust Fund established by the Depositor. The
Securities will not represent obligations of the Depositor or any affiliate
of the Depositor. Certain of the Loans may be guaranteed or insured as set
forth in the related Prospectus Supplement. Each Trust Fund will consist of,
to the extent provided in the Agreement, (i) the Trust Fund Assets, as from
time to time are subject to the related Agreement (exclusive of any amounts
specified in the related Prospectus Supplement ("Retained Interest")),
including all payments of interest and principal received with respect to the
Loans after the Cut-off Date (to the extent not applied in computing the
Cut-off Date Principal Balance); (ii) such assets as from time to time are
required to be deposited in the related Security Account, as described below
under "The Agreements--Payments on Loans; Deposits to Security Account";
(iii) property which secured a Loan and which is acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure and (iv) any
insurance policies or other forms of credit enhancement required to be
maintained pursuant to the related Agreement. If so specified in the related
Prospectus Supplement, a Trust Fund may also include one or more of the
following: reinvestment income on payments received on the Trust Fund
Assets, a Reserve Account, a mortgage pool insurance policy, a Special Hazard
Insurance Policy, a Bankruptcy Bond, one or more letters of credit, a surety
bond, guaranties or similar instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right to
payment to one or more other classes of Securities of such Series. One or
more classes of Securities of a Series may be entitled to receive
distributions of principal, interest or any combination thereof.
Distributions on one or more classes of a Series of Securities may be made
prior to one or more other classes, after the occurrence of specified events,
in accordance with a schedule or formula, on the basis of collections from
designated portions of the Trust Fund Assets in the related Trust Fund or on
a different basis, in each case as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among
classes or over time as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the Trustee
on each Distribution Date (i.e., monthly or at such other intervals and on
the dates as are specified in the Prospectus Supplement) in proportion to the
percentages specified in the related Prospectus Supplement. Distributions
will be made to the persons in whose names the Securities are registered at
the close of business on the dates specified in the related Prospectus
Supplement (each, a "Record Date"). Distributions will be made in the manner
specified in the Prospectus Supplement to the persons entitled thereto at the
address appearing in the register maintained for holders of Securities (the
"Security Register"); provided, however, that the final distribution in
retirement of the Securities will be made only upon presentation and
surrender of the Securities at the office or agency of the Trustee or other
person specified in the notice to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange
or transfer of Securities of any Series but the Trustee may require payment
of a sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee
benefit plan or other retirement arrangement (including individual retirement
accounts and annuities, Keogh plans and collective investment funds in which
such plans, accounts or arrangements are invested) subject to provisions of
ERISA or the Code may result in prohibited transactions within the meaning of
ERISA and the Code. See "ERISA Considerations". Unless otherwise specified
in the related Prospectus Supplement, the transfer of Securities of such a
class will not be registered unless the transferee (i) represents that it is
not, and is not purchasing on behalf of, any such plan, account or
arrangement or (ii) provides an opinion of counsel satisfactory to the
Trustee and the Depositor that the purchase of Securities of such a class by
or on behalf of such plan, account or arrangement is permissible under
applicable law and will not subject the Trustee, the Master Servicer or the
Depositor to any obligation or liability in addition to those undertaken in
the Agreements.
As to each Series, an election may be made to treat the related Trust
Fund or designated portions thereof as a "real estate mortgage investment
conduit" or "REMIC" as defined in the Code. The related Prospectus
Supplement will specify whether a REMIC election is to be made.
Alternatively, the Agreement for a Series may provide that a REMIC election
may be made at the discretion of the Depositor or the Master Servicer and may
only be made if certain conditions are satisfied. As to any such Series, the
terms and provisions applicable to the making of a REMIC election, as well as
any material federal income tax consequences to Securityholders not otherwise
described herein, will be set forth in the related Prospectus Supplement. If
such an election is made with respect to a Series, one of the classes will be
designated as evidencing the sole class of "residual interests" in the
related REMIC, as defined in the Code. All other classes of Securities in
such a Series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each Series with respect to which a REMIC
election is to be made, the Master Servicer or a holder of the related
residual certificate will be obligated to take all actions required in order
to comply with applicable laws and regulations and will be obligated to pay
any prohibited transaction taxes. The Master Servicer, to the extent set
forth in the related Prospectus Supplement, will be entitled to reimbursement
for any such payment from the assets of the Trust Fund or from any holder of
the related residual certificate.
DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type of
credit support, if any, that is used with respect to such Series. See
"Credit Enhancement". Set forth below are descriptions of various methods
that may be used to determine the amount of distributions on the Securities
of a particular Series. The Prospectus Supplement for each Series of
Securities will describe the method to be used in determining the amount of
distributions on the Securities of such Series.
Distributions allocable to principal and interest on the Securities will
be made by the Trustee out of, and only to the extent of, funds in the
related Security Account, including any funds transferred from any Reserve
Account (a "Reserve Account"). As between Securities of different classes
and as between distributions of principal (and, if applicable, between
distributions of Principal Prepayments, as defined below, and scheduled
payments of principal) and interest, distributions made on any Distribution
Date will be applied as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions to any class of Securities will be made pro rata to all
Securityholders of that class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below,
in accordance with the terms described in the related Prospectus Supplement
and specified in the Agreement. Unless otherwise provided in the related
Prospectus Supplement, "Available Funds" for each Distribution Date will
equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including Principal Prepayments, if any, and
prepayment penalties, if so provided in the related Prospectus
Supplement) and interest on the Loans in the related Trust Fund
(including Liquidation Proceeds and Insurance Proceeds and amounts drawn
under letters of credit or other credit enhancement instruments as
permitted thereunder and as specified in the related Agreement) received
by the Master Servicer after the Cut-off Date and on or prior to the day
of the month of the related Distribution Date specified in the related
Prospectus Supplement (the "Determination Date") except
(a) all payments which were due on or before the Cut-off Date;
(b) all Liquidation Proceeds and all Insurance Proceeds, all
Principal Prepayments and all other proceeds of any Loan purchased
by the Depositor, Master Servicer, any Sub-Servicer or any Seller
pursuant to the Agreement that were received after the prepayment
period specified in the related Prospectus Supplement and all
related payments of interest representing interest for any period
after the interest accrual period;
(c) all scheduled payments of principal and interest due on a
date or dates subsequent to the Due Period relating to such
Distribution Date;
(d) amounts received on particular Loans as late payments of
principal or interest or other amounts required to be paid by
borrowers, but only to the extent of any unreimbursed advance in
respect thereof made by the Master Servicer (including the related
Sub-Servicers, Support Servicers or the Trustee);
(e) amounts representing reimbursement, to the extent permitted
by the Agreement and as described under "Advances" below, for
advances made by the Master Servicer, Sub-Servicers, Support
Servicers or the Trustee that were deposited into the Security
Account, and amounts representing reimbursement for certain other
losses and expenses incurred by the Master Servicer or the Depositor
and described below;
(f) that portion of each collection of interest on a particular
Loan in such Trust Fund which represents servicing compensation
payable to the Master Servicer or Retained Interest which is to be
retained from such collection or is permitted to be retained from
related Insurance Proceeds, Liquidation Proceeds or proceeds of
Loans purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer, Sub
Servicer, Support Servicer or Trustee as described under "Advances"
below and deposited by it in the Security Account;
(iii) if applicable, amounts withdrawn from a Reserve Account;
(iv) if applicable, amounts provided under a letter of credit,
insurance policy, surety bond or other third-party guaranties; and
(v) if applicable, the amount of prepayment interest shortfall.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Security
Principal Balance (or, in the case of Securities (i) entitled only to
distributions allocable to interest, the aggregate notional principal balance
or (ii) which, under certain circumstances, allow for the accrual of interest
otherwise scheduled for payment to remain unpaid until the occurrence of
certain events specified in the related Prospectus Supplement) of each class
of Securities entitled to interest from the date, at the Pass-Through Rate
(which may be a fixed rate or rate adjustable as specified in such Prospectus
Supplement) and for the periods specified in such Prospectus Supplement. To
the extent funds are available therefor, interest accrued during each such
specified period on each class of Securities entitled to interest (other than
a class of Securities that provides for interest that accrues, but is not
currently payable, referred to hereafter as "Accrual Securities") will be
distributable on the Distribution Dates specified in the related Prospectus
Supplement until the aggregate Security Principal Balance of the Securities
of such class has been distributed in full or, in the case of Securities
entitled only to distributions allocable to interest, until the aggregate
notional principal balance of such Securities is reduced to zero or for the
period of time designated in the related Prospectus Supplement. The original
Security Principal Balance of each Security will equal the aggregate
distributions allocable to principal to which such Security is entitled.
Unless otherwise specified in the related Prospectus Supplement,
distributions allocable to interest on each Security that is not entitled to
distributions allocable to principal will be calculated based on the notional
principal balance of such Security. The notional principal balance of a
Security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing
the calculation of interest and for certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending
two or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at
par) to Securityholders will be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid
on a given Distribution Date will be added to the aggregate Security
Principal Balance of such class of Securities on that Distribution Date.
Distributions of interest on any class of Accrual Securities will commence
only after the occurrence of the events specified in the related Prospectus
Supplement. Prior to such time, the beneficial ownership interest of such
class of Accrual Securities in the Trust Fund, as reflected in the aggregate
Security Principal Balance of such class of Accrual Securities, will increase
on each Distribution Date by the amount of interest that accrued on such
class of Accrual Securities during the preceding interest accrual period but
that was not required to be distributed to such class on such Distribution
Date. Any such class of Accrual Securities will thereafter accrue interest
on its outstanding Security Principal Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will
specify the method by which the amount of principal to be distributed on the
Securities on each Distribution Date will be calculated and the manner in
which such amount will be allocated among the classes of Securities entitled
to distributions of principal. The aggregate Security Principal Balance of
any class of Securities entitled to distributions of principal generally will
be the aggregate original Security Principal Balance of such class of
Securities specified in such Prospectus Supplement, reduced by all
distributions reported to the holders of such Securities as allocable to
principal and, (i) in the case of Accrual Securities, increased by all
interest accrued but not then distributable on such Accrual Securities and
(ii) in the case of adjustable rate Securities, subject to the effect of
negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more classes
of Securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or
for the periods specified in such Prospectus Supplement. Any such allocation
of Principal Prepayments to such class or classes of Securityholders will
have the effect of accelerating the amortization of such Securities while
increasing the interests evidenced by other Securities in the Trust Fund.
Increasing the interests of the other Securities relative to that of certain
Securities allocated by the principal prepayments is intended to preserve the
availability of the subordination provided by such other Securities. See
"Credit Enhancement-Subordination".
Unscheduled Distributions. The Securities will be subject to receipt of
distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such
unscheduled distributions on the day and in the amount specified in the
related Prospectus Supplement if, due to substantial payments of principal
(including Principal Prepayments) on the Trust Fund Assets, the Trustee or
the Master Servicer determines that the funds available or anticipated to be
available from the Security Account and, if applicable, any Reserve Account,
may be insufficient to make required distributions on the Securities on such
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the amount of any such unscheduled distribution that is allocable
to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Securities on the next
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified
in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Securities would have been made on the next Distribution Date, and with
respect to Securities of the same class, unscheduled distributions of
principal will be made on the same basis as such distributions would have
been made on the next Distribution Date on a pro rata basis. Notice of any
unscheduled distribution will be given by the Trustee prior to the date of
such distribution.
ADVANCES
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date
(from its own funds, funds advanced by Sub-Servicers or Support Servicers or
funds held in the Security Account for future distributions to the holders of
such Securities), an amount equal to the aggregate of payments of interest
and/or principal that were delinquent on the related Determination Date and
were not advanced by any Sub-Servicer, subject to the Master Servicer's
determination that such advances will be recoverable out of late payments by
borrowers, Liquidation Proceeds, Insurance Proceeds or otherwise. In
addition, to the extent provided in the related Prospectus Supplement, a cash
account may be established to provide for Advances to be made in the event of
certain Trust Fund Assets payment defaults or collection shortfalls.
In making Advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If Advances
are made by the Master Servicer from cash being held for future distribution
to Securityholders, the Master Servicer will replace such funds on or before
any future Distribution Date to the extent that funds in the applicable
Security Account on such Distribution Date would be less than the amount
required to be available for distributions to Securityholders on such date.
Any Master Servicer funds advanced will be reimbursable to the Master
Servicer out of recoveries on the specific Loans with respect to which such
Advances were made (e.g., late payments made by the related borrower, any
related Insurance Proceeds, Liquidation Proceeds or proceeds of any Loan
purchased by a Sub-Servicer or a Seller under the circumstances described
hereinabove). Advances by the Master Servicer (and any advances by a
Sub-Servicer or a Support Servicer) also will be reimbursable to the Master
Servicer (or Sub-Servicer or a Support Servicer) from cash otherwise
distributable to Securityholders (including the holders of Senior Securities)
to the extent that the Master Servicer determines that any such Advances
previously made are not ultimately recoverable as described above. To the
extent provided in the related Prospectus Supplement, the Master Servicer
also will be obligated to make Advances, to the extent recoverable out of
Insurance Proceeds, Liquidation Proceeds or otherwise, in respect of certain
taxes and insurance premiums not paid by borrowers on a timely basis. Funds
so advanced are reimbursable to the Master Servicer to the extent permitted
by the Agreement. The obligations of the Master Servicer to make advances
may be supported by a cash advance reserve fund, a surety bond or other
arrangement, in each case as described in such Prospectus Supplement.
The Master Servicer or Sub-Servicer may enter into an agreement (a
"Support Agreement") with a Support Servicer pursuant to which the Support
Servicer agrees to provide funds on behalf of the Master Servicer or Sub-
Servicer in connection with the obligation of the Master Servicer or Sub-
Servicer, as the case may be, to make Advances. The Support Agreement will
be delivered to the Trustee and the Trustee will be authorized to accept a
substitute Support Agreement in exchange for an original Support Agreement,
provided that such substitution of the Support Agreement will not adversely
affect the rating or ratings then in effect on the Securities.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Master Servicer, a Sub-Servicer or a Support Servicer fails to make
a required Advance, the Trustee will be obligated to make such Advance in its
capacity as successor servicer. If the Trustee makes such an Advance, it
will be entitled to be reimbursed for such Advance to the same extent and
degree as the Master Servicer, a Sub-Servicer or a Support Servicer is
entitled to be reimbursed for Advances. See "Description of the Securities--
Distributions on Securities" herein.
COMPENSATING INTEREST
If so specified in the related Prospectus Supplement, the Master
Servicer will be required to remit to the Trustee, with respect to each Loan
in the related Trust Fund as to which a principal prepayment in full or a
principal payment which is in excess of the scheduled monthly payment and is
not intended to cure a delinquency was received during any Due Period, an
amount, from and to the extent of amounts otherwise payable to the Master
Servicer as servicing compensation, equal to the excess, if any, of (a) 30
days' interest on the principal balance of the related Loan at the Loan Rate
net of the per annum rate at which the Master Servicer's servicing fee
accrues, over (b) the amount of interest actually received on such Loan
during such Due Period, net of the Master Servicer's servicing fee.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date,
the Master Servicer or the Trustee will furnish to each Securityholder of
record of the related Series a statement setting forth, to the extent
applicable to such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal Prepayments
and any applicable prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on such Distribution Date, and (b)
withdrawn from the Reserve Fund, if any, that is included in the amounts
distributed to the Senior Securityholders;
(v) the outstanding principal balance or notional principal balance
of such class after giving effect to the distribution of principal on
such Distribution Date;
(vi) the percentage of principal payments on the Loans (excluding
prepayments), if any, which such class will be entitled to receive on
the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if
any, which such class will be entitled to receive on the following
Distribution Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Security Account by the Master Servicer, and the
amount of additional servicing compensation received by the Master
Servicer attributable to penalties, fees, excess Liquidation Proceeds
and other similar charges and items;
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 31 to 60 days, (2) 61
to 90 days and (3) 91 or more days and (B) in foreclosure and delinquent
(1) 31 to 60 days, (2) 61 to 90 days and (3) 91 or more days, as of the
close of business on the last day of the calendar month preceding such
Distribution Date;
(x) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
(xi) if a class is entitled only to a specified portion of
payments of interest on the Loans in the related Pool, the Pass-Through
Rate, if adjusted from the date of the last statement, of the Loans
expected to be applicable to the next distribution to such class;
(xii) if applicable, the amount remaining in any Reserve Account
at the close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the immediately
preceding Distribution Date;
and
(xiv) any amounts remaining under letters of credit, pool policies
or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Securityholders for any Series of Securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) above for
such calendar year or, in the event such person was a Securityholder of
record during a portion of such calendar year, for the applicable portion of
such year and (b) such other customary information as may be deemed necessary
or desirable for Securityholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through the Depository Trust Company ("DTC") in the United States,
or Cedel Bank, societe anonyme ("CEDEL") or the Euroclear System
("Euroclear") (in Europe) if they are participants ("Participants") of such
systems, or indirectly through organizations which are Participants in such
systems. The Book-Entry Securities will be issued in one or more
certificates which equal the aggregate principal balance of the Securities
and will initially be registered in the name of Cede & Co., the nominee of
DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. will act as
depositary for CEDEL and the Brussels, Belgium branch of Morgan Guarantee
Trust Company of New York ("Morgan") will act as depositary for Euroclear (in
such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Except as described below, no Security Owner will
be entitled to receive a physical certificate representing such Security (a
"Definitive Security"). Unless and until Definitive Securities are issued,
it is anticipated that the only "Securityholders" of the Securities will be
Cede & Co., as nominee of DTC. Security Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
The Security Owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Security Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the Security Owner's Financial Intermediary is not a
Participant and on the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants.
While the Securities are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect
to the Securities and is required to receive and transmit distributions of
principal of, and interest on, the Securities. Participants and indirect
participants with whom Security Owners have accounts with respect to
Securities are similarly required to make book-entry transfers and receive
and transmit such distributions on behalf of their respective Security
Owners. Accordingly, although Security Owners will not possess certificates,
the Rules provide a mechanism by which Security Owners will receive
distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive
Securities are issued, Security Owners who are not Participants may transfer
ownership of Securities only through Participants and indirect participants
by instructing such Participants and indirect participants to transfer
Securities, by book-entry transfer, through DTC for the account of the
purchasers of such Securities, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Securities will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Security Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be
reported to the relevant Euroclear or CEDEL Participants on such business
day. Cash received in CEDEL or Euroclear as a result of sales of securities
by or through a CEDEL Participant (as defined herein) or Euroclear
Participant (as defined herein) to a DTC Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL
or Euroclear cash account only as of the business day following settlement in
DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will,
if the transaction meets its settlement requirements, deliver instructions to
the Relevant Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. CEDEL Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations
("CEDEL Participants") and facilitates the clearance and settlement of
securities transactions between CEDEL Participants through electronic
book-entry changes in accounts of CEDEL Participants, thereby eliminating the
need for physical movement of certificates. Transactions may be settled in
CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. CEDEL interfaces
with domestic markets in several countries. As a professional depository,
CEDEL is subject to regulation by the Luxembourg Monetary Institute. CEDEL
participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan, under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations
are conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is
a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed
by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear, and receipts of payments with respect to securities
in Euroclear. All securities in Euroclear are held on a fungible basis
without attribution of specific certificates to specific securities clearance
accounts. The Euroclear Operator acts under the Terms and Conditions only on
behalf of Euroclear Participants, and has no record of or relationship with
persons holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with
respect to Securities held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance
with the relevant system's rules and procedures, to the extent received by
the Relevant Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See
"Certain Material Federal Income Tax Consequences--Tax Treatment of Foreign
Investors" and "--Tax Consequences to Holders of Notes--Backup Withholding"
herein. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a beneficial owner to pledge Book-Entry Securities to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Securities, may be limited due to the
lack of physical certificates for such Book-Entry Securities. In addition,
issuance of the Book-Entry Securities in book-entry form may reduce the
liquidity of such Securities in the secondary market since certain potential
investors may be unwilling to purchase Securities for which they cannot
obtain physical certificates.
Monthly and annual reports on the Trust will be provided to CEDE, as
nominee of DTC, and may be made available by CEDE to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose
DTC accounts the Book-Entry Securities of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of
the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Securityholder under the
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability
of the Relevant Depositary to effect such actions on its behalf through DTC.
DTC may take actions, at the direction of the related Participants, with
respect to some Securities which conflict with actions taken with respect to
other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued
at any time.
None of the Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating, to or payments made
on account of beneficial ownership interests of the Book-Entry Securities
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a Series of Securities or with respect to the Trust Fund Assets in the
related Trust Fund. Credit enhancement may be in the form of a limited
financial guaranty policy issued by an entity named in the related Prospectus
Supplement, the subordination of one or more classes of the Securities of
such Series, the establishment of one or more Reserve Accounts, the use of a
cross-support feature, use of a mortgage pool insurance policy, FHA
Insurance, VA Guarantee, bankruptcy bond, special hazard insurance policy,
surety bond, letter of credit, guaranteed investment contract or another
method of credit enhancement described in the related Prospectus Supplement,
or any combination of the foregoing. Unless otherwise specified in the
related Prospectus Supplement, credit enhancement will not provide protection
against all risks of loss and will not guarantee repayment of the entire
principal balance of the Securities and interest thereon. If losses occur
which exceed the amount covered be credit enhancement or which are not
covered by the credit enhancement, Securityholders will bear their allocable
share of deficiencies.
SUBORDINATION
Protection afforded to holders of one or more classes of Securities of a
Series by means of the subordination feature may be accomplished by the
preferential right of holders of one or more other classes of such Series
(the "Senior Securities") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise
would have been payable to holders of Subordinated Securities under the
circumstances and to the extent specified in the related Prospectus
Supplement. Protection may also be afforded to the holders of Senior
Securities of a Series by: (i) reducing the ownership interest of the related
Subordinated Securities; (ii) a combination of the immediately preceding
sentence and clause (i) above; or (iii) as otherwise described in the related
Prospectus Supplement. Delays in receipt of scheduled payments on the Loans
and losses on defaulted Loans may be borne first by the various classes of
Subordinated Securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the
limitations specified in such related Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Loans over the lives
of the Securities or at any time, the aggregate losses in respect of
defaulted Loans which must be borne by the Subordinated Securities by virtue
of subordination and the amount of the distributions otherwise distributable
to the Subordinated Securityholders that will be distributable to Senior
Securityholders on any Distribution Date may be limited as specified in the
related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Loans or aggregate losses in respect of such Loans
were to exceed an amount specified in the related Prospectus Supplement,
holders of Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee or distributed to holders of Senior Securities. Such deposits may be
made on each Distribution Date, for specified periods or until the balance in
the Reserve Account has reached a specified amount and, following payments
from the Reserve Account to holders of Senior Securities or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve
Account to required levels, in each case as specified in the related
Prospectus Supplement. Amounts on deposit in the Reserve Account may be
released to the holders of certain classes of Securities at the times and
under the circumstances specified in such Prospectus Supplement.
Various classes of Senior Securities and Subordinated Securities may
themselves be subordinate in their right to receive certain distributions to
other classes of Senior and Subordinated Securities, respectively, through a
cross support mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the related
Prospectus Supplement. As between classes of Subordinated Securities,
payments to holders of Senior Securities on account of delinquencies or
losses and payments to any Reserve Account will be allocated as specified in
the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
A separate Special Hazard Insurance Policy may be obtained for the Pool
and issued by the insurer (the "Special Hazard Insurer") named in the related
Prospectus Supplement. Each Special Hazard Insurance Policy will, subject to
limitations described below, protect holders of the related Securities from
(i) loss by reason of damage to Properties caused by certain hazards
(including earthquakes and, to a limited extent, tidal waves and related
water damage or as otherwise specified in the related Prospectus Supplement)
not insured against under the standard form of hazard insurance policy for
the respective states in which the Properties are located or under a flood
insurance policy if the Property is located in a federally designated flood
area, and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "The Agreements-Hazard
Insurance". Each Special Hazard Insurance Policy will not cover losses
occasioned by fraud or conversion by the Trustee or Master Servicer, war,
insurrection, civil war, certain governmental action, errors in design,
faulty workmanship or materials (except under certain circumstances), nuclear
or chemical reactions, flood (if the Property is located in a federally
designated flood area), nuclear or chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will
be specified in the related Prospectus Supplement. Each Special Hazard
Insurance Policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the Property securing the Loan have been kept
in force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in
the related Prospectus Supplement, each Special Hazard Insurance Policy will
provide that where there has been damage to Property securing a foreclosed
Loan (title to which has been acquired by the insured) and to the extent such
damage is not covered by the hazard insurance policy or flood insurance
policy, if any, maintained by the borrower or the Master Servicer, the
Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the Property to the
Special Hazard Insurer, the unpaid principal balance of such Loan at the time
of acquisition of such Property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and
certain expenses incurred by the Master Servicer with respect to such
Property. If the unpaid principal balance of a Loan plus accrued interest
and certain expenses is paid by the Special Hazard Insurer, the amount of
further coverage under the related Special Hazard Insurance Policy will be
reduced by such amount less any net proceeds from the sale of the Property.
Any amount paid as the cost of repair of the Property will further reduce
coverage by such amount.
The Master Servicer may deposit cash, an irrevocable letter of credit or
any other instrument acceptable to each Rating Agency rating the Securities
of the related Series in a special trust account to provide protection in
lieu of or in addition to that provided by a Special Hazard Insurance Policy.
The amount of any Special Hazard Insurance Policy or of the deposit to the
special trust account relating to such Securities in lieu thereof may be
reduced so long as any such reduction will not result in a downgrading of the
rating of such Securities by any such Rating Agency.
BANKRUPTCY BONDS
A bankruptcy bond ("Bankruptcy Bond") for proceedings under the federal
Bankruptcy Code may be issued by an insurer named in such Prospectus
Supplement. Each Bankruptcy Bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal and
interest on a Loan or a reduction by such court of the principal amount of a
Loan and will cover certain unpaid interest on the amount of such a principal
reduction from the date of the filing of a bankruptcy petition. The required
amount of coverage under each Bankruptcy Bond will be set forth in the
related Prospectus Supplement. The Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
Rating Agency rating the Securities of the related Series in a special trust
account to provide protection in lieu of or in addition to that provided by a
Bankruptcy Bond. Coverage under a Bankruptcy Bond may be cancelled or
reduced by the Master Servicer if such cancellation or reduction would not
adversely affect the then current rating or ratings of the related
Securities. See "Certain Legal Aspects of the Loans-Anti-Deficiency
Legislation and Other Limitations on Lenders".
RESERVE ACCOUNTS
Credit support with respect to a Series of Securities may be provided by
the establishment and maintenance with the Trustee for such Series of
Securities, in trust, of one or more Reserve Accounts for such Series. The
related Prospectus Supplement will specify whether or not any such Reserve
Accounts will be included in the Trust Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit
therein of cash, United States Treasury securities, instruments evidencing
ownership of principal or interest payments thereon, letters of credit,
demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in the related Prospectus Supplement, (ii) by the
deposit therein from time to time of certain amounts, as specified in the
related Prospectus Supplement to which the Subordinate Securityholders, if
any, would otherwise be entitled or (iii) in such other manner as may be
specified in the related Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
Permitted Investments which may include obligations of the United States and
certain agencies thereof, certificates of deposit, certain commercial paper,
time deposits and bankers acceptances sold by eligible commercial banks and
certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the
Trustee, such letter of credit will be irrevocable. Any instrument deposited
therein will name the Trustee, in its capacity as trustee for the holders of
the Securities, as beneficiary and will be issued by an entity acceptable to
each Rating Agency that rates the Securities. Additional information with
respect to such instruments deposited in the Reserve Accounts will be set
forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Securities for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
POOL INSURANCE POLICIES
A separate pool insurance policy ("Pool Insurance Policy") may be
obtained for the Pool and issued by the insurer (the "Pool Insurer") named in
the related Prospectus Supplement. Each Pool Insurance Policy will, subject
to the limitations described below, cover loss by reason of default in
payment on Loans in the Pool in an amount equal to a percentage specified in
such Prospectus Supplement of the aggregate principal balance of such Loans
on the Cut-off Date which are not covered as to their entire outstanding
principal balances by Primary Mortgage Insurance Policies. As more fully
described below, the Master Servicer will present claims thereunder to the
Pool Insurer on behalf of itself, the Trustee and the holders of the
Securities. The Pool Insurance Policies, however, are not blanket policies
against loss, since claims thereunder may only be made respecting particular
defaulted Loans and only upon satisfaction of certain conditions precedent
described below. Unless otherwise specified in the related Prospectus
Supplement, the Pool Insurance Policies will not cover losses due to a
failure to pay or denial of a claim under a Primary Mortgage Insurance
Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for
the defaulted Loan and a claim thereunder has been submitted and settled;
(ii) hazard insurance on the related Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Property, it has been
restored to its physical condition (reasonable wear and tear excepted) at the
time of issuance of the policy; and (iv) the insured has acquired good and
merchantable title to the Property free and clear of liens except certain
permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted Loan at a price equal to the principal balance thereof plus accrued
and unpaid interest at the Loan Rate to the date of purchase and certain
expenses incurred by the Master Servicer on behalf of the Trustee and
Securityholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted Loan plus accrued and unpaid interest at the Loan
Rate to the date of payment of the claim and the aforementioned expenses
exceeds the proceeds received from an approved sale of the Property, in
either case net of certain amounts paid or assumed to have been paid under
the related Primary Mortgage Insurance Policy. If any Property securing a
defaulted Loan is damaged and proceeds, if any, from the related hazard
insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged Property to a condition sufficient to
permit recovery under the Pool Insurance Policy, the Master Servicer will not
be required to expend its own funds to restore the damaged Property unless it
determines that (i) such restoration will increase the proceeds to
securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) such expenses will be recoverable by it
through proceeds of the sale of the Property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will not insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Loan, including misrepresentation by the borrower, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Property in accordance with plans and specifications. A failure
of coverage attributable to one of the foregoing events might result in a
breach of the related Seller's representations described above, and, in such
events might give rise to an obligation on the part of such Seller to
purchase the defaulted Loan if the breach cannot be cured by such Seller. No
Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in respect of a defaulted Loan occurring when
the servicer of such Loan, at the time of default or thereafter, was not
approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of
claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims
paid may include certain expenses incurred by the Master Servicer as well as
accrued interest on delinquent Loans to the date of payment of the claim.
Accordingly, if aggregate net claims paid under any Pool Insurance Policy
reach the original policy limit, coverage under that Pool Insurance Policy
will be exhausted and any further losses will be borne by the
Securityholders.
FHA INSURANCE; VA GUARANTEES
Loans designated in the related Prospectus Supplement as insured by the
FHA will be insured by the FHA as authorized under the United States Housing
Act of 1934, as amended. In addition to the Title I Program of the FHA, see
"Certain Legal Considerations -- Title I Program", certain Loans will be
insured under various FHA programs including the standard FHA 203(b) program
to finance the acquisition of one- to four-family housing units and the FHA
245 graduated payment mortgage program. These programs generally limit the
principal amount and interest rates of the mortgage loans insured.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD")
or by the Master Servicer or any Sub-Servicer and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged premises to the
United States of America or upon assignment of the defaulted Loan to the
United States of America. With respect to a defaulted FHA-insured Loan, the
Master Servicer or any Sub-Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible,
into one of a number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made upon
or before the maturity date of the mortgage, or the recasting of payments due
under the mortgage up to or, other than Loans originated under the Title I
Program of the FHA, beyond the maturity date. In addition, when a default
caused by such circumstances is accompanied by certain other criteria, HUD
may provide relief by making payments to the Master Servicer or any Sub-
Servicer in partial or full satisfaction of amounts due under the Loan (which
payments are to be repaid by the mortgagor to HUD) or by accepting assignment
of the loan from the Master Servicer or any Sub-Servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the Loan, and HUD must have rejected any request for relief from the
mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such
debenture issued in satisfaction of such Loan upon default for an amount
equal to the principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master
Servicer or Sub-Servicer for certain costs and expenses and to deduct certain
amounts received or retained by the Master Servicer or Sub-Servicer after
default. When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance to HUD, the Master Servicer
or Sub-Servicer is compensated for no more than two-thirds of its foreclosure
costs, and is compensated for interest accrued and unpaid prior to such date
but in general only to the extent it was allowed pursuant to a forbearance
plan approved by HUD. When entitlement to insurance benefits results from
assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the borrower's first uncorrected failure
to perform any obligation to make any payment due under the mortgage and,
upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan
guarantee by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit at interest rates permitted by the VA. The program
has no mortgage loan limits, requires no down payment from the purchaser and
permits the guarantee of mortgage loans of up to 30 years' duration.
However, no Loan guaranteed by the VA will have an original principal amount
greater than five times the partial VA guarantee for such Loan.
The maximum guarantee that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage
loan, as further described in 38 United States Code Section 1803(a), as
amended. As of January 1, 1990, the maximum guarantee that may be issued by
the VA under a VA guaranteed mortgage loan of more than $144,000 is the
lesser of 25% of the original principal amount of the mortgage loan and
$46,000. The liability on the guarantee is reduced or increased pro rata
with any reduction or increase in the amount of indebtedness, but in no event
will the amount payable on the guarantee exceed the amount of the original
guarantee. The VA may, at its option and without regard to the guarantee,
make full payment to a mortgage holder of unsatisfied indebtedness on a
mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Master Servicer or
Sub-Servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim for the guarantee is submitted after liquidation of the
Property.
The amount payable under the guarantee will be the percentage of the VA-
insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guarantee will be equal to the unpaid principal amount of the Loan,
interest accrued on the unpaid balance of the Loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to
the extent that such amounts have not been recovered through liquidation of
the Property. The amount payable under the guarantee may in no event exceed
the amount of the original guarantee.
CROSS-SUPPORT
The beneficial ownership of separate groups of assets included in a
Trust Fund may be evidenced by separate classes of the related Series of
Securities. In such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect to Securities
evidencing a beneficial ownership interest in, or secured by, other asset
groups within the same Trust Fund. The related Prospectus Supplement for a
Series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds to which such credit
support relates and the manner of determining the amount of the coverage
provided thereby and of the application of such coverage to the identified
Trust Funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A Trust Fund may also include insurance, guaranties, surety bonds,
letters of credit or similar arrangements for the purpose of (i) maintaining
timely payments or providing additional protection against losses on the
assets included in such Trust Fund, (ii) paying administrative expenses or
(iii) establishing a minimum reinvestment rate on the payments made in
respect of such assets or principal payment rate on such assets. Such
arrangements may include agreements under which Securityholders are entitled
to receive amounts deposited in various accounts held by the Trustee upon the
terms specified in such Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will
be affected primarily by the amount and timing of principal payments received
on or in respect of the Trust Fund Assets included in the related Trust Fund.
With respect to a Trust Fund which includes Private Asset Backed Securities,
the possible effects of the amount and timing of principal payments received
with respect to the underlying mortgage loans will be described in the
related Prospectus Supplement. The original terms to maturity of the Loans
in a given Pool will vary depending upon the type of Loans included therein.
Each Prospectus Supplement will contain information with respect to the type
and maturities of the Loans in the related Pool. Unless otherwise specified
in the related Prospectus Supplement, Loans may be prepaid without penalty in
full or in part at any time. The prepayment experience on the Loans in a
Pool will affect the life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant
volume only during the past few years and the Depositor is not aware of any
publicly available studies or statistics on the rate of prepayment of such
loans. Generally, home equity loans and home improvement contracts are not
viewed by borrowers as permanent financing. Accordingly, the Loans may
experience a higher rate of prepayment than traditional first mortgage loans.
On the other hand, because home equity loans such as the Revolving Credit
Line Loans generally are not fully amortizing, the absence of voluntary
borrower prepayments could cause rates of principal payments lower than, or
similar to, those of traditional fully-amortizing first mortgages. The
prepayment experience of the related Trust Fund may be affected by a wide
variety of factors, including general economic conditions, prevailing
interest rate levels, the availability of alternative financing and homeowner
mobility and the frequency and amount of any future draws on any Revolving
Credit Line Loans. Other factors that might be expected to affect the
prepayment rate of a pool of home equity mortgage loans or home improvement
contracts include the amounts of, and interest rates on, the underlying
senior mortgage loans, and the use of first mortgage loans as long-term
financing for home purchase and subordinate mortgage loans as shorter-term
financing for a variety of purposes, including home improvement, education
expenses and purchases of consumer durables such as automobiles.
Accordingly, the Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations
on the right of borrowers to deduct interest payments on home equity loans
for federal income tax purposes may further increase the rate of prepayments
of the Loans. The enforcement of a "due-on-sale" provision (as described
below) will have the same effect as a prepayment of the related Loan. See
"Certain Legal Aspects of the Loans--Due-on-Sale Clauses". The yield to an
investor who purchases Securities in the secondary market at a price other
than par will vary from the anticipated yield if the rate of prepayment on
the Loans is actually different than the rate anticipated by such investor at
the time such Securities were purchased.
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the
minimum monthly payment for such month or, during the interest-only period
for certain Revolving Credit Line Loans and, in more limited circumstances,
Closed-End Loans, with respect to which an interest-only payment option has
been selected, the interest and the fees and charges for such month or (ii)
make payments as high as the entire outstanding principal balance plus
accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make the required periodic payments. In addition,
collections on the Loans may vary due to seasonal purchasing and the payment
habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, the
Loans will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the loan upon sale or certain transfers by the
borrower. Loans insured by the FHA, and Single Family Loans partially
guaranteed by the VA, are assumable with the consent of the FHA and the VA,
respectively. Thus, the rate of prepayments on such Loans may be lower than
that of conventional Loans bearing comparable interest rates. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
generally will enforce any due-on-sale or due-on-encumbrance clause, to the
extent it has knowledge of the conveyance or further encumbrance or the
proposed conveyance or proposed further encumbrance of the Property and
reasonably believes that it is entitled to do so under applicable law;
provided, however, that the Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Agreements-Collection Procedures" and "Certain
Legal Aspects of the Loans" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. If prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans may be
subject to higher prepayment rates than if prevailing interest rates remain
at or above such Loan Rates. Conversely, if prevailing interest rates rise
appreciably above the Loan Rates borne by the Loans, such Loans may
experience a lower prepayment rate than if prevailing rates remain at or
below such Loan Rates. However, there can be no assurance that such will be
the case.
When a full prepayment is made on a Loan, the borrower is charged
interest on the principal amount of the Loan so prepaid only for the number
of days in the month actually elapsed up to the date of the prepayment,
rather than for a full month. Unless the Master Servicer remits amounts
otherwise payable to it as servicing compensation, see "Description of the
Securities-Compensating Interest", the effect of prepayments in full will be
to reduce the amount of interest passed through in the following month to
holders of Securities because interest on the principal amount of any Loan so
prepaid will be paid only to the date of prepayment. Partial prepayments in
a given month may be applied to the outstanding principal balances of the
Loans so prepaid on the first day of the month of receipt or the month
following receipt. In the latter case, partial prepayments will not reduce
the amount of interest passed through in such month. Unless otherwise
specified in the related Prospectus Supplement, neither full nor partial
prepayments will be passed through until the month following receipt.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a
default by a borrower, these restrictions among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts due on the
related Loan. In addition, the Master Servicer will be entitled to deduct
from related liquidation proceeds all expenses reasonably incurred in
attempting to recover amounts due on defaulted Loans and not yet repaid,
including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a large
remaining principal balance, the amount realized after expenses of
liquidation would be smaller as a percentage of the remaining principal
balance of the small mortgage loan than would be the case with the other
defaulted mortgage loan having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most have other laws,
public policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and practices which may apply to
the origination, servicing and collection of the Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Master Servicer to
damages and administrative sanctions.
If the rate at which interest is passed through to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis,
disproportionate principal prepayments among Loans with different Loan Rates
will affect the yield on such Securities. In most cases, the effective yield
to Securityholders will be lower than the yield otherwise produced by the
applicable Pass-Through Rate and purchase price, because while interest will
accrue on each Loan from the first day of the month (unless otherwise
specified in the related Prospectus Supplement), the distribution of such
interest will not be made earlier than the month following the month of
accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust
Fund thereby effecting earlier retirement of the related Series of
Securities. See "The Agreements--Termination; Optional Termination".
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and
over the lives of the Securities. The relative contribution of the various
factors affecting prepayment may also vary from time to time. There can be
no assurance as to the rate of payment of principal of the Trust Fund Assets
at any time or over the lives of the Securities.
The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions
or terms used in the Agreements are referred to, such provisions or terms are
as specified in the Agreements. Except as otherwise specified, the Agreement
described herein contemplates a Trust Fund comprised of Loans. The
provisions of an Agreement with respect to a Trust Fund which consists of or
includes Private Asset Backed Securities may contain provisions similar to
those described herein but will be more fully described in the related
Prospectus Supplement.
ASSIGNMENT OF THE TRUST FUND ASSETS
Assignment of the Loans. At the time of issuance of the Securities of a
Series, the Depositor will cause the Loans comprising the related Trust Fund
to be assigned to the Trustee, together with all principal and interest
received by or on behalf of the Depositor on or with respect to such Loans
after the Cut-off Date, other than principal and interest due on or before
the Cut-off Date and other than any Retained Interest specified in the
related Prospectus Supplement. The Trustee will, concurrently with such
assignment, deliver the Securities to the Depositor in exchange for the
Loans. Each Loan will be identified in a schedule appearing as an exhibit to
the related Agreement. Such schedule will include information as to the
outstanding principal balance of each Loan after application of payments due
on or before the Cut-off Date, as well as information regarding the Loan Rate
or APR, the current scheduled monthly payment of principal and interest, the
maturity of the Loan, the Combined Loan-to-Value Ratios at origination and
certain other information.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies of
documents and instruments related to each Home Improvement Contract and,
other than in the case of unsecured Home Improvement Contracts, the security
interest in the Property securing such Home Improvement Contract. In order
to give notice of the right, title and interest of Securityholders to the
Home Improvement Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the
Trustee as the secured party and identifying all Home Improvement Contracts
as collateral. Unless otherwise specified in the related Prospectus
Supplement, the Home Improvement Contracts will not be stamped or otherwise
marked to reflect their assignment to the Trustee. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See "Certain Legal Aspects of the Loans--The Home
Improvement Contracts."
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to
the custodian hereinafter referred to) as to each Home Equity Loan, among
other things, (i) the mortgage note or contract endorsed without recourse in
blank or to the order of the Trustee, (ii) the mortgage, deed of trust or
similar instrument (a "Mortgage") with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording
office, in which case the Depositor will deliver or cause to be delivered a
copy of such Mortgage together with a certificate that the original of such
Mortgage was delivered to such recording office), (iii) an assignment of the
Mortgage to the Trustee, which assignment will be in recordable form in the
case of a Mortgage assignment, and (iv) such other security documents,
including those relating to any senior interests in the Property, as may be
specified in the related Prospectus Supplement. Unless otherwise specified
in the related Prospectus Supplement, the Depositor will promptly cause the
assignments of the related Loans to be recorded in the appropriate public
office for real property records, except in states in which, in the opinion
of counsel acceptable to the Trustee, such recording is not required to
protect the Trustee's interest in such Loans against the claim of any
subsequent transferee or any successor to or creditor of the Depositor or the
originator of such Loans.
The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the Securityholders. Unless otherwise specified in
the related Prospectus Supplement, if any such document is found to be
missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Depositor, and the Master Servicer
will notify the related Seller. If the Seller cannot cure the omission or
defect within a specified number of days after receipt of such notice (or
such other period as may be specified in the related Prospectus Supplement),
the Seller will be obligated either (i) to purchase the related Loan from the
Trust at the Purchase Price or (ii) to remove such Loan from the Trust Fund
and substitute in its place one or more other Loans. There can be no
assurance that a Seller will fulfill this purchase or substitution
obligation. Although the Master Servicer may be obligated to enforce such
obligation to the extent described above under "Loan Program-Representations
by Sellers; Repurchases", neither the Master Servicer nor the Depositor will
be obligated to purchase or replace such Loan if the Seller defaults on its
obligation, unless such breach also constitutes a breach of the
representations or warranties of the Master Servicer or the Depositor, as the
case may be. Unless otherwise specified in the related Prospectus
Supplement, this purchase obligation constitutes the sole remedy available to
the Securityholders or the Trustee for omission of, or a material defect in,
a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation
of the Master Servicer which materially and adversely affects the interests
of the Securityholders in a Loan, the Master Servicer will be obligated
either to cure the breach in all material respects or to purchase or replace
the Loan at the Purchase Price. Unless otherwise specified in the related
Prospectus Supplement, this obligation to cure, purchase or substitute
constitutes the sole remedy available to the Securityholders or the Trustee
for such a breach of representation by the Master Servicer.
Assignment of Private Asset Backed Securities. The Depositor will cause
Private Asset Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated
Private Asset Backed Securities. Unless otherwise specified in the related
Prospectus Supplement, the Trustee will not be in possession of or be
assignee of record of any underlying assets for a Private Asset Backed
Security. See "The Trust Fund-Private Asset Backed Securities" herein. Each
Private Asset Backed Security will be identified in a schedule appearing as
an exhibit to the related Agreement which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, annual pass-
through rate or interest rate and maturity date and certain other pertinent
information for each Private Asset Backed Security conveyed to the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund
for which a REMIC election is to be made, no purchase or substitution of a
Loan will be made if such purchase or substitution would result in a
prohibited transaction tax under the Code.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing Agreement
(as defined below under "-Sub-Servicing of Loans") will establish and
maintain an account (the "Sub-Servicing Account") which meets the following
requirements and is otherwise acceptable to the Master Servicer. A Sub-
Servicing Account must be established with a Federal Home Loan Bank or with a
depository institution (including the Sub-Servicer itself) whose accounts are
insured by either the Bank Insurance Fund (the "BIF") of the FDIC or the
Savings Association Insurance Fund (as successor to the Federal Savings and
Loan Insurance Corporation ("SAIF")) of the FDIC. If a Sub-Servicing Account
is maintained at an institution that is a Federal Home Loan Bank or an FDIC-
insured institution and, in either case, the amount on deposit in the Sub-
Servicing Account exceeds the FDIC insurance coverage amount, then such
excess amount must be remitted to the Master Servicer within one business day
of receipt. In addition, the Sub-Servicer must maintain a separate account
for escrow and impound funds relating to the Loans. Each Sub-Servicer is
required to deposit into its Sub-Servicing Account on a daily basis all
amounts described below under "-Sub-Servicing of Loans" that are received by
it in respect of the Loans, less its servicing or other compensation. On or
before the date specified in the Sub-Servicing Agreement, the Sub-Servicer
will remit or cause to be remitted to the Master Servicer or the Trustee all
funds held in the Sub-Servicing Account with respect to Loans that are
required to be so remitted. The Sub-Servicer may also be required to advance
on the scheduled date of remittance an amount corresponding to any monthly
installment of interest and/or principal, less its servicing or other
compensation, on any Loan for which payment was not received from the
mortgagor. Unless otherwise specified in the related Prospectus Supplement,
any such obligation of the Sub-Servicer to advance will continue up to and
including the first of the month following the date on which the related
Property is sold at a foreclosure sale or is acquired on behalf of the
Securityholders by deed in lieu of foreclosure, or until the related Loan is
liquidated.
The Master Servicer will establish and maintain or cause to be
established and maintained with respect to the related Trust Fund a separate
account or accounts for the collection of payments on the related Trust Fund
Assets in the Trust Fund (the "Security Account") must be either (i)
maintained with a depository institution the debt obligations of which (or in
the case of a depository institution that is the principal subsidiary of a
holding company, the obligations of which) are rated in one of the two
highest rating categories by the Rating Agency or Rating Agencies that rated
one or more classes of the related Series of Securities, (ii) an account or
accounts the deposits in which are fully insured by either the BIF or SAIF,
(iii) an account or accounts the deposits in which are insured by the BIF or
SAIF (to the limits established by the FDIC), and the uninsured deposits in
which are otherwise secured such that, as evidenced by an opinion of counsel,
the Securityholders have a claim with respect to the funds in the Security
Account or a perfected first priority security interest against any
collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Security Account is maintained, or (iv) an account or accounts otherwise
acceptable to each Rating Agency. The collateral eligible to secure amounts
in the Security Account is limited to United States government securities and
other high-quality investments ("Permitted Investments"). A Security Account
may be maintained as an interest bearing account or the funds held therein
may be invested pending each succeeding Distribution Date in Permitted
Investments. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or its designee will be entitled to receive
any such interest or other income earned on funds in the Security Account as
additional compensation and will be obligated to deposit in the Security
Account the amount of any loss immediately as realized. The Security Account
may be maintained with the Master Servicer or with a depository institution
that is an affiliate of the Master Servicer, provided it meets the standards
set forth above.
The Master Servicer will deposit or cause to be deposited in the
Security Account for each Trust Fund on a daily basis, to the extent
applicable and provided in the Agreement, the following payments and
collections received or advances made by or on behalf of it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and any applicable prepayment penalties, on the Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred, and
unreimbursed advances made, by the related Sub-Servicer, if any) of the
hazard insurance policies and any Primary Mortgage Insurance Policies,
to the extent such proceeds are not applied to the restoration of the
property or released to the Mortgagor in accordance with the Master
Servicer's normal servicing procedures (collectively, "Insurance
Proceeds") and all other cash amounts (net of unreimbursed expenses
incurred in connection with liquidation or foreclosure ("Liquidation
Expenses") and unreimbursed advances made, by the related Sub-Servicer,
if any) received and retained in connection with the liquidation of
defaulted Loans, by foreclosure or otherwise ("Liquidation Proceeds"),
together with any net proceeds received on a monthly basis with respect
to any properties acquired on behalf of the Securityholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Seller as described under "Loan Program-Representations by Sellers;
Repurchases" or "-Assignment of Trust Fund Assets" above and all
proceeds of any Loan repurchased as described under "-Termination;
Optional Termination" below;
(v) all payments required to be deposited in the Security Account
with respect to any deductible clause in any blanket insurance policy
described under "-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Security Account; and
(vii) all other amounts required to be deposited in the Security
Account pursuant to the Agreement.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which the Depositor
will deposit the Pre-Funded Amount on the related Closing Date. The Pre-
Funded Amount will not exceed 25% of the initial aggregate principal amount
of the Certificates and Notes of the related Series. The Pre-Funded Amount
will be used by the related Trustee to purchase Subsequent Loans from the
Depositor from time to time during the Funding Period. The Funding Period,
if any, for a Trust Fund will begin on the related Closing Date and will end
on the date specified in the related Prospectus Supplement, which in no event
will be later than the date that is three months after the Closing Date. Any
amounts remaining in the Pre-Funding Account at the end of the Funding Period
will be distributed to the related Securityholders in the manner and priority
specified in the related Prospectus Supplement, as a prepayment of principal
of the related Securities.
SUB-SERVICING OF LOANS
Each Seller of a Loan or any other servicing entity may act as the Sub-
Servicer for such Loan pursuant to an agreement (each, a "Sub-Servicing
Agreement"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely
between the Master Servicer and the Sub-Servicer, the Agreement pursuant to
which a Series of Securities is issued will provide that, if for any reason
the Master Servicer for such Series of Securities is no longer the Master
Servicer of the related Loans, the Trustee or any successor Master Servicer
must recognize the Sub-Servicer's rights and obligations under such Sub-
Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers, but such Sub-Servicer
will remain obligated under the related Sub-Servicing Agreement. Each Sub-
Servicer will be required to perform the customary functions of a servicer of
mortgage loans. Such functions generally include collecting payments from
mortgagors or obligors and remitting such collections to the Master Servicer;
maintaining hazard insurance policies as described herein and in any related
Prospectus Supplement, and filing and settling claims thereunder, subject in
certain cases to the right of the Master Servicer to approve in advance any
such settlement; maintaining escrow or impoundment accounts of mortgagors or
obligors for payment of taxes, insurance and other items required to be paid
by the mortgagor or obligor pursuant to the related Loan; processing
assumptions or substitutions, although, the Master Servicer is generally
required to exercise due-on-sale clauses to the extent such exercise is
permitted by law and would not adversely affect insurance coverage;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Properties under certain circumstances; maintaining accounting
records relating to the Loans; and, to the extent specified in the related
Prospectus Supplement, maintaining additional insurance policies or credit
support instruments and filing and settling claims thereunder. A Sub-
Servicer will also be obligated to make advances in respect of delinquent
installments of interest and/or principal on Loans, as described more fully
above under "-Payments on Loans; Deposits to Security Account", and in
respect of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on
the related Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and
retain, as part of its servicing compensation, any prepayment or late charges
provided in the Mortgage Note or related instruments. Each Sub-Servicer will
be reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under
the Agreement. The Master Servicer may purchase the servicing of Loans if
the Sub-Servicer elects to release the servicing of such Loans to the Master
Servicer. See "-Servicing and Other Compensation and Payment of Expenses".
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its
servicing capacity. Each Sub-Servicer will be required to maintain a
fidelity bond and an errors and omissions policy with respect to its
officers, employees and other persons acting on its behalf or on behalf of
the Master Servicer.
Each Sub-Servicer will be required to service each Loan pursuant to the
terms of the Sub-Servicing Agreement for the entire term of such Loan, unless
the Sub-Servicing Agreement is earlier terminated by the Master Servicer or
unless servicing is released to the Master Servicer. The Master Servicer may
terminate a Sub-Servicing Agreement without cause, upon written notice to the
Sub-Servicer in the manner specified in such Sub-Servicing Agreement.
The Master Servicer may agree with a Sub-Servicer to amend a Sub-
Servicing Agreement or, upon termination of the Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Loans or enter into new
Sub-Servicing Agreements with other Sub-Servicers. If the Master Servicer
acts as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be
a Seller or meet the standards for becoming a Seller or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Depositor. The Master Servicer will make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an
assumption will occur. In the event of such an assumption, the Master
Servicer may in the exercise of its business judgment release the terminated
Sub-Servicer from liability in respect of such representations and
warranties. Any amendments to a Sub-Servicing Agreement or new Sub-Servicing
Agreements may contain provisions different from those which are in effect in
the original Sub-Servicing Agreement. However, each Agreement will provide
that any such amendment or new agreement may not be inconsistent with or
violate such Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Loans
and will, consistent with each Agreement and any Pool Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and
Bankruptcy Bond or alternative arrangements, follow such collection
procedures as are customary with respect to loans that are comparable to the
Loans. Consistent with the above, the Master Servicer may, in its
discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Loan and (ii) to the extent not inconsistent with the
coverage of such Loan by a Pool Insurance Policy, Primary Mortgage Insurance
Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond or alternative
arrangements, if applicable, arrange with a borrower a schedule for the
liquidation of delinquencies running for no more than 125 days after the
applicable due date for each payment. Both the Sub-Servicer and the Master
Servicer may be obligated to make Advances during any period of such an
arrangement.
Except as otherwise specified in the related Prospectus Supplement, in
any case in which property securing a Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Master Servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause
to be exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such
rights is permitted by applicable law. If these conditions are not met or if
the Master Servicer reasonably believes it is unable under applicable law to
enforce such due-on-sale clause, or the Master Servicer will enter into or
cause to be entered into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable for repayment of the Loan and, to the extent
permitted by applicable law, the mortgagor remains liable thereon. Any fee
collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer
as additional servicing compensation. See "Certain Legal Aspects of the
Loans-Due-on-Sale Clauses". In connection with any such assumption, the
terms of the related Loan may not be changed.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to
maintain a hazard insurance policy providing for no less than the coverage of
the standard form of fire insurance policy with extended coverage customary
for the type of Property in the state in which such Property is located. All
amounts collected by the Master Servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the Property or
released to the mortgagor or obligor in accordance with the Master Servicer's
normal servicing procedures) will be deposited in the related Security
Account. In the event that the Master Servicer maintains a blanket policy
insuring against hazard losses on all the Loans comprising part of a Trust
Fund, it will conclusively be deemed to have satisfied its obligation
relating to the maintenance of hazard insurance. Such blanket policy may
contain a deductible clause, in which case the Master Servicer will be
required to deposit from its own funds into the related Security Account the
amounts which would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a Loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the Loans may have been
underwritten by different insurers under different state laws in accordance
with different applicable forms and therefore may not contain identical terms
and conditions, the basic terms thereof are dictated by respective state
laws, and most such policies typically do not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mud flows), nuclear reactions, wet or dry rot, vermin,
rodents, insects or domestic animals, theft and, in certain cases, vandalism.
The foregoing list is merely indicative of certain kinds of uninsured risks
and is not intended to be all inclusive. If the Property securing a Loan is
located in a federally designated special flood area at the time of
origination, the Master Servicer will require the mortgagor or obligor to
obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time
to carry insurance of a specified percentage of the full replacement value of
the insured property in order to recover the full amount of any partial loss.
If the insured's coverage falls below this specified percentage, then the
insurer's liability in the event of partial loss will not exceed the larger
of (i) the actual cash value (generally defined as replacement cost at the
time and place of loss, less physical depreciation) of the improvements
damaged or destroyed or (ii) such proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement
cost of such improvements. Since the amount of hazard insurance the Master
Servicer may cause to be maintained on the improvements securing the Loans
declines as the principal balances owing thereon decrease, and since improved
real estate generally has appreciated in value over time in the past, the
effect of this requirement in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damaged
property. If specified in the related Prospectus Supplement, a special
hazard insurance policy will be obtained to insure against certain of the
uninsured risks described above. See "Credit Enhancement-Special Hazard
Insurance Policies".
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the Master Servicer is not required to expend its own funds
to restore the damaged Property unless it determines (i) that such
restoration will increase the proceeds to Securityholders on liquidation of
the Loan after reimbursement of the Master Servicer for its expenses and (ii)
that such expenses will be recoverable by it from related Insurance Proceeds
or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is
not available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer
will be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the
defaulted Loan are less than the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Trust Fund will
realize a loss in the amount of such difference plus the aggregate of
expenses incurred by the Master Servicer in connection with such proceedings
and which are reimbursable under the Agreement. In the unlikely event that
any such proceedings result in a total recovery which is, after reimbursement
to the Master Servicer of its expenses, in excess of the principal balance of
such Loan plus interest accrued thereon that is payable to Securityholders,
the Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect
to such Loan and, unless otherwise specified in the related Prospectus
Supplement, amounts representing the balance of such excess, exclusive of any
amount required by law to be forwarded to the related borrower, as additional
servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if the
Master Servicer or its designee recovers Insurance Proceeds which, when added
to any related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the principal balance of such
Loan plus interest accrued thereon that is payable to Securityholders, the
Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect
to such Loan. In the event that the Master Servicer has expended its own
funds to restore the damaged Property and such funds have not been reimbursed
under the related hazard insurance policy, it will be entitled to withdraw
from the Security Account out of related Liquidation Proceeds or Insurance
Proceeds in an amount equal to such expenses incurred by it, in which event
the Trust Fund may realize a loss up to the amount so charged. Since
Insurance Proceeds cannot exceed deficiency claims and certain expenses
incurred by the Master Servicer, no such payment or recovery will result in a
recovery to the Trust Fund which exceeds the principal balance of the
defaulted Loan together with accrued interest thereon. See "Credit
Enhancement".
REALIZATION UPON DEFAULTED LOANS
Primary Mortgage Insurance Policies. The Master Servicer will maintain
or cause each Sub-Servicer to maintain, as the case may be, in full force and
effect, to the extent specified in the related Prospectus Supplement, a
Primary Mortgage Insurance Policy with regard to each Loan for which such
coverage is required. The Master Servicer will not cancel or refuse to renew
any such Primary Mortgage Insurance Policy in effect at the time of the
initial issuance of a Series of Securities that is required to be kept in
force under the applicable Agreement unless the replacement Primary Mortgage
Insurance Policy for such cancelled or nonrenewed policy is maintained with
an insurer whose claims-paying ability is sufficient to maintain the current
rating of the classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Loan will consist of the insured percentage of the unpaid
principal amount of the covered Loan and accrued and unpaid interest thereon
and reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Property, (ii)
hazard insurance proceeds in excess of the amount required to restore the
Property and which have not been applied to the payment of the Loan, (iii)
amounts expended but not approved by the issuer of the related Primary
Mortgage Insurance Policy (the "Primary Insurer"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained
by reason of defaults in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained
by reason of a default arising from or involving certain matters, including
(i) fraud or negligence in origination or servicing of the Loans, including
misrepresentation by the originator, borrower or other persons involved in
the origination of the Loans; (ii) failure to construct the Property subject
to the Loan in accordance with specified plans; (iii) physical damage to the
Property; and (iv) the related Master Servicer or Sub-servicer not being
approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Loan, the insured will be required to (i) advance
or discharge (a) all hazard insurance policy premiums and (b) as necessary
and approved in advance by the Primary Insurer, (1) real estate property
taxes, (2) all expenses required to maintain the related Property in at least
as good a condition as existed at the effective date of such Primary Mortgage
Insurance Policy, ordinary wear and tear excepted, (3) Property sales
expenses, (4) any outstanding liens (as defined in such Primary Mortgage
Insurance Policy) on the Property and (5) foreclosure costs, including court
costs and reasonable attorneys' fees; (ii) in the event of any physical loss
or damage to the Property, to have the Property restored and repaired to at
least as good a condition as existed at the effective date of such Primary
Mortgage Insurance Policy, ordinary wear and tear excepted; and (iii) tender
to thePrimaryInsurer goodandmerchantable titleto andpossessionof theProperty.
In those cases in which a Loan is serviced by a Sub-Servicer, the Sub-
Servicer, on behalf of itself, the Trustee and Securityholders, will present
claims to the Primary Insurer, and all collection thereunder will be
deposited in the Sub-Servicing Account. In all other cases, the Master
Servicer, on behalf of itself, the Trustee and the Securityholders, will
present claims to the insurer under each Primary Mortgage Insurance Policy,
and will take such reasonable steps as are necessary to receive payment or to
permit recovery thereunder with respect to defaulted Loans. As set forth
above, all collections by or on behalf of the Master Servicer under any
Primary Mortgage Insurance Policy and, when the Property has not been
restored, the hazard insurance policy, are to be deposited in the Security
Account, subject to withdrawal as heretofore described.
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property to a condition sufficient to permit recovery under the
related Primary Mortgage Insurance Policy, if any, the Master Servicer is not
required to expend its own funds to restore the damaged Property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) that such expenses will be recoverable by
it from related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Loan is not covered by a Primary Mortgage
Insurance Policy, the Master Servicer will be obligated to follow or cause to
be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Loan. If the proceeds of any
liquidation of the Property securing the defaulted Loan are less than the
principal balance of such Loan plus interest accrued thereon that is payable
to Securityholders, the Trust Fund will realize a loss in the amount of such
difference plus the aggregate of expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the
Agreement. In the unlikely event that any such proceedings result in a total
recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Master Servicer will
be entitled to withdraw or retain from the Security Account amounts
representing its normal servicing compensation with respect to such Loan and,
except as otherwise specified in the Prospectus Supplement, amounts
representing the balance of such excess, exclusive of any amount required by
law to be forwarded to the related borrower, as additional servicing
compensation.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's primary servicing compensation with respect to a Series of
Securities will come from the monthly payment to it, out of each interest
payment on a Loan, of an amount equal to the percentage per annum specified
in the related Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of
the outstanding principal balance of each Loan, such amounts will decrease as
the Loans amortize. In addition to primary compensation, the Master Servicer
or the Sub-Servicers may be entitled to retain all assumption fees and late
payment charges, to the extent collected from borrowers, and, if so provided
in the related Prospectus Supplement, any prepayment penalties and any
interest or other income which may be earned on funds held in the Security
Account or any Sub-Servicing Account. Unless otherwise specified in the
related Prospectus Supplement, any Sub-Servicer will receive a portion of the
Master Servicer's primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Master Servicer
will, unless otherwise specified in the related Prospectus Supplement, pay
from its servicing compensation certain expenses incurred in connection with
its servicing of the Loans, including, without limitation, payment of any
premium for any insurance policy, guaranty, surety or other form of credit
enhancement as specified in the related Prospectus Supplement, payment of the
fees and disbursements of the Trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
Securityholders, and payment of any other expenses described in the related
Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to
the Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC,
the servicing by or on behalf of the Master Servicer of mortgage loans or
private asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Audit Program
for Mortgage Bankers, it is required to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of Loans
or Private Asset Backed Securities by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC (rendered within one year of such statement) of
firms of independent public accountants with respect to the related Sub-
Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at
the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign from
its obligations and duties under the Agreement except upon a determination
that its duties thereunder are no longer permissible under applicable law.
The Master Servicer may, however, be removed from its obligations and duties
as set forth in the Agreement. No such resignation will become effective
until the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Depositor nor any director, officer, employee, or agent of the Master
Servicer or the Depositor will be under any liability to the related Trust
Fund or Securityholders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Agreement, or for errors
in judgment; provided, however, that neither the Master Servicer, the
Depositor nor any such person will be protected against any liability which
would otherwise be imposed by reason of wilful misfeasance or gross
negligence in the performance of duties thereunder or by reasons of reckless
disregard of obligations and duties thereunder. To the extent provided in
the related Agreement, the Master Servicer, the Depositor and any director,
officer, employee or agent of the Master Servicer or the Depositor may be
entitled to indemnification by the related Trust Fund and may be held
harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Agreement or the Securities, other than any
loss, liability or expense related to any specific Loan or Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the
Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance or gross negligence in the performance of duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. In
addition, each Agreement will provide that neither the Master Servicer nor
the Depositor will be under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its respective responsibilities
under the Agreement and which in its opinion may involve it in any expense or
liability. The Master Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties
thereto and the interests of the Securityholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund and the
Master Servicer or the Depositor, as the case may be, will be entitled to be
reimbursed therefor out of funds otherwise distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer
to distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
business days after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Securities of such class
evidencing not less than 25% of the aggregate Percentage Interests evidenced
by such class; (ii) any failure by the Master Servicer to make an Advance as
required under the Agreement, unless cured as specified therein; (iii) any
failure by the Master Servicer duly to observe or perform in any material
respect any of its other covenants or agreements in the Agreement which
continues unremedied for thirty days after the giving of written notice of
such failure to the Master Servicer by the Trustee or the Depositor, or to
the Master Servicer, the Depositor and the Trustee by the holders of
Securities of any class evidencing not less than 25% of the aggregate
Percentage Interests constituting such class; and (iv) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceeding and certain actions by or on behalf of the Master Servicer
indicating its insolvency, reorganization or inability to pay its
obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund in the event that payments in respect thereto are insufficient to
make payments required in the Agreement. The assets of the Trust Fund will
be sold only under the circumstances and in the manner specified in the
related Prospectus Supplement.
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Securities of any class evidencing not less than 51% of the aggregate
Percentage Interests constituting such class and under such other
circumstances as may be specified in such Agreement, the Trustee shall,
terminate all of its rights and obligations of the Master Servicer under the
Agreement relating to such Trust Fund and in and to the Trust Fund Assets,
whereupon the Trustee will succeed to all of the responsibilities, duties and
liabilities of the Master Servicer under the Agreement, including, if
specified in the related Prospectus Supplement, the obligation to make
advances, and will be entitled to similar compensation arrangements. In the
event that the Trustee is unwilling or unable so to act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a mortgage
loan servicing institution with a net worth of a least $10,000,000 to act as
successor to the Master Servicer under the Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee
and any such successor may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation payable to the Master
Servicer under the Agreement.
No Securityholder, solely by virtue of such holder's status as a
Securityholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus
Supplement; (iii) any representation or warranty made by the Depositor or the
Trust Fund in the Indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith with respect to or affecting such
Series having been incorrect in a material respect as of the time made, and
such breach is not cured within sixty (60) days after notice thereof is given
in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the holders
of a majority of the then aggregate outstanding amount of the Notes of such
Series may declare the principal amount (or, if the Notes of that Series have
a Pass-Through Rate of 0%, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded
and annulled by the holders of more than 50% of the Percentage Interests of
the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and
to continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide
sufficient funds for the payment of principal of and interest on the Notes of
such Series as they would have become due if there had not been such a
declaration. In addition, the Trustee may not sell or otherwise liquidate
the collateral securing the Notes of a Series following an Event of Default,
other than a default in the payment of any principal or interest on any Note
of such Series for thirty (30) days or more, unless (a) the holders of 100%
of the Percentage Interests of the Notes of such Series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding
Notes of such Series at the date of such sale or (c) the Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes
had not been declared due and payable, and the Trustee obtains the consent of
the holders of 662/3% of the Percentage Interests of the Notes of such
Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for thirty (30) days or more in
the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Trustee will have a prior lien on the proceeds of
any such liquidation for unpaid fees and expenses. As a result, upon the
occurrence of such an Event of Default, the amount available for distribution
to the Noteholders would be less than would otherwise be the case. However,
the Trustee may not institute a proceeding for the enforcement of its lien
except in connection with a proceeding for the enforcement of the lien of the
Indenture for the benefit of the Noteholders after the occurrence of such an
Event of Default.
Except as otherwise specified in the related Prospectus Supplement, in
the event the principal of the Notes of a Series is declared due and payable,
as described above, the holders of any such Notes issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying
with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
holders of a majority of the then aggregate outstanding amount of the Notes
of such Series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee with respect to the
Notes of such Series, and the holders of a majority of the then aggregate
outstanding amount of the Notes of such Series may, in certain cases, waive
any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of
the Indenture that cannot be modified without the waiver or consent of all
the holders of the outstanding Notes of such Series affected thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the
Trustee, without the consent of any of the Securityholders, (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or (iii) to make
any other revisions with respect to matters or questions arising under the
Agreement which are not inconsistent with the provisions thereof, provided
that such action will not adversely affect in any material respect the
interests of any Securityholder. In addition, to the extent provided in the
related Agreement, an Agreement may be amended without the consent of any of
the Securityholders, to change the manner in which the Security Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Securities of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any
of its provisions to such extent as may be necessary to maintain the
qualification of the related Trust Fund as a REMIC, provided that the Trustee
has received an opinion of counsel to the effect that such action is
necessary or helpful to maintain such qualification. Except as otherwise
specified in the related Prospectus Supplement, each Agreement may also be
amended by the Depositor, the Master Servicer and the Trustee with consent of
holders of Securities of such Series evidencing not less than 66% of the
aggregate Percentage Interests of each class affected thereby for the purpose
of adding any provisions to or changing in an manner or eliminating any of
the provisions of the Agreement or of modifying in any manner the rights of
the holders of the related Securities; provided, however, that no such
amendment may (i) reduce in any manner the amount of or delay the timing of,
payments received on Loans which are required to be distributed on any
Security without the consent of the holder of such Security, or (ii) reduce
the aforesaid percentage of Securities of any class of holders which are
required to consent to any such amendment without the consent of the holders
of all Securities of such class covered by such Agreement then outstanding.
If a REMIC election is made with respect to a Trust Fund, the Trustee will
not be entitled to consent to an amendment to the related Agreement without
having first received an opinion of counsel to the effect that such amendment
will not cause such Trust Fund to fail to qualify as a REMIC.
TERMINATIONS; OPTIONAL TERMINATION
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling
and Servicing Agreement and Trust Agreement for each Series of Securities
will terminate upon the payment to the related Securityholders of all amounts
held in the Security Account or by the Master Servicer and required to be
paid to them pursuant to such Agreement following the later of (i) the final
payment of or other liquidation of the last of the Trust Fund Assets subject
thereto or the disposition of all property acquired upon foreclosure of any
such Trust Fund Assets remaining in the Trust Fund and (ii) the purchase by
the Master Servicer or, if REMIC treatment has been elected and if specified
in the related Prospectus Supplement, by the holder of the residual interest
in the REMIC (see "Certain Material Federal Income Tax Consequences" below),
from the related Trust Fund of all of the remaining Trust Fund Assets and all
property acquired in respect of such Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any
such purchase of Trust Fund Assets and property acquired in respect of Trust
Fund Assets evidenced by a Series of Securities will be made at the option of
the Master Servicer or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Securities of that Series, but the right of the Master
Servicer or, if applicable, such holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Trust Fund Assets
being less than the percentage specified in the related Prospectus Supplement
of the aggregate principal balance of the Trust Fund Assets at the Cut-off
Date for the Series. The foregoing is subject to the provision that if a
REMIC election is made with respect to a Trust Fund, any repurchase pursuant
to clause (ii) above will be made only in connection with a "qualified
liquidation" of the REMIC within the meaning of Section 860F(g)(4) of the
Code.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes
of such Series or, with certain limitations, upon deposit with the Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series,
the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of such Series (except for certain obligations relating
to temporary Notes and exchange of Notes, to register the transfer of or
exchange Notes of such Series, to replace stolen, lost or mutilated Notes of
such Series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America
which through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of and each installment of interest on the Notes of such Series
on the last scheduled Distribution Date for such Notes and any installment of
interest on such Notes in accordance with the terms of the Indenture and the
Notes of such Series. In the event of any such defeasance and discharge of
Notes of such Series, holders of Notes of such Series would be able to look
only to such money and/or direct obligations for payment of principal and
interest, if any, on their Notes until maturity.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as
Trustee may have normal banking relationships with the Depositor, the Master
Servicer and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect
the laws of any particular state, nor to encompass the laws of all states in
which the security for the Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal laws and the
appropriate laws of the states in which Loans may be originated.
GENERAL
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing
practice in the state in which the property subject to the loan is located.
A mortgage creates a lien upon the real property encumbered by the mortgage,
which lien is generally not prior to the lien for real estate taxes and
assessments. Priority between mortgages depends on their terms and generally
on the order of recording with a state or county office. There are two
parties to a mortgage, the mortgagor, who is the borrower and owner of the
mortgaged property, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid,
in trust, generally with a power of sale, to the trustee to secure payment of
the obligation. A security deed and a deed to secure debt are special types
of deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the
subject property to the grantee until such time as the underlying debt is
repaid. The trustee's authority under a deed of trust, the mortgagee's
authority under a mortgage and the grantee's authority under a security deed
or deed to secure debt are governed by law and, with respect to some deeds of
trust, the directions of the beneficiary.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a non-
judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any
default by the borrower under the terms of the note or deed of trust. In
addition to any notice requirements contained in a deed of trust, in some
states, the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to
certain other persons. In general, the borrower, or any other person having
a junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender.
After the reinstatement period has expired without the default having been
cured, the borrower or junior lienholder no longer has the right to reinstate
the loan and must pay the loan in full to prevent the scheduled foreclosure
sale. If the deed of trust is not reinstated, a notice of sale must be
posted in a public place and, in most states, published for a specific period
of time in one or more newspapers. In addition, some state laws require that
a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of
the parties. When the mortgagee's right to foreclosure is contested, the
legal proceedings necessary to resolve the issue can be time consuming.
After the completion of a judicial foreclosure proceeding, the court
generally issues a judgment of foreclosure and appoints a referee or other
court officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided
in the mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and
a requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure
in which event the mortgagor's debt will be extinguished or the lender may
purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where such judgment is
available. Thereafter, subject to the right of the borrower in some states
to remain in possession during the redemption period, the lender will assume
the burden of ownership, including obtaining hazard insurance and making such
repairs at its own expense as are necessary to render the property suitable
for sale. The lender will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Any loss may be reduced by the receipt of any mortgage guaranty insurance
proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of
the borrower's defaults under the loan documents. Some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for fair notice require that borrowers under
deeds of trust receive notice longer than that prescribed by statute. For the
most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust does not
involve sufficient state action to afford constitutional protection to the
borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or
deed of trust. See "Junior Mortgages; Rights of Senior Mortgagees".
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and
safety. These include laws and regulations governing air pollutant
emissions, hazardous and toxic substances, impacts to wetlands, leaks from
underground storage tanks, and the management, removal and disposal of lead-
and asbestos-containing materials. In certain circumstances, these laws and
regulations impose obligations on the owners or operators of residential
properties such as those subject to the Loans. The failure to comply with
such laws and regulations may result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator.
In addition, persons who transport or dispose of hazardous substances, or
arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are
releases or threatened releases of hazardous substances at such off-site
locations.
In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), contamination of property may give rise to a lien on the property
to assure the payment of the costs of clean-up. In several states, such a
lien has priority over the lien of an existing mortgage against such
property. Under CERCLA, such a lien is subordinate to pre-existing,
perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA 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 ("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
("EPA") in April 1992 attempted to clarify the activities in which lenders
could engage both prior to and subsequent to foreclosure of a security
interest without forfeiting the secured creditor exemption under CERCLA. The
rule was struck down in 1994 by the United States Court of Appeals for the
District of Columbia Circuit in Kelley ex rel State of Michigan v.
Environmental Protection Agency, 15 F.3d 1100 (D.C Cir. 1994), reh'g denied,
25 F.3d 1088, cert. denied sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct.
900 (1995). Another EPA regulation promulgated in 1995 clarifies the
activities in which lenders may engage without forfeiting the secured
creditor exemption under the underground storage tank provisions of the SWDA.
That regulation has not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA to
provide additional clarification regarding the scope of the lender liability
exemptions under the two statutes. Among other things, the 1996 amendments
specify the circumstances under which a lender will be protected by the
CERCLA and SWDA exemptions, both while the borrower is still in possession of
the secured property and following foreclosure on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility will be
considered to participate in management only if, while the borrower is still
in possession of the facility encumbered by the security interest, the lender
(i) exercises decision-making control over environmental compliance related
to the facility such that the lender has undertaken responsibility for
hazardous substance handling or disposal practices related to the facility or
(ii) exercises control at a level comparable to that of a manager of the
facility such that the lender has assumed or manifested responsibility for
(x) overall management of the facility encompassing daily-decision making
with respect to environmental compliance or (y) overall or substantially all
of the operational functions (as distinguished from financial or
administrative functions) of the facility other than the function of
environmental compliance. The amendments also specify certain activities
that are not considered to be "participation in management", including
monitoring or enforcing the terms of the extension of credit or security
interest, inspecting the facility, and requiring a lawful means of addressing
the release or threatened release of a hazardous substance.
The 1996 amendments also specify that a lender who did not participate
in management of a facility prior to foreclosure will not be considered an
"owner or operator", even if the lender forecloses on the facility and after
foreclosure sells or liquidates the facility, maintains business activities,
winds up operations, undertakes an appropriate response action, or takes any
other measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at
the earliest practicable, commercially reasonable time, on commercially
reasonable terms, taking into account market conditions and legal and
regulatory requirements.
The CERCLA and SWDA lender liability amendments specifically address the
potential liability of lenders who hold mortgages or similar conventional
security interests in real property, such as the Trust Fund does in
connection with the Home Equity Loans and the Home Improvement Contracts.
The amendments do not clearly address the potential liability of lenders who
retain legal title to a property and enter into an agreement with the
purchaser for the payment of the purchase price and interest over the term of
the contract, such as the Trust Fund does in connection with the Installment
Contracts.
If a lender (including a lender under an Installment Contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a
previous owner or operator. However, such persons or entities may be
bankrupt or otherwise judgment proof, and the costs associated with
environmental cleanup and related actions may be substantial. Moreover, some
state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of
addressing a release or threatened release at a property pledged as
collateral for one of the Loans (or at a property subject to an Installment
Contract), would be imposed on the Trust Fund, and thus occasion a loss to
the Securityholders, therefore depends on the specific factual and legal
circumstances at issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of
a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption would
defeat the title of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states,
there is no right to redeem property after a trustee's sale under a deed of
trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the right
of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency
judgment is a personal judgment against the borrower equal in most cases to
the difference between the amount due to the lender and the fair market value
of the real property sold at the foreclosure sale. Other statutes require
the beneficiary or mortgagee to exhaust the security afforded under a deed of
trust or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower. In certain other
states, the lender has the option of bringing a personal action against the
borrower on the debt without first exhausting such security; however, in some
of these states, the lender, following judgment on such personal action, may
be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of
the election requirement, when applicable, is that lenders will usually
proceed first against the security rather than bringing a personal action
against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale
to the excess of the outstanding debt over the fair market value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids
at the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy
laws, the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state
laws affording relief to debtors, may interfere with or affect the ability of
the secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on
the Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the Property is
not the debtor's principal residence and the court determines that the value
of the Property is less than the principal balance of the mortgage loan, for
the reduction of the secured indebtedness to the value of the Property as of
the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference, and also may reduce the
monthly payments due under such mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to
any automatic stay, could result in delays in receiving payments on the Loans
underlying a Series of Securities and possible reductions in the aggregate
amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien
of a mortgage or secured party. Numerous federal and state consumer
protection laws impose substantive requirements upon mortgage lenders in
connection with the origination, servicing and enforcement of loans secured
by Single Family Properties. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act,
Fair Credit Billing Act, Fair Credit Reporting Act and related statutes and
regulations. These federal and state laws impose specific statutory
liabilities upon lenders who fail to comply with the provisions of the law.
In some cases, this liability may affect assignees of the loans or contracts.
DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, each
conventional Loan will contain a due-on-sale clause which will provide that
if the mortgagor or obligor sells, transfers or conveys the Property, the
loan or contract may be accelerated by the mortgagee or secured party. The
Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain
Act"), subject to certain exceptions, preempts state constitutional,
statutory and case law prohibiting the enforcement of due-on-sale clauses.
As a result, due-on-sale clauses have become generally enforceable except in
those states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain
Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St. Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St. Germain
Act sets forth nine specific instances in which a mortgagee covered by the
Act may not exercise its rights under a due-on-sale clause, notwithstanding
the fact that a transfer of the property may have occurred. The inability to
enforce a due-on-sale clause may result in transfer of the related Property
to an uncreditworthy person, which could increase the likelihood of default
or may result in a mortgage bearing an interest rate below the current market
rate being assumed by a new home buyer, which may affect the average life of
the Loans and the number of Loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from such
bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon the late charges which a lender
may collect from a borrower for delinquent payments. Certain states also
limit the amounts that a lender may collect from a borrower as an additional
charge if the loan is prepaid. Late charges and prepayment fees are
typically retained by servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles
are generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have
been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes of the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have substituted their judgment for the lender's
judgment and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from temporary
financial disability. In other cases, courts have limited the right of a
lender to realize upon his security if the default under the security
agreement is not monetary, such as the borrower's failure to adequately
maintain the property or the borrower's execution of secondary financing
affecting the property. Finally, some courts have been faced with the issue
of whether or not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under security
agreements receive notices in addition to the statutorily-prescribed
minimums. For the most part, these cases have upheld the notice provisions
as being reasonable or have found that, in some cases involving the sale by a
trustee under a deed of trust or by a mortgagee under a mortgage having a
power of sale, there is insufficient state action to afford constitutional
protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. The regulations of the Federal Home Loan Bank Board
(the "FHLBB") prohibit the imposition of a prepayment penalty or equivalent
fee 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 Loans having higher mortgage rates, may increase
the likelihood of refinancing or other early retirements of the 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. The Office of
Thrift Supervision, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized the states to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1993
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or
other charges.
THE HOME IMPROVEMENT CONTRACTS
General. The Home Improvement Contracts, other than those Home
Improvement Contracts that are unsecured or secured by mortgages on real
estate (such Home Improvement Contracts are hereinafter referred to in this
section as "contracts") generally are "chattel paper" or constitute "purchase
money security interests" each as defined in the Uniform Commercial Code (the
"UCC"). Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under
the related Agreement, the Depositor will transfer physical possession of the
contracts to the Trustee or a designated custodian or may retain possession
of the contracts as custodian for the Trustee. In addition, the Depositor
will make an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the Trustee's ownership of the
contracts. Unless otherwise specified in the related Prospectus Supplement,
the contracts will not be stamped or otherwise marked to reflect their
assignment from the Depositor to the Trustee. Therefore, if through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements. The contracts that are secured
by the Home Improvements financed thereby grant to the originator of such
contracts a purchase money security interest in such Home Improvements to
secure all or part of the purchase price of such Home Improvements and
related services. A financing statement generally is not required to be
filed to perfect a purchase money security interest in consumer goods. Such
purchase money security interests are assignable. In general, a purchase
money security interest grants to the holder a security interest that has
priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral
subject to a purchase money security interest becomes a fixture, in order for
the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in such Home
Improvement must generally be perfected by a timely fixture filing. In
general, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building
material or other goods that are deemed to lose such characterization upon
incorporation of such materials into the related property, will not be
secured by a purchase money security interest in the Home Improvement being
financed.
Enforcement of Security Interest in Home Improvements. So long as the
Home Improvement has not become subject to the real estate law, a creditor
can repossess a Home Improvement securing a contract by voluntary surrender,
by "self-help" repossession that is "peaceful" (i.e., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a contract
must give the debtor a number of days' notice, which varies from 10 to 30
days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states
also requires that the debtor be given notice of any sale prior to resale of
the unit that the debtor may redeem at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws. The so-called "Holder-in-Due Course" rule of
the Federal Trade Commission is intended to defeat the ability of the
transferor of a consumer credit contract which is the seller of goods which
gave rise to the transaction (and certain related lenders and assignees) to
transfer such contract free of notice of claims by the debtor thereunder.
The effect of this rule is to subject the assignee of such a contract to all
claims and defenses which the debtor could assert against the seller of
goods. Liability under this rule is limited to amounts paid under a
contract; however, the obligor also may be able to assert the rule to set off
remaining amounts due as a defense against a claim brought by the Trustee
against such obligor. Numerous other federal and state consumer protection
laws impose 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 of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"),
provides that, subject to the following conditions, state usury limitations
shall not apply to any contract which is secured by a first lien on certain
kinds of consumer goods. The contracts would be covered if they satisfy
certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V.
INSTALLMENT CONTRACTS
The Loans may also consist of installment contracts. Under an
installment contract ("Installment Contract") the seller (hereinafter
referred to in this section as the "lender") retains legal title to the
property and enters into an agreement with the purchaser hereinafter referred
to in this section as the "borrower") for the payment of the purchase price,
plus interest, over the term of such contract. Only after full performance
by the borrower of the contract is the lender obligated to convey title to
the property to the purchaser. As with mortgage or deed of trust financing,
during the effective period of the Installment Contract, the borrower is
generally responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance premiums
associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender
in such a situation does not have to foreclose in order to obtain title to
the property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may
be required, the lender may be required to give notice of default and the
borrower may be granted some grace period during which the Installment
Contract may be reinstated upon full payment of the default amount and the
borrower may have a post-foreclosure statutory redemption right. In other
states, courts in equity may permit a borrower with significant investment in
the property under an Installment Contract for the sale of real estate to
share in the proceeds of sale of the property after the indebtedness is
repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such interest rate limitation
could have an effect, for an indeterminate period of time, on the ability of
the Master Servicer to collect full amounts of interest on certain of the
Loans. Any shortfall in interest collections resulting from the application
of the Relief Act could result in losses to the Securityholders. The Relief
Act also imposes limitations which would impair the ability of the Master
Servicer to foreclose on an affected Loan during the borrower's period of
active duty status. Moreover, the Relief Act permits the extension of a
Loan's maturity and the re-adjustment of its payment schedule beyond the
completion of military service. Thus, in the event that such a Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Property in a timely fashion.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other
lenders or institutional investors, the rights of the Trust Fund (and
therefore the Securityholders), as mortgagee under any such junior mortgage,
are subordinate to those of any mortgagee under any senior mortgage. The
senior mortgagee has the right to receive hazard insurance and condemnation
proceeds and to cause the property securing the Loan to be sold upon default
of the mortgagor, thereby extinguishing the junior mortgagee's lien unless
the junior mortgagee asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full
and, in some states, may cure such default and bring the senior loan current,
in either event adding the amounts expended to the balance due on the junior
loan. In most states, absent a provision in the mortgage or deed of trust,
no notice of default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage, in such order as the mortgagee may
determine. Thus, in the event improvements on the property are damaged or
destroyed by fire or other casualty, or in the event the property is taken by
condemnation, the mortgagee or beneficiary under underlying senior mortgages
will have the prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness,
in most cases, may be applied to the indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding
purporting to affect the property or the rights of the mortgagee under the
mortgage. Upon a failure of the mortgagor to perform any of these
obligations, the mortgagee is given the right under certain mortgages to
perform the obligation itself, at its election, with the mortgagor agreeing
to reimburse the mortgagee for any sums expended by the mortgagee on behalf
of the mortgagor. All sums so expended by the mortgagee become part of the
indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically
contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the borrower by the
beneficiary or lender are to be secured by the deed of trust or mortgage.
Any amounts so advanced after the Cut-off Date with respect to any mortgage
will not be included in the Trust Fund. The priority of the lien securing
any advance made under the clause may depend in most states on whether the
deed of trust or mortgage is called and recorded as a credit line deed of
trust or mortgage. If the beneficiary or lender advances additional amounts,
the advance is entitled to receive the same priority as amounts initially
advanced under the trust deed or mortgage, notwithstanding the fact that
there may be junior trust deeds or mortgages and other liens which intervene
between the date of recording of the trust deed or mortgage and the date of
the future advance, and notwithstanding that the beneficiary or lender had
actual knowledge of such intervening junior trust deeds or mortgages and
other liens at the time of the advance. In most states, the trust deed or
mortgage lien securing mortgage loans of the type which includes home equity
credit lines applies retroactively to the date of the original recording of
the trust deed or mortgage, provided that the total amount of advances under
the home equity credit line does not exceed the maximum specified principal
amount of the recorded trust deed or mortgage, except as to advances made
after receipt by the lender of a written notice of lien from a judgment lien
creditor of the trustor.
THE TITLE I PROGRAM
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I
Program"). Under the Title I Program, the FHA is authorized and empowered to
insure qualified lending institutions against losses on eligible loans. The
Title I Program operates as a coinsurance program in which the FHA insures up
to 90% of certain losses incurred on an individual insured loan, including
the unpaid principal balance of the loan, but only to the extent of the
insurance coverage available in the lender's FHA insurance coverage reserve
account. The owner of the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under the
Title I Program include property improvement loans ("Property Improvement
Loans" or "Title I Loans"). A Property Improvement Loan or Title I Loan
means a loan made to finance actions or items that substantially protect or
improve the basic livability or utility of a property and includes single
family improvement loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan,
the borrower makes application directly to a lender without any assistance
from a dealer, which application may be filled out by the borrower or by a
person acting at the direction of the borrower who does not have a financial
interest in the loan transaction, and the lender may disburse the loan
proceeds solely to the borrower or jointly to the borrower and other parties
to the transaction. With respect to a dealer loan, the dealer, who has a
direct or indirect financial interest in the loan transaction, assists the
borrower in preparing the loan application or otherwise assists the borrower
in obtaining the loan from the lender. The lender may disburse proceeds
solely to the dealer or the borrower or jointly to the borrower and the
dealer or other parties to the transaction. With respect to a dealer Title I
Loan, a dealer may include a seller, a contractor or supplier of goods or
services.
Loans insured under the Title I Program are required to have fixed
interest rates and generally provide for equal installment payments due
weekly, biweekly, semi-monthly or monthly, except that a loan may be payable
quarterly or semi-annually where a borrower has an irregular flow of income.
The first or last payments (or both) may vary in amount but may not exceed
150% of the regular installment payment, and the first payment may be due no
later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest
rate must be negotiated and agreed to by the borrower and the lender and must
be fixed for the term of the loan and recited in the note. Interest on an
insured loan must accrue from the date of the loan and be calculated
according to the actuarial method. The lender must assure that the note and
all other documents evidencing the loan are in compliance with applicable
federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence
and diligence to determine whether the borrower and any co-maker is solvent
and an acceptable credit risk, with a reasonable ability to make payments on
the loan obligation. The lender's credit application and review must
determine whether the borrower's income will be adequate to meet the periodic
payments required by the loan, as well as the borrower's other housing and
recurring expenses, which determination must be made in accordance with the
expense-to-income ratios published by the Secretary of HUD unless the lender
determines and documents in the loan file the existence of compensating
factors concerning the borrower's creditworthiness which support approval of
the loan.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution (as is typically the case with
other federal loan programs). If, after a loan has been made and reported
for insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the
FHA. In such case, provided that the validity of any lien on the property
has not been impaired, the insurance of the loan under the Title I Program
will not be affected unless such material misstatements of fact or misuse of
loan proceeds was caused by (or was knowingly sanctioned by) the lender or
its employees.
Requirements for Title I Loans. The maximum principal amount for Title
I Loans must not exceed the actual cost of the project plus any applicable
fees and charges allowed under the Title I Program; provided that such
maximum amount does not exceed $25,000 (or the current applicable amount) for
a single family property improvement loan. Generally, the term of a Title I
Loan may not be less than six months nor greater than 20 years and 32 days.
A borrower may obtain multiple Title I Loans with respect to multiple
properties, and a borrower may obtain more than one Title I Loan with respect
to a single property, in each case as long as the total outstanding balance
of all Title I Loans in the same property does not exceed the maximum loan
amount for the type of Title I Loan thereon having the highest permissible
loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property,
a lease thereof for a term expiring at least six months after the final
maturity of the Title I Loan or a recorded land installment contract for the
purchase of the real property. In the case of a Title I Loan with a total
principal balance in excess of $15,000, if the property is not occupied by
the owner, the borrower must have equity in the property being improved at
least equal to the principal amount of the loan, as demonstrated by a current
appraisal. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or
deed of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary
of HUD has published a list of items and activities which cannot be financed
with proceeds from any Title I Loan and from time to time the Secretary of
HUD may amend such list of items and activities. With respect to any dealer
Title I Loan, before the lender may disburse funds, the lender must have in
its possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender
is required to obtain, promptly upon completion of the improvements but not
later than 6 months after disbursement of the loan proceeds with one 6 month
extension if necessary, a completion certificate, signed by the borrower.
The lender is required to conduct an on-site inspection on any Title I Loan
where the principal obligation is $7,500 or more, and on any direct Title I
Loan where the borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program, the FHA establishes
an insurance coverage reserve account for each lender which has been granted
a Title I contract of insurance. The amount of insurance coverage in this
account is a maximum of 10% of the amount disbursed, advanced or expended by
the lender in originating or purchasing eligible loans registered with the
FHA for Title I insurance, with certain adjustments. The balance in the
insurance coverage reserve account is the maximum amount of insurance claims
the FHA is required to pay to the Title I lender. Loans to be insured under
the Title I Program will be registered for insurance by the FHA and the
insurance coverage attributable to such loans will be included in the
insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. For each eligible loan
reported and acknowledged for insurance, the FHA charges a fee (the
"Premium"). For loans having a maturity of 25 months or less, the FHA bills
the lender for the entire Premium in an amount equal to the product of 0.50%
of the original loan amount and the loan term. For home improvement loans
with a maturity greater than 25 months, each year that a loan is outstanding
the FHA bills the lender for a Premium in an amount equal to 0.50% of the
original loan amount. If a loan is prepaid during the year, the FHA will not
refund or abate the Premium paid for such year.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount
of the FHA insurance claims approved for payment relating to such insured
loans and (ii) the amount of insurance coverage attributable to insured loans
sold by the lender, and such insurance coverage may be reduced for any FHA
insurance claims rejected by the FHA. The balance of the lender's FHA
insurance coverage reserve account will be further adjusted as required under
Title I or by the FHA, and the insurance coverage therein may be earmarked
with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest to
do so. Originations and acquisitions of new eligible loans will continue to
increase a lender's insurance coverage reserve account balance by 10% of the
amount disbursed, advanced or expended in originating or acquiring such
eligible loans registered with the FHA for insurance under the Title I
Program. The Secretary of HUD may transfer insurance coverage between
insurance coverage reserve accounts with earmarking with respect to a
particular insured loan or group of insured loans when a determination is
made that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guaranty or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
such loan in accordance with the Title I regulations, will transfer from the
transferor's insurance coverage reserve account to the transferee's insurance
coverage reserve account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of such loan (whichever is
less). However, under the Title I Program not more than $5,000 in insurance
coverage shall be transferred to or from a lender's insurance coverage
reserve account during any October 1 to September 30 period without the prior
approval of the Secretary of HUD. Amounts which may be recovered by the
Secretary of HUD after payment of an insurance claim are not added to the
amount of insurance coverage in the related lender's insurance coverage
reserve account.
Claims Procedures Under Title I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after
the lender or its agent has contacted the borrower in a face-to-face meeting
or by telephone to discuss the reasons for the default and to seek its cure.
If the borrower does not cure the default or agree to a modification
agreement or repayment plan, the lender will notify the borrower in writing
that, unless within 30 days the default is cured or the borrower enters into
a modification agreement or repayment plan, the loan will be accelerated and
that, if the default persists, the lender will report the default to an
appropriate credit agency. The lender may rescind the acceleration of
maturity after full payment is due and reinstate the loan only if the
borrower brings the loan current, executes a modification agreement or agrees
to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If
the lender chooses to proceed against the property under a security
instrument (or if it accepts a voluntary conveyance or surrender of the
property), the lender may file an insurance claim only with the prior
approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation
of the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender
has properly filed proofs of claims, where the borrower is bankrupt or
deceased. Generally, a claim for reimbursement for loss on any Title I Loan
must be filed with the FHA no later than 9 months after the date of default
of such loan. Concurrently with filing the insurance claim, the lender shall
assign to the United States of America the lender's entire interest in the
loan note (or a judgment in lien of the note), in any security held and in
any claim filed in any legal proceedings. If, at the time the note is
assigned to the United States, the Secretary has reason to believe that the
note is not valid or enforceable against the borrower, the FHA may deny the
claim and reassign the note to the lender. If either such defect is
discovered after the FHA has paid a claim, the FHA may require the lender to
repurchase the paid claim and to accept a reassignment of the loan note. If
the lender subsequently obtains a valid and enforceable judgment against the
borrower, the lender may resubmit a new insurance claim with an assignment of
the judgment. Although the FHA may contest any insurance claim and make a
demand for repurchase of the loan at any time up to two years from the date
the claim was certified for payment and may do so thereafter in the event of
fraud or misrepresentation on the part of the lender, the FHA has expressed
an intention to limit the period of time within which it will take such
action to one year from the date the claim was certified for payment.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. For the
purposes hereof, the "Claimable Amount" means an amount equal to 90% of the
sum of: (a) the unpaid loan obligation (net unpaid principal and the
uncollected interest earned to the date of default) with adjustments thereto
if the lender has proceeded against property securing such loan; (b) the
interest on the unpaid amount of the loan obligation from the date of default
to the date of the claim's initial submission for payment plus 15 calendar
days (but not to exceed 9 months from the date of default), calculated at the
rate of 7% per annum; (c) the uncollected court costs; (d) the attorney's
fees not to exceed $500; and (e) the expenses for recording the assignment of
the security to the United States.
The Secretary of HUD may deny a claim for insurance in whole or in part
for any violations of the regulations governing the Title I Program; however,
the Secretary of HUD may waive such violations if it determines that
enforcement of the regulations would impose an injustice upon a lender which
has substantially complied with the regulations in good faith.
OTHER LEGAL CONSIDERATIONS
The Loans are also subject to federal laws, including: (i) Regulation Z,
which requires certain disclosures to the borrowers regarding the terms of
the Loans; (ii) the Equal Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit Protection Act, in the
extension of credit; and (iii) the Fair Credit Reporting Act, which regulates
the use and reporting of information related to the borrower's credit
experience. Violations of certain provisions of these federal laws may limit
the ability of the Sellers to collect all or part of the principal of or
interest on the Loans and in addition could subject the Sellers to damages
and administrative enforcement.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Securities and is based on the opinion of Brown & Wood LLP, special counsel
to the Depositor (in such capacity, "Tax Counsel"). The summary is based
upon the provisions of the Code, the regulations promulgated thereunder,
including, where applicable, proposed regulations, and the judicial and
administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and such a change could apply retroactively.
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 ("REMIC") under
the Internal Revenue Code of 1986, as amended (the "Code"); (iii) the
Securities represent an ownership interest in some or all of the assets
included in the Trust Fund for a Series; or (iv) an election is made to treat
the Trust Fund relating to a particular Series of Certificates as a
partnership. The Prospectus Supplement for each Series of Securities will
specify how the Securities will be treated for federal income tax purposes
and will discuss whether a REMIC election, if any, will be made with respect
to such Series.
TAXATION OF DEBT SECURITIES
Status 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)(5)(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 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 (the "OID Regulations"). A holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Debt
Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero
if it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than
a substantial amount of a particular class of Debt Securities is sold for
cash on or prior to the Closing Date, the issue price for such class will be
treated as the fair market value of such class on the Closing Date. The
issue price of a Debt Security also includes the amount paid by an initial
Debt Security holder for accrued interest that relates to a period prior to
the issue date of the Debt Security. The stated redemption price at maturity
of a Debt Security includes the original principal amount of the Debt
Security, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are
unconditionally payable only if a late payment or nonpayment is expected to
be penalized or reasonable remedies exist to compel payment. Certain Debt
Securities may provide for default remedies in the event of late payment or
nonpayment of interest. In the opinion of Tax Counsel, the interest on such
Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID
Regulations, where Debt Securities do not provide for default remedies, the
interest payments will be included in the Debt Security's stated redemption
price at maturity and taxed as OID. Interest is payable at a single fixed
rate only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on Debt Securities with
respect to which deferred interest will accrue, will not constitute qualified
stated interest payments, in which case the stated redemption price at
maturity of such Debt Securities includes all distributions of interest as
well as principal thereon. Where the interval between the issue date and the
first Distribution Date on a Debt Security is either longer or shorter than
the interval between subsequent Distribution Dates, all or part of the
interest foregone, in the case of the longer interval, and all of the
additional interest, in the case of the shorter interval, will be included in
the stated redemption price at maturity and tested under the de minimis rule
described below. In the case of a Debt Security with a long first period
which has non-de minimis OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own
tax advisors to determine the issue price and stated redemption price at
maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of
the Debt Security. For this purpose, the weighted average maturity of the
Debt Security is computed as the sum of the amounts determined by multiplying
the number of full years (i.e., rounding down partial years) from the issue
date until each distribution in reduction of stated redemption price at
maturity is scheduled to be made by a fraction, the numerator of which is the
amount of each distribution included in the stated redemption price at
maturity of the Debt Security and the denominator of which is the stated
redemption price at maturity of the Debt Security. Holders generally must
report de minimis OID pro rata as principal payments are received, and such
income will be capital gain if the Debt Security is held as a capital asset.
However, accrual method holders may elect to accrue all de minimis OID as
well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a
qualified variable rate and not as contingent interest if, generally, (i)
such interest is unconditionally payable at least annually, (ii) the issue
price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a "qualified floating
rate," an "objective rate," or a combination of "qualified floating rates"
that do not operate in a manner that significantly accelerates or defers
interest payments on such Debt Security. In the case of Compound Interest
Securities, certain Interest Weighted Securities, and certain of the other
Debt Securities, none of the payments under the instrument will be considered
qualified stated interest, and thus the aggregate amount of all payments will
be included in the stated redemption price.
The Internal Revenue Services (the "IRS") recently issued regulations
(the "Contingent Regulations") governing the calculation of OID on
instruments having contingent interest payments. The Contingent Regulations
represent the only guidance regarding the views of the IRS with respect to
contingent interest instruments and specifically do not apply for purposes of
calculating OID on debt instruments subject to 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 Trustee intends to base its
computation on Code Section 1272(a)(6) and the OID Regulations as described
in this Prospectus. However, because no regulatory guidance currently exists
under Code Section 1272(a)(6), there can be no assurance that such
methodology represents the correct manner of calculating OID.
The holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount.
The amount of OID includible in income by a holder will be computed by
allocating to each day during a taxable year a pro rata portion of the
original issue discount that accrued during the relevant accrual period. In
the case of a Debt Security that is not a Regular Interest Security and the
principal payments on which are not subject to acceleration resulting from
prepayments on the Loans, the amount of OID includible in income of a holder
for an accrual period (generally the period over which interest accrues on
the debt instrument) will equal the product of the yield to maturity of the
Debt Security and the adjusted issue price of the Debt Security, reduced by
any payments of qualified stated interest. The adjusted issue price is the
sum of its issue price plus prior accruals or OID, reduced by the total
payments made with respect to such Debt Security in all prior periods, other
than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject
to acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account
the anticipated rate of prepayments assumed in pricing the debt instrument
(the "Prepayment Assumption"). The amount of OID that will accrue during an
accrual period on a Pay-Through Security is the excess (if any) of the sum of
(a) the present value of all payments remaining to be made on the Pay-Through
Security as of the close of the accrual period and (b) the payments during
the accrual period of amounts included in the stated redemption price of the
Pay-Through Security, over the adjusted issue price of the Pay-Through
Security at the beginning of the accrual period. The present value of the
remaining payments is to be determined on the basis of three factors: (i)
the original yield to maturity of the Pay-Through Security (determined on the
basis of compounding at the end of each accrual period and properly adjusted
for the length of the accrual period), (ii) events which have occurred before
the end of the accrual period and (iii) the assumption that the remaining
payments will be made in accordance with the original Prepayment Assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a holder to take into account prepayments with respect
to the Loans at a rate that exceeds the Prepayment Assumption, and to
decrease (but not below zero for any period) the portions of original issue
discount required to be included in income by a holder of a Pay-Through
Security to take into account prepayments with respect to the Loans at a rate
that is slower than the Prepayment Assumption. Although original issue
discount will be reported to holders of Pay-Through Securities based on the
Prepayment Assumption, no representation is made to holders that Loans will
be prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular
Interest Securities (or other regular interests in a REMIC) in a manner that
it believes to be appropriate, to take account of realized losses on the
Loans, although the OID Regulations do not provide for such adjustments. If
the Internal Revenue Service were to require that OID be accrued without such
adjustments, the rate of accrual of OID for a Class of Regular Interest
Securities could increase.
Certain classes of Regular Interest Securities may represent more than
one class of REMIC regular interests. Unless otherwise provided in the
related Prospectus Supplement, the Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the
purposes of computing OID, the separate regular interests were a single debt
instrument.
A subsequent holder of a Debt Security will also be required to include
OID in gross income, but such a holder who purchases such Debt Security for
an amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset
such OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax Counsel,
holders will be required to report income with respect to the related
Securities under an accrual method without giving effect to delays and
reductions in distributions attributable to a default or delinquency on the
Loans, except possibly to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income (including OID)
reported by a holder of such a Security in any period could significantly
exceed the amount of cash distributed to such holder in that period. The
holder will eventually be allowed a loss (or will be allowed to report a
lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is deduced as a result of a Loan default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, holders of Securities should consult their own
tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities
(as defined under "--Tax Status as a Grantor Trust; General" herein) the
payments on which consist solely or primarily of a specified portion of the
interest payments on qualified mortgages held by the REMIC or on Loans
underlying Pass-Through Securities ("Interest Weighted Securities"). The
Issuer intends to take the position that all of the income derived from an
Interest Weighted Security should be treated as OID and that the amount and
rate of accrual of such OID should be calculated by treating the Interest
Weighted Security as a Compound Interest Security. However, in the case of
Interest Weighted Securities that are entitled to some payments of principal
and that are Regular Interest Securities the 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 Internal Revenue Service could assert
that an Interest Weighted Security should be taxable under the rules
governing bonds issued with contingent payments. Such treatment may be more
likely in the case of Interest Weighted Securities that are Stripped
Securities as described below. See "--Tax Status as a Grantor Trust--
Discount or Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in the
case of Debt Securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that (i)
the yield to maturity of such Debt Securities and (ii) in the case of
Pay-Through Securities, the present value of all payments remaining to be
made on such Debt Securities, should be calculated as if the interest index
remained at its value as of the issue date of such Securities. Because the
proper method of adjusting accruals of OID on a variable rate Debt Security
is uncertain, holders of variable rate Debt Securities should consult their
own tax advisers regarding the appropriate treatment of such Securities for
federal income tax purposes.
Market Discount. In the opinion of Tax Counsel, a purchaser of a
Security may be subject to the market discount rules of Sections 1276-1278 of
the Code. A Holder that acquires a Debt Security with more than a prescribed
de minimis amount of "market discount" (generally, the excess of the
principal amount of the Debt Security over the purchaser's purchase price)
will be required to include accrued market discount in income as ordinary
income in each month, but limited to an amount not exceeding the principal
payments on the Debt Security received in that month and, if the Securities
are sold, the gain realized. Such market discount would accrue in a manner
to be provided in Treasury regulations but, until such regulations are
issued, such market discount would in general accrue either (i) on the basis
of a constant yield (in the case of a Pay-Through Security, taking into
account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below,
the Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the
case of Securities (or, in the case of a Pass-Through Security, as described
below, the Loans underlying such Security) originally issued at a discount,
OID in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a
Security (or, in the case of a Pass-Through Security, as described below, the
underlying Loans) with market discount over interest received on such
Security is allowed as a current deduction only to the extent such excess is
greater than the market discount that accrued during the taxable year in
which such interest expense was incurred. In general, the deferred portion
of any interest expense will be deductible when such market discount is
included in income, including upon the sale, disposition, or repayment of the
Security (or in the case of a Pass-Through Security, an underlying Loan). A
holder may elect to include market discount in income currently as it
accrues, on all market discount obligations acquired by such holder during
the taxable year such election is made and thereafter, in which case the
interest deferral rule will not apply.
Premium. In the opinion of Tax Counsel, a holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity,
generally will be considered to have purchased the Security at a premium,
which it may elect to amortize as an offset to interest income on such
Security (and not as a separate deduction item) on a constant yield method.
The legislative history of the 1986 Act indicates that premium is to be
accrued in the same manner as market discount. Accordingly, it appears that
the accrual of premium on a class of Pay-Through Securities will be
calculated using the prepayment assumption used in pricing such class. If a
holder makes an election to amortize premium on a Debt Security, such
election will apply to all taxable debt instruments (including all REMIC
regular interests and all pass-through certificates representing ownership
interests in a trust holding debt obligations) held by the holder at the
beginning of the taxable year in which the election is made, and to all
taxable debt instruments acquired thereafter by such holder, and will be
irrevocable without the consent of the IRS. Purchasers who pay a premium for
the Securities should consult their tax advisers regarding the election to
amortize premium and the method to be employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all
interest, discount (including de minimis market or original issue discount)
and premium in income as interest, based on a constant yield method for Debt
Securities acquired on or after April 4, 1994. If such an election were to
be made with respect to a Debt Security with market discount, the holder of
the Debt Security would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that such holder of the Debt Security acquires during
the year of the election or thereafter. Similarly, a holder of a Debt
Security that makes this election for a Debt Security that is acquired at a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
holder owns or acquires. The election to accrue interest, discount and
premium on a constant yield method with respect to a Debt Security is
irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as
all of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if
a REMIC election is made with respect to a Series of Securities, in the
opinion of Tax Counsel (i) Securities held by a domestic building and loan
association will constitute "a regular or a residual interest in a REMIC"
within the meaning of Code Section 7701(a)(19)(C)(xi) (assuming that at least
95% of the REMIC's assets consist of cash, government securities, "loans
secured by an interest in real property," and other types of assets described
in Code Section 7701(a)(19)(C)); and (ii) Securities held by a real estate
investment trust will constitute "real estate assets" within the meaning of
Code Section 856(c)(6)(B), and income with respect to the Securities will be
considered "interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of Code Section
856(c)(3)(B) (assuming, for both purposes, that at least 95% of the REMIC's
assets are qualifying assets). If less than 95% of the REMIC's assets
consist of assets described in clause (i) or (ii) above, then a Security will
qualify for the tax treatment described in clause (i) or (ii) in the
proportion that such REMIC assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of Tax Counsel, all of the expenses of
a REMIC will be taken into account by holders of the Residual Interest
Securities. In the case of a "single class REMIC," however, the expenses
will be allocated, under Treasury regulations, among the holders of the
Regular Interest Securities and the holders of the Residual Interest
Securities on a daily basis in proportion to the relative amounts of income
accruing to each holder on that day. In the case of a holder of a Regular
Interest Security who is an individual or a "pass-through interest holder"
(including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the holder,
exceed 2% of such Holder's adjusted gross income. In addition, for taxable
years beginning after December 31, 1990, the amount of itemized deductions
otherwise allowable for the taxable year for an individual whose adjusted
gross income exceeds the applicable amount (which amount will be adjusted for
inflation for taxable years beginning after 1990) will be reduced by the
lesser of (i) 3% of the excess of adjusted gross income over the applicable
amount, or (ii) 80% of the amount of itemized deductions otherwise allowable
for such taxable year. The reduction or disallowance of this deduction may
have a significant impact on the yield of the Regular Interest Security to
such a holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is
similar to such a trust and which is structured with the principal purpose of
avoiding the single class REMIC rules. Unless otherwise specified in the
related Prospectus Supplement, the expenses of the REMIC will be allocated to
holders of the related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC.
Calculation of REMIC Income. In the opinion of Tax Counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with
certain adjustments. In general, the taxable income or net loss will be the
difference between (i) the gross income produced by the REMIC's assets,
including stated interest and any original issue discount or market discount
on loans and other assets, and (ii) deductions, including stated interest and
original issue discount accrued on Regular Interest Securities, amortization
of any premium with respect to Loans, and servicing fees and other expenses
of the REMIC. A holder of a Residual Interest Security that is an individual
or a "pass-through interest holder" (including certain pass-through entities,
but not including real estate investment trusts) will be unable to deduct
servicing fees payable on the loans or other administrative expenses of the
REMIC for a given taxable year, to the extent that such expenses, when
aggregated with such holder's other miscellaneous itemized deductions for
that year, do not exceed two percent of such holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the
aggregate fair market value of the regular interests and the residual
interests on the Startup Day (generally, the day that the interests are
issued). That aggregate basis will be allocated among the assets of the
REMIC in proportion to their respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through
Securities accrue original issue discount (i.e., under the constant yield
method taking into account the Prepayment Assumption). The REMIC will deduct
OID on the Regular Interest Securities in the same manner that the holders of
the Regular Interest Securities include such discount in income, but without
regard to the de minimis rules. See "Taxation of Debt Securities" above.
However, a REMIC that acquires loans at a market discount must include such
market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the
life of the loans (taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding
recovery of premium attributable to loans originated on or before such date,
it is possible that such premium may be recovered in proportion to payments
of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited
transaction." For this purpose, net income will be calculated without taking
into account any losses from prohibited transactions or any deductions
attributable to any prohibited transaction that resulted in a loss. In
general, prohibited transactions include: (i) subject to limited exceptions,
the sale or other disposition of any qualified mortgage transferred to the
REMIC; (ii) subject to a limited exception, the sale or other disposition of
a cash flow investment; (iii) the receipt of any income from assets not
permitted to be held by the REMIC pursuant to the Code; or (iv) the receipt
of any fees or other compensation for services rendered by the REMIC. It is
anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition,
subject to a number of exceptions, a tax is imposed at the rate of 100% on
amounts contributed to a REMIC after the close of the three-month period
beginning on the Startup Day. The holders of Residual Interest Securities
will generally be responsible for the payment of any such taxes imposed on
the REMIC. To the extent not paid by such holders or otherwise, however,
such taxes will be paid out of the Trust Fund and will be allocated pro rata
to all outstanding classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
In the opinion of Tax Counsel, the holder of a Certificate representing
a residual interest (a "Residual Interest Security") will take into account
the "daily portion" of the taxable income or net loss of the REMIC for each
day during the taxable year on which such holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the holders (on
such day) of the Residual Interest Securities in proportion to their
respective holdings on such day.
In the opinion of Tax Counsel, the holder of a Residual Interest
Security must report its proportionate share of the taxable income of the
REMIC whether or not it receives cash distributions from the REMIC
attributable to such income or loss. The reporting of taxable income without
corresponding distributions could occur, for example, in certain REMIC issues
in which the loans held by the REMIC were issued or acquired at a discount,
since mortgage prepayments cause recognition of discount income, while the
corresponding portion of the prepayment could be used in whole or in part to
make principal payments on REMIC Regular Interests issued without any
discount or at an insubstantial discount (if this occurs, it is likely that
cash distributions will exceed taxable income in later years). Taxable
income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on REMIC Regular Interest Securities, will typically
increase over time as lower yielding Securities are paid, whereas interest
income with respect to loans will generally remain constant over time as a
percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond
or instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to
the holder's adjusted basis at the end of the calendar quarter in which such
loss arises. A holder's basis in a Residual Interest Security will initially
equal such holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the holder, and decreased
(but not below zero) by the amount of distributions made and the amount of
the REMIC's net loss allocated to the holder. Any disallowed loss may be
carried forward indefinitely, but may be used only to offset income of the
REMIC generated by the same REMIC. The ability of holders of Residual
Interest Securities to deduct net losses may be subject to additional
limitations under the Code, as to which such holders should consult their tax
advisers.
Distributions. In the opinion of Tax Counsel, distributions on a
Residual Interest Security (whether at their scheduled times or as a result
of prepayments) will generally not result in any additional taxable income or
loss to a holder of a Residual Interest Security. If the amount of such
payment exceeds a holder's adjusted basis in the Residual Interest Security,
however, the holder will recognize gain (treated as gain from the sale of the
Residual Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel, a holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the
amount realized and such holder's adjusted basis in the Residual Interest
Security at the time of such sale or exchange. Except to the extent provided
in regulations, which have not yet been issued, any loss upon disposition of
a Residual Interest Security will be disallowed if the selling holder
acquires any residual interest in a REMIC or similar mortgage pool within six
months before or after such disposition.
Excess Inclusions. In the opinion of Tax Counsel, the portion of the
REMIC taxable income of a holder of a Residual Interest Security consisting
of "excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on such holder's federal income tax return.
An exception applies to organizations to which Code Section 593 applies
(generally, certain thrift institutions); however, such exception will not
apply if the aggregate value of the Residual Interest Securities is not
considered to be "significant," as described below. 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 REMIC residual certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1,
1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the
alternative minimum taxable income of a residual holder. First, alternative
minimum taxable income for such residual holder is determined without regard
to the special rule that taxable income cannot be less than excess
inclusions. Second, a residual holder's alternative minimum taxable income
for a tax year cannot be less than excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deductions must
be computed without regard to any excess inclusions. These rules are
effective for tax years beginning after December 31, 1986, unless a residual
holder elects to have such rules apply only to tax years beginning after
August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period
allocable to a Residual Interest Security, over the daily accruals for such
quarterly period of (i) 120% of the long term applicable federal rate on the
Startup Day multiplied by (ii) the adjusted issue price of such Residual
Interest Security at the beginning of such quarterly period. The adjusted
issue price of a Residual Interest at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Interest), increased by the
aggregate of the daily accruals for prior calendar quarters, and decreased
(but not below zero) by the amount of loss allocated to a holder and the
amount of distributions made on the Residual Interest Security before the
beginning of the quarter. The long-term federal rate, which is announced
monthly by the Treasury Department, is an interest rate that is based on the
average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be
made to prevent the ownership of a REMIC residual interest by any
"Disqualified Organization." Disqualified Organizations include the United
States, any State or political subdivision thereof, any foreign government,
any international organization, or any agency or instrumentality of any of
the foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
Sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income. Accordingly, the applicable Pooling and Servicing
Agreement will prohibit Disqualified Organizations from owning a Residual
Interest Security. In addition, no transfer of a Residual Interest Security
will be permitted unless the proposed transferee shall have furnished to the
Trustee an affidavit representing and warranting that it is neither a
Disqualified Organization nor an agent or nominee acting on behalf of a
Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a
Disqualified Organization holds an interest in a pass-through entity after
March 31, 1988 (including, among others, a partnership, trust, real estate
investment trust, regulated investment company, or any person holding as
nominee), that owns a Residual Interest Security, the pass-through entity
will be required to pay an annual tax on its allocable share of the excess
inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all
Federal tax purposes unless no significant purpose of the transfer was to
impede the assessment or collection of tax. A Residual Interest Security is
a "noneconomic residual interest" unless, at the time of the transfer (i) the
present value of the expected future distributions on the Residual Interest
Security at least equals the product of the present value of the anticipated
excess inclusions and the highest rate of tax for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. If a transfer of a Residual
Interest is disregarded, the transferor would be liable for any Federal
income tax imposed upon taxable income derived by the transferee from the
REMIC. The REMIC Regulations provide no guidance as to how to determine if a
significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain
transfers of residual interests by foreign persons to United States persons.
See "--Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS recently released proposed
regulations (the "Proposed Mark-to-Market Regulations") which provide that a
REMIC Residual Interest Security acquired after January 3, 1995 cannot be
marked-to-market. The Proposed Mark-to-Market Regulations change the
temporary regulations discussed below which allowed a REMIC Residual Interest
Security to be marked-to-market provided that it was not a "negative value"
residual interest and did not have the same economic effect as a "negative
value" residual interest. This mark-to-market requirement applies to all
securities of a dealer, except to the extent that the dealer has specifically
identified a security as held for investment. The temporary regulations
released on December 28, 1993 (the "Temporary Mark to Market Regulations")
provided that for purposes of this mark-to-market requirement, a "negative
value" REMIC residual interest is not treated as a security and thus may not
be marked to market. In addition, a dealer was not required to identify such
REMIC Residual Interest Security as held for investment. In general, a REMIC
Residual Interest Security has negative value if, as of the date a taxpayer
acquires the REMIC Residual Interest Security, the present value of the tax
liabilities associated with holding the REMIC Residual Interest Security
exceeds the sum of (i) the present value of the expected future distributions
on the REMIC Residual Interest Security, and (ii) the present value of the
anticipated tax savings associated with holding the REMIC Residual Interest
Security as the REMIC generates losses. The amounts and present values of
the anticipated tax liabilities, expected future distributions and
anticipated tax savings were all to be determined using (i) the prepayment
and reinvestment assumptions adopted under Section 1272(a)(6), or that would
have been adopted had the REMIC's regular interests been issued with OID,
(ii) any required or permitted clean up calls, or required qualified
liquidation provided for in the REMIC's organizational documents and (iii) a
discount rate equal to the "applicable Federal rate" (as specified in Section
1274(d)(1)) that would have applied to a debt instrument issued on the date
of acquisition of the REMIC Residual Interest Security. Furthermore, the
Temporary Mark to Market Regulations provided the IRS with the authority to
treat any REMIC Residual Interest Security having substantially the same
economic effect as a "negative value" residual interest. The IRS could issue
subsequent regulations, which could apply retroactively, providing additional
or different requirements with respect to such deemed negative value residual
interests. Prospective purchasers of a REMIC Residual Interest Security
should consult their tax advisors regarding the possible application of the
Proposed 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 Trustee and the Servicer and
similar fees (collectively, the "Servicing Fee")), at the same time and in
the same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and
paid directly its share of the Servicing Fees. In the case of Pass-Through
Securities other than Stripped Securities, such income will consist of a pro
rata share of all of the income derived from all of the Loans and, in the
case of Stripped Securities, such income will consist of a pro rata share of
the income derived from each stripped bond or stripped coupon in which the
holder owns an interest. The holder of a Security will generally be entitled
to deduct such Servicing Fees under Section 162 or Section 212 of the Code to
the extent that such Servicing Fees represent "reasonable" compensation for
the services rendered by the Trustee and the Servicer (or third parties that
are compensated for the performance of services). In the case of a
noncorporate holder, however, Servicing Fees (to the extent not otherwise
disallowed, e.g., because they exceed reasonable compensation) will be
deductible in computing such holder's regular tax liability only to the
extent that such fees, when added to other miscellaneous itemized deductions,
exceed 2% of adjusted gross income and may not be deductible to any extent in
computing such holder's alternative minimum tax liability. In addition, for
taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation in taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values,
determined as of the time of purchase of the Securities. In the typical
case, the Trustee (to the extent necessary to fulfill its reporting
obligations) will treat each Loan as having a fair market value proportional
to the share of the aggregate principal balances of all of the Loans that it
represents, since the Securities, unless otherwise specified in the related
Prospectus Supplement, will have a relatively uniform interest rate and other
common characteristics. To the extent that the portion of the purchase price
of a Pass-Through Security allocated to a Loan (other than to a right to
receive any accrued interest thereon and any undistributed principal
payments) is less than or greater than the portion of the principal balance
of the Loan allocable to the Security, the interest in the Loan allocable to
the Pass-Through Security will be deemed to have been acquired at a discount
or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess
of a prescribed de minimis amount or a Stripped Security, a holder of a
Security will be required to report as interest income in each taxable year
its share of the amount of OID that accrues during that year in the manner
described above. OID with respect to a Loan could arise, for example, by
virtue of the financing of points by the originator of the Loan, or by virtue
of the charging of points by the originator of the Loan in an amount greater
than a statutory de minimis exception, in circumstances under which the
points are not currently deductible pursuant to applicable Code provisions.
Any market discount or premium on a Loan will be includible in income,
generally in the manner described above, except that in the case of Pass-
Through Securities, market discount is calculated with respect to the Loans
underlying the Certificate, rather than with respect to the Security. A
holder that acquires an interest in a Loan originated after July 18, 1984
with more than a de minimis amount of market discount (generally, the excess
of the principal amount of the Loan over the purchaser's allocable purchase
price) will be required to include accrued market discount in income in the
manner set forth above. See "--Taxation of Debt Securities; Market Discount"
and "--Premium" above.
In the case of market discount on a Pass-Through Security attributable
to Loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount
allocable to each principal payment in ordinary income at the time such
principal payment is made. Such treatment would generally result in discount
being included in income at a slower rate than discount would be required to
be included in income using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to
receive only principal payments on the Loans, or a right to receive certain
payments of both interest and principal. Certain Stripped Securities ("Ratio
Strip Securities") may represent a right to receive differing percentages of
both the interest and principal on each Loan. Pursuant to Section 1286 of
the Code, the separation of ownership of the right to receive some or all of
the interest payments on an obligation from ownership of the right to receive
some or all of the principal payments results in the creation of "stripped
bonds" with respect to principal payments and "stripped coupons" with respect
to interest payments. Section 1286 of the Code applies the OID rules to
stripped bonds and stripped coupons. For purposes of computing original
issue discount, a stripped bond or a stripped coupon is treated as a debt
instrument issued on the date that such stripped interest is purchased with
an issue price equal to its purchase price or, if more than one stripped
interest is purchased, the ratable share of the purchase price allocable to
such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan
principal balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be
treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a Loan by Loan basis, which could result in
some Loans being treated as having more than 100 basis points of interest
stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to
apply to Stripped Securities and other Pass-Through Securities. Under the
method described above for Pay-Through Securities (the "Cash Flow Bond
Method"), a prepayment assumption is used and periodic recalculations are
made which take into account with respect to each accrual period the effect
of prepayments during such period. However, the 1986 Act does not, absent
Treasury regulations, appear specifically to cover instruments such as the
Stripped Securities which technically represent ownership interests in the
underlying Loans, rather than being debt instruments "secured by" those
loans. Nevertheless, it is believed that the Cash Flow Bond Method is a
reasonable method of reporting income for such Securities, and it is expected
that OID will be reported on that basis unless otherwise specified in the
related Prospectus Supplement. In applying the calculation to Pass-Through
Securities, the Trustee will treat all payments to be received by a holder
with respect to the underlying Loans as payments on a single installment
obligation. The IRS could, however, assert that original issue discount must
be calculated separately for each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a holder's recognition of income. If, however, the Loans prepay
at a rate slower than the Prepayment Assumption, in some circumstances the
use of this method may decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the Trustee intends, absent contrary authority, to report income to
SecurityholdersasOID, inthemannerdescribedaboveforInterestWeightedSecurities.
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)(6)(B) of the Code, and "loans secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; and interest income attributable to the Securities should be
considered to represent "interest on obligations secured by mortgages on real
property or on interests in real property" within the meaning of Section
856(c)(3)(B) of the Code. Reserves or funds underlying the Securities may
cause a proportionate reduction in the above-described qualifying status
categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, in the opinion of Tax Counsel, a holder's tax
basis in its Security is the price such holder pays for a Security, plus
amounts of original issue or market discount included in income and reduced
by any payments received (other than qualified stated interest payments) and
any amortized premium. Gain or loss recognized on a sale, exchange, or
redemption of a Security, measured by the difference between the amount
realized and the Security's basis as so adjusted, will generally be capital
gain or loss, assuming that the Security is held as a capital asset. 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. For
taxable years beginning after December 31, 1993, the maximum tax rate on
ordinary income for individual taxpayers is 39.6% and the maximum tax rate on
long-term capital gains reported after December 31, 1990 for such taxpayers
is 28%. The maximum tax rate on both ordinary income and long-term capital
gains of corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a holder, other than
a holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to
distributions or the proceeds of a sale of certificates to or through brokers
that represent interest or original issue discount on the Securities. This
withholding generally applies if the holder of a Security (i) fails to
furnish the Trustee with its taxpayer identification number ("TIN"); (ii)
furnishes the Trustee an incorrect TIN; (iii) fails to report properly
interest, dividends or other "reportable payments" as defined in the Code; or
(iv) under certain circumstances, fails to provide the Trustee or such
holder's securities broker with a certified statement, signed under penalty
of perjury, that the TIN provided is its correct number and that the holder
is not subject to backup withholding. Backup withholding will not apply,
however, with respect to certain payments made to holders, including payments
to certain exempt recipients (such as exempt organizations) and to certain
Nonresidents (as defined below). Holders should consult their tax advisers
as to their qualification for exemption from backup withholding and the
procedure for obtaining the exemption.
The Trustee will report to the holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and
the amount of tax withheld, if any, with respect to payments on the
Securities.
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 which would require such amounts to be taken into
account at an earlier time in order to prevent the avoidance of tax. Such
regulations could, for example, require withholding prior to the distribution
of cash in the case of Residual Interest Securities that do not have
significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest
Security to a Nonresident will be disregarded for all Federal tax purposes.
A Residual Interest Security has tax avoidance potential unless, at the time
of the transfer the transferor reasonably expects that the REMIC will
distribute to the transferee residual interest holder amounts that will equal
at least 30% of each excess inclusion, and that such amounts will be
distributed at or after the time at which the excess inclusions accrue and
not later than the calendar year following the calendar year of accrual. If
a Nonresident transfers a Residual Interest Security to a United States
person, and if the transfer has the effect of allowing the transferor to
avoid tax on accrued excess inclusions, then the transfer is disregarded and
the transferor continues to be treated as the owner of the Residual Interest
Security for purposes of the withholding tax provisions of the Code. See "--
Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
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 (1) the
Trust Fund will not have certain characteristics necessary for a business
trust to be classified as an association taxable as a corporation and (2) the
nature of the income of the Trust Fund will exempt it from the rule that
certain publicly traded partnerships are taxable as corporations or the
issuance of the Certificates has been structured as a private placement under
an IRS safe harbor, so that the Trust Fund will not be characterized as a
publicly traded partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available
to make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the
Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. In such a circumstance, Tax Counsel
is, except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified
stated interest" under the OID regulations, and that any OID on the Notes
(i.e., any excess of the principal amount of the Notes over their issue
price) does not exceed a de minimis amount (i.e., 0.25% of their principal
amount multiplied by the number of full years included in their term), all
within the meaning of the OID regulations. If these conditions are not
satisfied with respect to any given series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the applicable
Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of Tax Counsel, the
Notes will not be considered issued with OID. The stated interest thereon
will be taxable to a Noteholder as ordinary interest income when received or
accrued in accordance with such Noteholder's method of tax accounting. Under
the OID regulations, a holder of a Note issued with a de minimis amount of
OID must include such OID in income, on a pro rata basis, as principal
payments are made on the Note. It is believed that any prepayment premium
paid as a result of a mandatory redemption will be taxable as contingent
interest when it becomes fixed and unconditionally payable. A purchaser who
buys a Note for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules
of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain
cash method holders, including regulated investment companies, as set forth
in Section 1281 of the Code) generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the Short-Term Note). However, a
cash basis holder of a Short-Term Note reporting interest income as it is
paid may be required to defer a portion of any interest expense otherwise
deductible on indebtedness incurred to purchase or carry the Short-Term Note
until the taxable disposition of the Short-Term Note. A cash basis taxpayer
may elect under Section 1281 of the Code to accrue interest income on all
nongovernment debt obligations with a term of one year or less, in which case
the taxpayer would include interest on the Short-Term Note in income as it
accrues, but would not be subject to the interest expense deferral rule
referred to in the preceding sentence. Certain special rules apply if a
Short-Term Note is purchased for more or less than its principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the
holder's adjusted tax basis in the Note. The adjusted tax basis of a Note to
a particular Noteholder will equal the holder's cost for the Note, increased
by any market discount, acquisition discount, OID and gain previously
included by such Noteholder in income with respect to the Note and decreased
by the amount of bond premium (if any) previously amortized and by the amount
of principal payments previously received by such Noteholder with respect to
such Note. Any such gain or loss will be capital gain or loss if the Note
was held as a capital asset, except for gain representing accrued interest
and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made
(or accrued) to a Noteholder who is a nonresident alien, foreign corporation
or other non-United States person (a "foreign person") generally will be
considered "portfolio interest", and generally will not be subject to United
States federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the
United States by the foreign person and the foreign person (i) is not
actually or constructively a "10 percent shareholder" of the Trust or the
Seller (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or the
Seller is a "related person" within the meaning of the Code and (ii) provides
the Owner Trustee or other person who is otherwise required to withhold U.S.
tax with respect to the Notes with an appropriate statement (on Form W-8 or a
similar form), signed under penalties of perjury, certifying that the
beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding
agent; in that case, however, the signed statement must be accompanied by a
Form W-8 or substitute form provided by the foreign person that owns the
Note. If such interest is not portfolio interest, then it will be subject to
United States federal income and withholding tax at a rate of 30 percent,
unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days
or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the
holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might
be treated as equity interests in the Trust Fund. If so treated, the Trust
Fund might be 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 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 should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining principal balance of the Loans at the time of purchase.
If so, in the opinion of Tax Counsel, the Loan will have been acquired at a
premium or discount, as the case may be. (As indicated above, the Trust Fund
will make this calculation on an aggregate basis, but might be required to
recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as
it accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. In the opinion of Tax Counsel, under Section
708 of the Code, the Trust Fund will be deemed to terminate for federal
income tax purposes if 50% or more of the capital and profits interests in
the Trust Fund are sold or exchanged within a 12-month period. If such a
termination occurs, the Trust Fund will be considered to distribute its
assets to the partners, who would then be treated as recontributing those
assets to the Trust Fund as a new partnership. The Trust Fund will not
comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Trust Fund may be subject
to certain tax penalties and may incur additional expenses if it is required
to comply with those requirements. Furthermore, the Trust Fund might not be
able to comply due to lack of data.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an
amount equal to the difference between the amount realized and the seller's
tax basis in the Certificates sold. A Certificateholder's tax basis in a
Certificate will generally equal the holder's cost increased by the holder's
share of Trust Fund income (includible in income) and decreased by any
distributions received with respect to such Certificate. In addition, both
the tax basis in the Certificates and the amount realized on a sale of a
Certificate would include the holder's share of the Notes and other
liabilities of the Trust Fund. A holder acquiring Certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in
such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Receivables would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates
owned by them as of the close of the last day of such month. As a result, a
holder purchasing Certificates may be allocated tax items (which will affect
its tax liability and tax basis) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Certificateholders.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to
reflect that higher (or lower) basis unless the Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records,
as well as potentially onerous information reporting requirements, the Trust
Fund will not make such election. As a result, Certificateholders might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and
the fiscal year of the Trust will be the calendar year. The Trustee will
file a partnership information return (IRS Form 1065) with the IRS for each
taxable year of the Trust Fund and will report each Certificateholder's
allocable share of items of Trust Fund income and expense to holders and the
IRS on Schedule K-1. The Trust Fund will provide the Schedule K-l
information to nominees that fail to provide the Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Certificates.
Generally, holders must file tax returns that are consistent with the
information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies .
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes
(i) the name, address and taxpayer identification number of the nominee and
(ii) as to each beneficial owner (x) the name, address and identification
number of such person, (y) whether such person is a United States person, a
tax-exempt entity or a foreign government, an international organization, or
any wholly owned agency or instrumentality of either of the foregoing, and
(z) certain information on Certificates that were held, bought or sold on
behalf of such person throughout the year. In addition, brokers and
financial institutions that hold Certificates through a nominee are required
to furnish directly to the Trust Fund information as to themselves and their
ownership of Certificates. A clearing agency registered under Section 17A of
the 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 withhold as if it
were so engaged in order to protect the Trust Fund from possible adverse
consequences of a failure to withhold. The Trust Fund expects to withhold on
the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other
foreign holders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Trust to change its
withholding procedures. In determining a holder's withholding status, the
Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust on Form W-8 in order to assure appropriate crediting
of the taxes withheld. A foreign holder generally would be entitled to file
with the IRS a claim for refund with respect to taxes withheld by the Trust
Fund taking the position that no taxes were due because the Trust Fund was
not engaged in a U.S. trade or business. However, interest payments made (or
accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. If these interest payments
are properly characterized as guaranteed payments, then the interest will not
be considered "portfolio interest." As a result, Certificateholders will be
subject to United States federal income tax and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable treaty.
In such case, a foreign holder would only be entitled to claim a refund for
that portion of the taxes in excess of the taxes that should be withheld with
respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Material Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Securities. State and local income tax law
may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences
of an investment in the Securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into
subclasses. If Securities are divided into subclasses the related Prospectus
Supplement will contain information concerning considerations relating to
ERISA and the Code that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively "Plans") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Generally, ERISA applies to investments made by
Plans. Among other things, ERISA requires that the assets of Plans be held
in trust and that the trustee, or other duly authorized fiduciary, have
exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans. Under ERISA, any person who exercises any authority or control
respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). Certain employee benefit plans, such as governmental plans
(as defined in ERISA Section 3(32)) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in ERISA Section 3(33)),
are not subject to ERISA requirements. Accordingly, assets of such plans may
be invested in Securities without regard to the ERISA considerations
described above and below, subject to the provisions of applicable state law.
Any such plan which is qualified and exempt from taxation under Code Sections
401(a) and 501(a), however, is subject to the prohibited transaction rules
set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain
other entities in which a Plan makes an "equity" investment could be deemed
for purposes of ERISA to be assets of the investing Plan in certain
circumstances. However, the regulation provides that, generally, the assets
of a corporation or partnership in which a Plan invests will not be deemed
for purposes of ERISA to be assets of such Plan if the equity interest
acquired by the investing Plan is a publicly-offered security. A
publicly-offered security, as defined in the Labor Reg. Section 2510.3-101,
is a security that is widely held, freely transferable and registered under
the Securities Exchange Act of 1934, as amended.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan. Because
the Loans may be deemed Plan assets of each Plan that purchases Securities,
an investment in the Securities by a Plan might be a prohibited transaction
under ERISA Sections 406 and 407 and subject to an excise tax under Code
Section 4975 unless a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's
prohibited transaction rules certain transactions relating to the operation
of residential mortgage pool investment trusts and the purchase, sale and
holding of "mortgage pool pass-through certificates" in the initial issuance
of such certificates. PTE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans related to the origination, maintenance
and termination of mortgage pools consisting of mortgage loans secured by
first or second mortgages or deeds of trust on single-family residential
property, and the acquisition and holding of certain mortgage pool pass-
through certificates representing an interest in such mortgage pools by
Plans. If the general conditions (discussed below) of PTE 83-1 are
satisfied, investments by a Plan in Securities that represent interests in a
Pool consisting of Loans ("Single Family Securities") will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid
to the pool sponsor, the Plan does not purchase more than 25% of all Single
Family Securities, and at least 50% of all Single Family Securities are
purchased by persons independent of the pool sponsor or pool trustee. PTE
83-1 does not provide an exemption for transactions involving Subordinate
Securities. Accordingly, unless otherwise provided in the related Prospectus
Supplement, no transfer of a Subordinate Security or a Security which is not
a Single Family Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The Depositor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include: (i)
Securities issued in a Series consisting of only a single class of
Securities; and (ii) Securities issued in a Series in which there is only one
class of Trust Securities; provided that the Securities in the case of clause
(i), or the Securities in the case of clause (ii), evidence the beneficial
ownership of both a specified percentage of future interest payments (greater
than 0%) and a specified percentage (greater than 0%) of future principal
payments on the Loans. It is not clear whether a class of Securities that
evidences the beneficial ownership in a Trust Fund divided into Loan groups,
beneficial ownership of a specified percentage of interest payments only or
principal payments only, or a notional amount of either principal or interest
payments, or a class of Securities entitled to receive payments of interest
and principal on the Loans only after payments to other classes or after the
occurrence of certain specified events would be a "mortgage pass-through
certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Securityholders against reductions
in pass-through payments due to property damage or defaults in loan payments
in an amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal
balance of the largest covered pooled mortgage loan; (ii) the existence of a
pool trustee who is not an affiliate of the pool sponsor; and (iii) a
limitation on the amount of the payment retained by the pool sponsor,
together with other funds inuring to its benefit, to not more than adequate
consideration for selling the mortgage loans plus reasonable compensation for
services provided by the pool sponsor to the Pool. The Depositor believes
that the first general condition referred to above will be satisfied with
respect to the Securities in a Series issued without a subordination feature,
or the Securities only in a Series issued with a subordination feature,
provided that the subordination and Reserve Account, subordination by
shifting of interests, the pool insurance or other form of credit enhancement
described herein (such subordination, pool insurance or other form of credit
enhancement being the system of insurance or other protection referred to
above) with respect to a Series of Securities is maintained in an amount not
less than the greater of one percent of the aggregate principal balance of
the Loans or the principal balance of the largest Loan. See "Description of
the Securities" herein. In the absence of a ruling that the system of
insurance or other protection with respect to a Series of Securities
satisfies the first general condition referred to above, there can be no
assurance that these features will be so viewed by the DOL. The Trustee will
not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTE 83-1 have been satisfied, or as to the
availability of any other prohibited transaction exemptions. Each Plan
fiduciary should also determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the
Securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
On September 6, 1990 the DOL issued to Greenwich Capital Markets, Inc.,
an individual exemption (Prohibited Transaction Exemption 90-59; Exemption
Application No. D-8374, 55 Fed. Reg. 36724) (the "Underwriter Exemption")
which applies to certain sales and servicing of "certificates" that are
obligations of a "trust" with respect to which Greenwich Capital Markets,
Inc. is the underwriter, manager or co-manager of an underwriting syndicate.
The Underwriter Exemption provides relief which is generally similar to that
provided by PTE 83-1, but is broader in several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTE 83-l. The Underwriter Exemption contains an
expanded definition of "certificate" which includes an interest which
entitles the holder to pass-through payments of principal, interest and/or
other payments. The Underwriter Exemption contains an expanded definition of
"trust" which permits the trust corpus to consist of secured consumer
receivables. The definition of "trust", however, does not include any
investment pool unless, inter alia, (i) the investment pool consists only of
assets of the type which have been included in other investment pools, (ii)
certificates evidencing interests in such other investment pools have been
purchased by investors other than Plans for at least one year prior to the
Plan's acquisition of certificates pursuant to the Underwriter Exemption, and
(iii) certificates in such other investment pools have been rated in one of
the three highest generic rating categories of the four credit rating
agencies noted below. Generally, the Underwriter Exemption holds that the
acquisition of the certificates by a Plan must be on terms (including the
price for the certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party. The
Underwriter Exemption requires that the rights and interests evidenced by the
certificates not be "subordinated" to the rights and interests evidenced by
other certificates of the same trust. The Underwriter Exemption requires
that certificates acquired by a Plan have received a rating at the time of
their acquisition that is in one of the three highest generic rating
categories of Standard & Poor's Corporation, Moody's Investors Service, Inc.,
Duff & Phelps Inc. or Fitch Investors Service, Inc. The Underwriter
Exemption specifies that the pool trustee must not be an affiliate of the
pool sponsor, nor an affiliate of the Underwriter, the pool servicer, any
obligor with respect to mortgage loans included in the trust constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the trust, or any affiliate of such entities. Finally, the
Underwriter Exemption stipulates that any Plan investing in the certificates
must be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D
of the Securities and Exchange Commission under the Securities Act of 1933.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the
Code, the applicability of PTE 83-1 and the Underwriter Exemption, and the
potential consequences in their specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify
which, if any, of the classes of Securities offered thereby constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of Securities that qualify as
"mortgage related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts, and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulations to the same
extent as, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any such entities. Under
SMMEA, if a state enacted legislation prior to October 4, 1991 specifically
limiting the legal investment authority of any such entities with respect to
"mortgage related securities", securities will constitute legal investments
for entities subject to such legislation only to the extent provided therein.
Approximately twenty-one states adopted such legislation prior to the October
4, 1991 deadline. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in securities, or require the sale or
other disposition of securities, so long as such contractual commitment was
made or such securities were acquired prior to the enactment of such
legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the
applicable federal authority may prescribe. In this connection, federal
credit unions should review the National Credit Union Administration ("NCUA")
Letter to Credit Unions No. 96, as modified by Letter to Credit Unions No.
108, which includes guidelines to assist federal credit unions in making
investment decisions for mortgage related securities and the NCUA's
regulation "Investment and Deposit Activities" (12 C.F.R. Part 703), which
sets forth certain restrictions on investment by federal credit unions in
mortgage related securities.
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on
the Securities Activities (to the extent adopted by their respective
regulators) (the "Policy Statement") setting forth, in relevant part, certain
securities trading and sales practices deemed unsuitable for an institution's
investment portfolio, and guidelines for (and restrictions on) investing in
mortgage derivative products, including "mortgage related securities", which
are "high-risk mortgage securities" as defined in the Policy Statement.
According to the Policy Statement such "high-risk mortgage securities"
include securities such as Securities not entitled to distributions allocated
to principal or interest, or Subordinated Securities. Under the Policy
Statement, it is the responsibility of each depository institution to
determine, prior to purchase (and at stated intervals thereafter), whether a
particular mortgage derivative product is a "high-risk mortgage security",
and whether the purchase (or retention) of such a product would be consistent
with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to "prudent investor" provisions which may restrict or prohibit
investment in securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depositors institutions, either to purchase Securities or to
purchase Securities representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Securities constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Securities may be effected from
time to time in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices to be determined at the
time of sale or at the time of commitment therefor. If so specified in the
related Prospectus Supplement, the Securities will be distributed in a firm
commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Greenwich Capital Markets, Inc. ("GCM") acting as
underwriter with other underwriters, if any, named therein. In such event,
the related Prospectus Supplement may also specify that the underwriters will
not be obligated to pay for any Securities agreed to be purchased by
purchasers pursuant to purchase agreements acceptable to the Depositor. In
connection with the sale of the Securities, underwriters may receive
compensation from the Depositor or from purchasers of the Securities in the
form of discounts, concessions or commissions. The related Prospectus
Supplement will describe any such compensation paid by the Depositor.
Alternatively, the related Prospectus Supplement may specify that the
Securities will be distributed by GCM acting as agent or in some cases as
principal with respect to Securities that it has previously purchased or
agreed to purchase. If GCM acts as agent in the sale of Securities, GCM will
receive a selling commission with respect to each Series of Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related Trust Fund Assets as of the Cut-off Date.
The exact percentage for each Series of Securities will be disclosed in the
related Prospectus Supplement. To the extent that GCM elects to purchase
Securities as principal, GCM may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of
Securities of such Series.
The Depositor will indemnify GCM and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments GCM and any underwriters may be required to make
in respect thereof.
In the ordinary course of business, GCM and the Depositor may engage in
various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's loans or private
asset backed securities, pending the sale of such loans or private asset
backed securities, or interests therein, including the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Holders of Securities should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Securities of each Series, including certain
material federal income tax consequences with respect thereto, will be passed
upon for the Depositor by Brown & Wood LLP, New York, New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been
rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies (each, a "Rating Agency")
specified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund Assets and any credit enhancement with respect to
such class and will reflect such Rating Agency's assessment solely of the
likelihood that holders of a class of Securities of such class will receive
payments to which such Securityholders are entitled under the related
Agreement. Such rating will not constitute an assessment of the likelihood
that principal prepayments on the related Loans will be made, the degree to
which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination of the Series of
Securities. Such rating should not be deemed a recommendation to purchase,
hold or sell Securities, inasmuch as it does not address market price or
suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield
or that an investor purchasing a Security at a significant premium might fail
to recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to
any erosion in the adequacy of the value of the Trust Fund Assets or any
credit enhancement with respect to a Series, such rating might also be
lowered or withdrawn among other reasons, because of an adverse change in the
financial or other condition of a credit enhancement provider or a change in
the rating of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series.
Such criteria are sometimes based upon an actuarial analysis of the behavior
of mortgage loans in a larger group. Such analysis is often the basis upon
which each Rating Agency determines the amount of credit enhancement required
with respect to each such class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately
reflect future experience nor any assurance that the data derived from a
large pool of mortgage loans accurately predicts the delinquency, foreclosure
or loss experience of any particular pool of Loans. No assurance can be
given that values of any Properties have remained or will remain at their
levels on the respective dates of origination of the related Loans. If the
residential real estate markets should experience an overall decline in
property values such that the outstanding principal balances of the Loans in
a particular Trust Fund and any secondary financing on the related Properties
become equal to or greater than the value of the Properties, the rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In additional,
adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Loans and, accordingly, the rates of
delinquencies, foreclosures and losses with respect to any Trust Fund. To
the extent that such losses are not covered by credit enhancement, such
losses will be borne, at least in part, by the holders of one or more classes
of the Securities of the related Series.