PROSPECTUS SUPPLEMENT
(To Prospectus dated September 9, 1997)
(CITYSCAPE LOGO)
CITYSCAPE HOME LOAN OWNER TRUST 1997-4
$61,000,000 CLASS A-1 VARIABLE RATE HOME LOAN ASSET BACKED NOTES
$46,000,000 CLASS A-2 6.77% HOME LOAN ASSET BACKED NOTES
$11,000,000 CLASS A-3 7.09% HOME LOAN ASSET BACKED NOTES
$13,500,000 CLASS A-4 7.44% HOME LOAN ASSET BACKED NOTES
$11,500,000 CLASS A-5 7.01% HOME LOAN ASSET BACKED NOTES
$29,500,000 CLASS M-1 7.56% HOME LOAN ASSET BACKED NOTES
$13,500,000 CLASS M-2 7.71% HOME LOAN ASSET BACKED NOTES
$12,000,000 CLASS B 7.94% HOME LOAN ASSET BACKED NOTES
HOME LOAN ASSET BACKED NOTES
DISTRIBUTIONS PAYABLE ON THE 25TH DAY OF EACH MONTH, COMMENCING IN OCTOBER 1997
FINANCIAL ASSET SECURITIES CORP.,
as Depositor
CITYSCAPE CORP.,
as Servicer
-----------
The Cityscape Home Loan Owner Trust 1997-4 (the "Trust") will be
formed pursuant to a trust agreement to be dated as of August 31, 1997 (the
"Trust Agreement") and entered into by Financial Asset Securities Corp., as
depositor (the "Depositor"), Wilmington Trust Company, as owner trustee (the
"Owner Trustee"), U.S. Bank National Association, dba First Bank National
Association, as co-owner trustee (in such capacity, the "Co-Owner Trustee")
and Cityscape Funding Corporation V (the "Transferor"). The Trust will issue
$198,000,000 aggregate principal amount of Home Loan Asset Backed Notes (the
"Notes") pursuant to an indenture to be dated as of August 31, 1997 (the
"Indenture"), between the Trust and U.S. Bank National Association, dba First
Bank National Association, as indenture trustee (in such capacity, the
"Indenture Trustee"). The Trust will also issue instruments evidencing the
residual interest in the Trust (the "Residual Interest"). Only the Notes are
offered hereby.
Underwriting Proceeds to
Price to Public Discount Depositor(2)
Class A-1 Notes . . . . . . . . . .100.000000% 0.200% 99.800000%
Class A-2 Notes(1) . . . . . . . . 99.984375% 0.275% 99.709375%
Class A-3 Notes(1) . . . . . . . .100.000000% 0.320% 99.680000%
Class A-4 Notes(1) . . . . . . . . 99.968750% 0.400% 99.568750%
Class A-5 Notes(1) . . . . . . . . 99.953125% 0.320% 99.633125%
Class M-1 Notes(1) . . . . . . . . 99.968750% 0.500% 99.468750%
Class M-2 Notes(1) . . . . . . . . 99.984375% 0.600% 99.384375%
Class B Notes(1) . . . . . . . . . 99.984375% 0.750% 99.234375%
Total . . . . . . . . . . . . . . . $197,970,000 $693,000 $197,277,000
(1) Plus accrued interest, if any, at the applicable rate from September 1,
1997.
(2) Before deducting expenses, estimated to be $350,000.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
NOTES, SEE THE INFORMATION HEREIN UNDER "RISK FACTORS" BEGINNING ON PAGE S-11
AND IN THE PROSPECTUS BEGINNING ON PAGE 11.
____________________
THE NOTES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, TRANSFEROR, SERVICER,
OWNER TRUSTEE, INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO THE
EXTENT PROVIDED HEREIN. NEITHER THE LOANS NOR THE NOTES ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THE 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 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.
____________________
BEAR, STEARNS & CO. INC.
September 9, 1997
THE YIELDS TO MATURITY OF 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. THE YIELD
TO INVESTORS ON THE CLASS A-1 NOTES ALSO WILL BE SENSITIVE TO, AMONG OTHER
THINGS, THE LEVEL OF THE LONDON INTERBANK OFFERED RATE FOR ONE-MONTH UNITED
STATES DOLLAR DEPOSITS ("ONE-MONTH LIBOR"). NOTEHOLDERS SHOULD CONSIDER, IN
THE CASE OF ANY NOTES PURCHASED AT A DISCOUNT, THE RISK THAT A LOWER 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.
The Trust will primarily consist of a pool (the "Pool") of home loans
(the "Loans") secured by either mortgages, deeds of trust or other similar
security instruments (the "Mortgages") as described herein under "The Pool."
Loans having an aggregate unpaid principal balance as of August 31, 1997 (the
"Initial Cut-Off Date") of approximately $151,169,569.92 (the "Initial
Loans") have been designated for inclusion in the Pool. On or prior to
October 31, 1997, the Trust may purchase additional loans (the "Subsequent
Loans") having an aggregate unpaid principal balance of up to approximately
$48,830,430.08 with amounts on deposit in an account (the "Pre-Funding
Account") established for such purpose on the Closing Date.
Distributions on the Notes will be made to the holders of the Notes (the
"Noteholders") on the 25th day of each month or, if such day is not a
Business Day (as defined herein), the next succeeding Business Day (each, a
"Distribution Date"), beginning in October 1997. The Notes are secured by
the assets of the Trust pursuant to the Indenture. 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 under "Description of the Notes--Distributions on the Notes."
Distributions of interest on the Class B Notes will be subordinated in
priority to distributions of interest on the Class M-1 and Class M-2 Notes
(together, the "Mezzanine Notes") which, in turn, will be subordinated in
priority to distributions of interest on the Class A-1, Class A-2, Class A-3,
Class A-4 and Class A-5 Notes (the "Senior Notes") as described herein.
Distributions of principal on the Class B Notes will be subordinated in
priority to distributions of principal on the Mezzanine Notes which, in turn,
will be subordinated in priority to distributions of principal of the Senior
Notes as described herein.
Greenwich Capital Markets, Inc. and Bear, Stearns & Co. Inc. (together,
the "Underwriters") intend to make a secondary market in the applicable
Classes of Notes but have 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.
____________________
The applicable Classes of Notes are offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters
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
September 12, 1997.
____________________
Certain persons participating in this offering may engage in
transactions that stabilize, maintain, or otherwise affect the price of the
Notes. Such transactions may include stabilizing and the purchase of Notes
to cover syndicate short positions. For a description of these activities,
see "Method of Distribution" herein.
This Prospectus Supplement does not contain complete information about
the offering of the Notes. Additional information is contained in the
Prospectus dated September 9, 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.
Upon written request, Cityscape Corp. ("Cityscape") will make available
its most recent audited financial statements. Requests should be directed to
Cityscape Corp., 565 Taxter Road, Elmsford, New York 10523, Attention: Cheryl
P. Carl, Senior Vice President.
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." 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).
Requests should be made in writing to Peter McMullin, Vice President of
Financial Asset Securities Corp., at 600 Steamboat Road, Greenwich,
Connecticut 06830.
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.
Trust . . . . . . . . . . . . . . Cityscape Home Loan Owner Trust
1997-4 (the "Trust" or the
"Issuer"), a Delaware business
trust, will be established
pursuant to a trust agreement to
be dated as of August 31, 1997
(the "Trust Agreement"), among the
Depositor, the Owner Trustee, the
Co-Owner Trustee and the
Transferor.
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.
("Greenwich"). 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 will insure or
guarantee or otherwise be
obligated with respect to the
Notes.
Servicer . . . . . . . . . . . . Cityscape Corp. (the "Servicer"),
a New York corporation, in its
capacity as servicer of the Loans.
Transferor . . . . . . . . . . . Cityscape Funding Corporation V
(the "Transferor"), a Delaware
corporation, in its capacity as
transferor of the Loans to the
Depositor.
Indenture Trustee . . . . . . . . U.S. Bank National Association,
dba First Bank National
Association, a national banking
association, as the indenture
trustee (in such capacity, the
"Indenture Trustee") under an
indenture to be dated as of August
31, 1997 (the "Indenture") between
the Trust and the Indenture
Trustee.
Owner Trustee and Co-Owner Trustee
Wilmington Trust Company, a
Delaware banking corporation, as
owner trustee under the Trust
Agreement (the "Owner Trustee")
and U.S. Bank National
Association, dba First Bank
National Association, as co-owner
trustee under the Trust Agreement
(in such capacity, the "Co-Owner
Trustee").
Custodian . . . . . . . . . . . . U.S. Bank National Association,
dba First Bank National
Association, as the custodian (the
"Custodian") under the Custodial
Agreement to be dated as of August
31, 1997 by and among the Trust,
the Depositor, the Transferor, the
Servicer, the Indenture Trustee
and the Custodian.
Closing Date . . . . . . . . . . On or about September 12, 1997.
Cut-Off Date . . . . . . . . . . With respect to the Initial Loans,
the close of business on August
31, 1997 (the "Initial Cut-Off
Date"). With respect to the
Subsequent Loans, the close of
business on the date specified as
such in the related Subsequent
Transfer Agreement (as defined
herein).
Distribution Date . . . . . . . . The 25th day of each month or, if
such day is not a Business Day,
the next succeeding Business Day,
commencing in October 1997 (each,
a "Distribution Date").
Due Period . . . . . . . . . . . With respect to a Distribution
Date, the calendar month
immediately preceding such
Distribution Date (each, a "Due
Period").
Determination Date . . . . . . . The fourteenth calendar day of
each month or, if such day is not
a Business Day, the immediately
preceding Business Day (each, a
"Determination Date").
Record Date . . . . . . . . . . . With respect to each Distribution
Date, the close of business on the
last Business Day of the month
immediately preceding the month in
which each Distribution Date
occurs (each, a "Record Date").
The Notes . . . . . . . . . . . . The Trust will issue the Classes
of Notes pursuant to the Indenture
in the respective aggregate
initial principal amounts
specified on the cover hereof
(each such aggregate principal
amount being the "Original Class
Principal Balance" for the related
Class). The Notes will be secured
by the assets of the Trust
pursuant to the Indenture and will
be senior in right of payment to
the Residual Interest. In
addition, as described herein, the
Class A-1, Class A-2, Class A-3,
Class A-4 and Class A-5 Notes (the
"Senior Notes") will also be
senior in the right to receive
certain payments relative to the
Class M-1 and Class M-2 Notes
(together, the "Mezzanine Notes"),
which will be senior in the right
to receive certain payments
relative to the Class B Notes.
Payments in respect of interest on
the Notes will be made prior to
payments of principal of the
Notes. Interest will accrue on
the Class A-1 Notes with respect
to each Distribution Date at a per
annum rate equal to the lesser of
(a) One-Month LIBOR plus 0.14% or
(b) 12.0% (with respect to such
Class, the "Note Interest Rate").
Interest will accrue on each Class
of Notes other than the Class A-1
Notes at the applicable per annum
rate set forth herein under
"Description of the Notes--Related
Definitions" (as to each such
Class, the "Note Interest Rate").
Interest on the Class A-1 Notes
with respect to any Distribution
Date will accrue based on the
actual number of days included in
the period commencing on the
immediately preceding Distribution
Date (or the Closing Date in the
case of the first Distribution
Date) and ending on the day
immediately preceding such
Distribution Date and will be
calculated based on a 360-day
year. Interest on the Notes other
than the Class A-1 Notes will
accrue on the basis of a 360-day
year consisting of twelve 30-day
months. See "Description of the
Notes--Distributions on the Notes"
herein.
Priority of Distributions
Regular Distribution Amount . . . The Regular Distribution Amount
(as defined herein) will be
distributed on each Distribution
Date in the following order of
priority: (i) to pay accrued and
unpaid interest on the Senior
Notes, pro rata, based on the
amount of interest distributable
in respect of each such Class
calculated at the related Note
Interest Rate; (ii) to pay accrued
and unpaid interest, first, on the
Class M-1 Notes and, second, on
the Class M-2 Notes; (iii) to pay
accrued and unpaid interest on the
Class B Notes; (iv) first, to pay
the Class A-5 Priority Principal
Distribution Amount (as defined
herein) on the Class A-5 Notes
until the Class Principal Balance
thereof is reduced to zero and,
second, to pay as principal 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, the amount
necessary to reduce the aggregate
Class Principal Balance of the
Senior Notes to the Senior Optimal
Principal Balance (as defined
herein); (v) to pay as principal
of the Class M-1 and Class M-2
Notes, in that order, the amount
necessary to reduce the Class
Principal Balances thereof to the
Class M-1 and Class M-2 Optimal
Principal Balances, respectively;
(vi) to pay as principal of the
Class B Notes, the amount
necessary to reduce the Class
Principal Balance thereof to zero;
(vii) to pay to the Class M-1,
Class M-2 and Class B Notes, in
that order, their respective Loss
Reimbursement Deficiencies (as
defined herein), if any; and
(viii) to pay any remaining amount
to the Residual Interest.
Excess Spread . . . . . . . . . The Excess Spread (as defined
herein) will be distributed on
each Distribution Date in the
following order of priority (after
giving effect to all distributions
specified above under "--Regular
Distribution Amount"): (i) in an
amount equal to the
Overcollateralization Deficiency
Amount (as defined herein), if
any, as follows: (A) (1) to pay to
the Class A-5 Notes the Class A-5
Priority Excess Spread
Distribution Amount (as defined
herein), until the Class Principal
Balance thereof is reduced to zero
and (2) to pay as principal 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, the amount
necessary to reduce the aggregate
Class Principal Balance of the
Senior Notes to the Senior Optimal
Principal Balance; (B) to pay as
principal of the Class M-1 and
Class M-2 Notes, in that order,
the amount necessary to reduce the
respective Class Principal
Balances thereof to the Class M-1
and Class M-2 Optimal Principal
Balances, respectively; and (C) to
pay as principal of the Class B
Notes, the amount necessary to
reduce the Class Principal Balance
thereof to zero; (ii) to pay to
the Class M-1, Class M-2 and
Class B Notes, in that order,
their respective Loss
Reimbursement Deficiencies, if
any; and (iii) to pay any
remaining amount to the Residual
Interest.
Final Maturity Date . . . . . . . The Class Principal Balance of
each Class of Notes, to the extent
not previously paid, will be
payable in full on the
Distribution Date in October 2018
(the "Final Maturity Date"),
although it is anticipated that
the actual final Distribution Date
for each such Class will occur
significantly earlier than the
Final Maturity Date.
Form and Registration of the Notes
The Notes will be available in
book-entry form. Persons acquiring
beneficial ownership interests in
the Notes ("Note Owners") will
hold such Notes through the book
entry facilities of The Depository
Trust Company ("DTC"). Transfers
within DTC will be 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 will
be evidenced by one or more
certificates registered in the
name of the nominee of DTC. The
interests of the Note Owners will
be represented by book-entries on
the records of DTC and
participating members thereof. No
Note Owner 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 Note Owners 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 "Risk Factors-- Book-
Entry Registration" and
"Description of the Securities--
Book-Entry Registration of
Securities" in the Prospectus.
The Note Owners' interests in each
Class of Notes will be held only
in minimum denominations of
$100,000 and integral multiples of
$1,000 in excess thereof.
Assets of the Trust . . . . . . . On the Closing Date, the Trust
will purchase from the Depositor a
pool (the "Pool") of home loans
(the "Initial Loans") having an
aggregate unpaid principal balance
of approximately $151,169,569.92
as of the Initial Cut-Off Date
(the "Original Pool Principal
Balance") pursuant to a Sale and
Servicing Agreement to be dated as
of August 31, 1997 (the "Sale and
Servicing Agreement") among the
Trust, the Depositor, the
Transferor, the Servicer, the
Indenture Trustee and the Co-Owner
Trustee. On or prior to October
31, 1997, the Trust may purchase
additional loans (the "Subsequent
Loans," and together with the
Initial Loans, the "Loans") having
an aggregate unpaid principal
balance of up to approximately
$48,830,430.08 (the "Original Pre-
Funded Amount"). The Loans will
be secured by mortgages, deeds of
trust or other similar security
instruments (the "Mortgages").
The assets of the Trust will
consist primarily of the Loans.
The assets of the Trust will also
include (i) payments of interest
and principal received in respect
of the Loans after the related
Cut-Off Date; (ii) amounts on
deposit in the Collection Account,
Note Distribution Account, Pre-
Funding Account, Capitalized
Interest Account and Certificate
Distribution Account; and (iii)
certain other ancillary or
incidental funds, rights and
properties related to the
foregoing. See "The Trust--
General" herein. The Trust will
include the unpaid principal
balance of each Loan as of its
applicable Cut-Off Date (the "Cut-
Off Date Principal Balance").
With respect to any date, the
"Pool Principal Balance" will be
equal to the aggregate of the
Principal Balances of all Loans as
of the last day of the immediately
preceding Due Period (as defined
herein). The Principal Balance of
any Loan will be calculated as
described herein under "The Trust-
-General."
The Trust will also issue an
instrument evidencing the residual
interest in the assets of the
Trust (the "Residual Interest"),
which is not being offered hereby.
The Residual Interest is
subordinate in right of payment to
the Notes.
The Loans . . . . . . . . . . . . All of the Loans will be home
loans for which the related
proceeds were used to finance
(i) property improvements,
(ii) the acquisition of personal
property such as home appliances
or furnishings, (iii) debt
consolidation, (iv) the
refinancing of one- to two-family
residential properties (which may
include cash-out to the borrower)
or (v) a combination of property
improvements, debt consolidation
and other consumer purposes.
Substantially all of the Mortgages
for the Loans will be junior
(i.e., second, third, etc.) in
priority to one or more senior
liens on the related mortgaged
properties ("Mortgaged
Properties"), which will consist
primarily of owner-occupied
single-family residences.
Substantially all of the Loans
will be secured by liens on
Mortgaged Properties in which the
borrowers have little or no equity
(i.e., the related Combined Loan-
to-Value Ratios exceed 100%) at
the time of origination. None of
the home loans are insured or
guaranteed by a governmental
agency or instrumentality. See
"Risk Factors --Adequacy of the
Mortgaged Properties as Security
for the Loans" and "The Pool"
herein and "The Trust Fund --The
Loans" in the Prospectus.
"Combined Loan-to-Value Ratio"
means, with respect to any Loan,
the fraction, expressed as a
percentage, the numerator of which
is the principal balance of such
Loan at origination plus, in the
case of a junior lien Loan, the
aggregate outstanding principal
balance of the related senior
liens on the date of origination
of such Loan, and the denominator
of which is the appraised value of
the related Mortgaged Property at
the time of origination of such
Loan (determined as described
herein under "Cityscape Corp.--
Underwriting Criteria").
The Pool will initially consist of
approximately 3,780 loans and will
have an Original Pool Principal
Balance of approximately
$151,169,569.92. See "The Pool"
herein.
The Servicer has an option to
repurchase any Loan incident to
foreclosure, default or imminent
default thereof (a "Defaulted
Loan") (up to an aggregate amount
of Loans representing 10% of the
Maximum Collateral Amount, as
defined herein). Cityscape and
the Transferor will also 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 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" will
have characteristics that are
substantially similar to the
characteristics of the Loan which
it replaces. The repurchase of
any Loan (rather than the
replacement thereof through
substitution) will result in
accelerated payments of principal
distributions on the Notes. See
"Cityscape Corp.--Repurchase or
Substitution of Loans" herein.
With respect to any date, the
"Maximum Collateral Amount" shall
equal the sum of the (i) the
Original Pool Principal Balance
and (ii) the aggregate Cut-Off
Date Principal Balance of all
Subsequent Loans transferred to
the Trust on or prior to such
date.
Credit Enhancement . . . . . . . Credit enhancement with respect to
the Notes will be provided by (i)
the subordination of distributions
in respect of the Residual
Interest (as well as the
subordination of certain Classes
of Notes to other Classes of
Notes, as described herein) and
(ii) the Overcollateralization
Amount (as defined below), which
results from the limited accelera-
tion of the principal amortization
of the Notes relative to the
amortization of the Loans by the
application of Excess Spread, as
described herein.
Subordination . . . . . . . . . The rights of the holders of the
Class M-1 Notes to receive
distributions of interest on each
Distribution Date will be
subordinated to such rights of the
holders of the Senior Notes, the
rights of the holders of the
Class M-2 Notes to receive
distributions of interest on each
Distribution Date will be
subordinated to such rights of the
holders of the Class M-1 Notes and
the Senior Notes, and the rights
of the holders of the Class B
Notes to receive distributions of
interest on each Distribution Date
will be subordinated to such
rights of the holders of all other
Classes of Notes. In addition,
the rights of the holders of the
Class M-1 Notes to receive
distributions of principal on each
Distribution Date generally will
be subordinated to such rights of
the holders of the Senior Notes,
and the rights of the holders of
the Class M-2 Notes to receive
distributions of principal on each
Distribution Date generally will
be subordinated to such rights of
the holders of the Senior Notes
and the Class M-1 Notes. The
rights of the holders of the Class
B Notes to receive distributions
of principal on each Distribution
Date generally will be
subordinated to such rights of the
holders of all other Classes of
Notes. In addition, the rights of
the holders of the Residual
Interest to receive any
distributions from amounts
available on each Distribution
Date will be subordinated to such
rights of the holders of all
Classes of Notes. The
subordination described above 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 . . . . . As of any date of determination,
the "Overcollateralization Amount"
will equal the excess of (A) the
sum of (i) the Pool Principal
Balance and (ii) the Pre-Funded
Amount over (B) the aggregate of
the Class Principal Balances of
the Notes. On the Closing Date,
the Overcollateralization Amount
will be $2,000,000, which is equal
to 1% of the sum of the Original
Pool Principal Balance and the
Original Pre-Funded Amount. As a
result of the application of
Excess Spread in reduction of the
Class Principal Balances of the
Notes, the Overcollateralization
Amount is expected to increase
over time until such amount is
equal to the Overcollateralization
Target Amount.
Except as otherwise provided
herein, the "Overcollateralization
Target Amount" (A) prior to the
Stepdown Date (as defined herein)
will be equal to the greater of
(x) 7.75% of the Maximum
Collateral Amount and (y) the Net
Delinquency Calculation Amount (as
defined herein); and (B) on and
after the Stepdown Date, the
Overcollateralization Target
Amount will be equal to the
greater of (x) 15.5% of the Pool
Principal Balance as of the end of
the preceding Due Period and (y)
the Net Delinquency Calculation
Amount; provided, however, that
the Overcollateralization Target
Amount will in no event be less
than 0.50% of the Maximum
Collateral Amount.
While the distribution of Excess
Spread to holders of the Notes in
reduction of their respective
Class Principal Balances has been
designed to produce and maintain a
given level of overcollaterali-
zation with respect to the Notes,
there can be no assurance that
Excess Spread will be generated in
sufficient amounts to ensure that
such overcollateralization level
will be achieved or maintained at
all times. See "Description of
Credit Enhancement--Subordination
and Allocation of Losses" and
"Risk Factors--Adequacy of Credit
Enhancement" herein.
Application of Allocable Loss
Amounts . . . . . . . . . . . . In the event that (a) the
aggregate of the Class Principal
Balances of all Classes of Notes
on any Distribution Date (after
giving effect to all distributions
on such date) exceeds (b) the sum
of the Pool Principal Balance and
the Pre-Funded Amount, each as of
the end of the immediately
preceding Due Period (such excess,
an "Allocable Loss Amount"), such
Allocable Loss Amount will be
applied, sequentially, in
reduction of the Class Principal
Balances of the Class B, Class M-2
and Class M-1 Notes, in that
order, until the respective Class
Principal Balances thereof have
been reduced to zero. Allocable
Loss Amounts will not be applied
to the reduction of the Class
Principal Balance of any Class of
Senior Notes. Allocable Loss
Amounts applied to any applicable
Class of Notes will entitle such
Class to reimbursement (such
entitlement, a "Loss Reimbursement
Deficiency") under the
circumstances and to the extent
provided herein. See "Description
of the Notes--Application of
Allocable Loss Amounts" herein.
Fees and Expenses of the Trust . As compensation for its services
pursuant to the Sale and Servicing
Agreement, the Servicer will be
entitled to the Servicing Fee and
the additional compensation
described under "Description of
Transfer and Servicing Agreements-
-Servicing" (together, the
"Servicing Compensation"). As
compensation for their services
pursuant to the applicable
Transfer and Servicing Agreements,
the Indenture Trustee will be
entitled to its accrued and unpaid
fee (the "Indenture Trustee Fee")
and the Owner Trustee will be
entitled to its accrued and unpaid
fee (the "Owner Trustee Fee").
The Servicing Compensation, the
Indenture Trustee and the Owner
Trustee Fee are collectively
referred to as the "Trust Fees and
Expenses."
Pre-Funding Account . . . . . . . On the Closing Date, approximately
$48,830,430.08 (the "Original Pre-
Funded Amount") will be deposited
in an account (the "Pre-Funding
Account"), which account will be
in the name of the Indenture
Trustee and is part of the Trust
and will be used to acquire
Subsequent Loans. During the Pre-
Funding Period (as defined below),
the amount on deposit in the Pre-
Funding Account (net of investment
earnings thereon) (the "Pre-Funded
Amount") will be reduced by the
amount thereof used to purchase
Subsequent Loans in accordance
with the Sale and Servicing
Agreement. The "Pre-Funding
Period" is the period commencing
on the Closing Date and ending
generally on the earlier to occur
of (i) the date on which the
amount on deposit in the Pre-
Funding Account (net of any
investment earnings thereon) is
less than $100,000 and (ii)
October 31, 1997. On the
Distribution Date following the
Due Period in which the
termination of the Pre-Funding
Period occurs, if the Pre-Funded
Amount at the end of the Pre-
Funding Period is less than
$100,000, any such Pre-Funded
Amount will be distributed to
holders of the Classes of Notes
then entitled to receive principal
on such Distribution Date in
reduction of the related Class
Principal Balances, thus resulting
in a partial redemption of the
related Notes on such date. On
the Distribution Date following
the Due Period in which the
termination of the Pre-Funding
Period occurs, if the Pre-Funded
Amount at the end of the Pre-
Funding Period is greater than or
equal to $100,000 (such event, a
"Pre-Funding Pro Rata Distribution
Trigger"), such Pre-Funded Amount
will be distributed to the holders
of all Classes of Notes and the
Residual Interest (which initially
is represented by the Overcollat-
eralization Amount on the Closing
Date), pro rata, based on the
Original Class Principal Balances
thereof and the Residual Interest
in relation to the sum of the
Original Pool Principal Balance
and the Original Pre-Funded
Amount.
Capitalized Interest Account . . On the Closing Date, a portion of
the sales proceeds of the Notes
will be deposited in an account
(the "Capitalized Interest
Account") for application by the
Indenture Trustee on the
Distribution Dates in October 1997
and November 1997 to cover
shortfalls in interest on the
Notes that may arise due to the
utilization of the Pre-Funding
Account as described herein. Any
amounts remaining in the
Capitalized Interest Account at
the end of the Pre-Funding Period
will be paid to Cityscape.
Optional Termination . . . . . . The holders of Residual Interests
exceeding in the aggregate a 50%
percentage interest (the "Majority
Residual Interestholders") may, at
their option, effect an early
termination of the Trust on or
after any Distribution Date on
which the Pool Principal Balance
declines to 10% or less of the
Maximum Collateral Amount, by
purchasing all of the Loans at a
price equal to or greater than the
Termination Price (as defined
herein). The proceeds from any
such sale will be distributed in
the amounts and subject to the
priorities described herein under
"Description of the Notes--
Distributions on the Notes." See
"Description of the Notes--
Optional Termination of the Trust"
herein.
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 a publicly
traded partnership) taxable as a
corporation. Each Noteholder, by
the acceptance of a Note, will
agree to treat the Notes as
indebtedness for Federal income
tax purposes. Alternative
characterizations of the Trust are
possible, but would not result in
materially adverse tax
consequences to Noteholders. See
"Certain Federal Income Tax
Consequences" herein and "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 Notes.
ERISA . . . . . . . . . . . . . . Generally, plans that are subject
to the requirements of the
Employee Retirement Income
Security Act of 1974, as amended
("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.
Servicing of the Loans . . . . . The Servicer will perform the loan
servicing functions with respect
to the Loans pursuant to the Sale
and Servicing Agreement and will
be entitled to receive a fee (the
"Servicing Fee") and other
servicing compensation
(collectively, the "Servicing
Compensation"), payable monthly,
as described herein (see
"Description of the Transfer and
Servicing Agreements--Servicing"
herein). The Servicer may
subcontract its servicing
obligations and duties with
respect to certain Loans to
certain qualified servicers
pursuant to a subservicing
agreement (each such servicer, in
this capacity, a "Subservicer").
However, the Servicer will not be
relieved of its servicing
obligations and duties with
respect to any subserviced Loans.
In addition, the Servicer will be
responsible for paying the fees of
any such Subservicer.
Legal Investment . . . . . . . . The Notes will not constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA"), because some of the
Mortgages securing the Loans 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 Matters"
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
Senior Notes be rated "AAA" by
Standard & Poor's Ratings
Services, a division of The
McGraw-Hill Companies, Inc.
("Standard & Poor's") and Duff &
Phelps Credit Rating Co. ("DCR"
and together with Standard &
Poor's, the "Rating Agencies"),
and that the Class M-1 Notes be
rated "AA" by Standard & Poor's
and DCR, the Class M-2 Notes be
rated "A-" by Standard & Poor's
and "A" by DCR and the Class B
Notes be rated "BBB-" by Standard
& Poor's and "BBB" by DCR. A
security rating does not address
the frequency of principal
prepayments or the corresponding
effect on yield to holders of the
Notes. The security rating does
not address the ability of the
Trust to acquire Subsequent Loans,
any potential redemption with
respect thereto or the effect on
yield resulting therefrom. None
of the Depositor, Transferor,
Servicer, Indenture Trustee, Owner
Trustee, Co-Owner Trustee 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 the 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
Initial Loans included in the Pool as of the Closing Date.
PREPAYMENT AND YIELD CONSIDERATIONS
All of the Loans may be prepaid in whole or in part at any time;
however, with respect to certain Loans, a prepayment charge, as permitted by
applicable law, may apply to full and partial prepayments during the first
three years after origination as described below under "Prepayment and Yield
Considerations." Home loans, such as the Loans, have been originated in
significant volume only during the past few years and neither the Depositor
nor the 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,
homeowner mobility and the Combined Loan-to-Value Ratios of the Loans. In
addition, substantially all of the Loans contain due-on-sale provisions and
the Servicer intends to enforce such provisions unless (i) the Servicer, in a
manner consistent with accepted servicing practices, permits the purchaser of
the related Mortgaged Property to assume the Loan or (ii) such enforcement is
not permitted by applicable law. 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.
The extent to which the yield to maturity of a Note may vary from the
anticipated yield will depend upon (i) the degree to which it is purchased at
a premium or discount, (ii) 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 Excess Spread and (iii) to
the application of Allocable Loss Amounts to certain Classes of Notes as
specified herein. 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 such 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 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 such 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 Overcollateralization Amount is
at least equal to the Overcollateralization Target Amount, the allocation of
the Excess Spread for such Distribution Date as an additional distribution of
principal of the Notes will accelerate the amortization of the Notes relative
to the amortization of the Loans. Further, in the event that significant
distributions of principal are made to holders of the Notes as a result of
prepayments, liquidations, repurchases and purchases of the Loans or
distributions of 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.
ADEQUACY OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Notes will be provided by (i) the
subordination of distributions in respect of the Residual Interest (as well
as the subordination of certain Classes of Notes to other Classes of Notes,
as described herein) and (ii) the Overcollateralization Amount, which results
from the limited acceleration of the principal amortization of the Notes
relative to the amortization of the Loans by the application of Excess
Spread, as described herein. If the Loans experience higher rates of
delinquencies, defaults and losses than initially anticipated in connection
with the ratings of the Notes, the amounts available from the credit
enhancement may not be adequate to cover the delays or shortfalls in
distributions to the holders of the Notes that result from such higher
delinquencies, defaults and losses. If the amounts available from the credit
enhancement are inadequate, the holders of the Notes will bear the risk of
any delays and losses resulting from the delinquencies, defaults and losses
on the Loans.
The rights of the holders of the Class M-1 Notes to receive
distributions of interest on each Distribution Date generally will be
subordinated to such rights of the holders of the Senior Notes, the rights of
the holders of the Class M-2 Notes to receive distributions of interest on
each Distribution Date generally will be subordinated to such rights of the
holders of the Class M-1 Notes and the Senior Notes, and the rights of the
holders of the Class B Notes to receive distributions of interest on each
Distribution Date generally will be subordinated to such rights of the
holders of all other Classes of Notes. In addition, the rights of the
holders of the Class M-1 Notes to receive distributions of principal on each
Distribution Date generally will be subordinated to such rights of the
holders of the Senior Notes, and the rights of the holders of the Class M-2
Notes to receive distributions of principal on each Distribution Date
generally will be subordinated to such rights of the holders of the Senior
Notes and the Class M-1 Notes. Further, distributions of principal of the
Class B Notes generally will be subordinated in priority of payment to all
other Classes of Notes. See "Description of Credit Enhancement--
Subordination and Allocation of Losses" herein.
While the distribution of Excess Spread to the holders of the Notes in
the manner specified herein has been designed to produce and maintain a given
level of overcollateralization with respect to the Notes, there can be no
assurance that Excess Spread will be generated in sufficient amounts to
ensure that such overcollateralization level will be achieved or maintained
at all times. In particular, as a result of delinquencies on the Loans
during any Due Period, the amount of interest received on the Loans during
such Due Period may be less than the amount of interest distributable on the
Notes on the related Distribution Date. Such an occurrence will cause the
Class Principal Balances of the Classes of Notes to decrease at a slower rate
relative to the Pool Principal Balance, resulting in a reduction of the
Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount.
The holders of the Residual Interest will not be required to refund any
amounts previously distributed to such holders pursuant to the Transfer and
Servicing Agreements, including any distributions of Excess Spread,
regardless of whether there are sufficient funds on a subsequent Distribution
Date to make a full distribution to holders of the Notes.
ADEQUACY OF THE MORTGAGED PROPERTIES AS SECURITY FOR THE LOANS
As of the Initial Cut-Off Date, the Combined Loan-to-Value Ratios for
the Initial Loans ranged from approximately 67.48% to 126.11%, with
approximately 96.95% of the Original Pool Principal Balance consisting of
Loans having Combined-Loan-to-Value Ratios in excess of 100%. As of the
Initial Cut-Off Date the weighted average Combined Loan-to-Value Ratio of the
Initial Loans was 117.79%. As a result of the foregoing, the Mortgaged
Properties may not provide adequate security for the Loans. Even assuming
that a Mortgaged Property provides adequate security for the related Loan,
substantial delays could be encountered in connection with the liquidation of
a Loan that would result in current shortfalls in distributions to the
Noteholders to the extent such shortfalls are not covered by the credit
enhancement described herein. In addition, liquidation expenses relating to
any Liquidated Loan (such as legal fees, real estate taxes, and maintenance
and preservation expenses) would reduce the liquidation proceeds otherwise
payable to the Noteholders. 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 Noteholders as described herein to the extent
that the credit enhancement described herein is insufficient to absorb all
such losses.
RECENT ORIGINATION OF LOANS
Initial Loans representing approximately 0.07% of the Original Pool
Principal Balance were 30 days or more delinquent in their scheduled monthly
payments of principal and interest as of the Initial Cut-Off Date; however,
approximately 63.89% of the Original Pool Principal Balance consists of
Initial Loans that have a first scheduled monthly payment due date occurring
after July 31, 1997 and, therefore, it was not possible for such Initial
Loans to have had a scheduled monthly payment that was 30 days or more
delinquent as of the Initial Cut-Off Date.
UNDERWRITING GUIDELINES
Pursuant to the underwriting guidelines of Cityscape's Sav*-A-Loan
program, the assessment of the creditworthiness of the related borrower is
the primary consideration in underwriting the Loans. See "Cityscape Corp.--
Underwriting Criteria" herein. Although the creditworthiness of the related
borrower is the primary consideration in the underwriting of the Loans, no
assurance can be given that such creditworthiness of the borrower will not
deteriorate as a result of future economic and social factors, which
deterioration may result in a delinquency or default by such borrower on the
related Loan. In general, the credit quality of the Loans is lower than that
of mortgage loans conforming to the FNMA or FHLMC underwriting guidelines for
first-lien, single family mortgage loans. Accordingly, the Loans are likely
to experience higher rates of delinquencies, defaults and losses (which rates
could be substantially higher) than those rates that would be experienced by
similar types of loans underwritten in a manner which is more similar to the
FNMA or FHLMC underwriting guidelines.
PURCHASED LOANS
Substantially all of the Loans will have been either originated by or on
behalf of Cityscape or purchased and re-underwritten by Cityscape in
accordance with Cityscape's Sav*-A-Loan program. As described herein,
Cityscape will make certain representations and warranties regarding all of
the Loans and, in the event of a breach of any such representation or
warranty that materially and adversely affects the Noteholders, Cityscape
will be required either to cure such breach, repurchase the related Loan or
Loans or substitute one or more Qualified Substitute Loans therefor.
GEOGRAPHIC CONCENTRATION
Approximately 14.98%, 8.40%, 7.95%, 7.59%, 7.48%, 6.68%, and 6.68% of
the Original Pool Principal Balance will consist of Initial Loans that are
secured by Mortgaged Properties located in the States of Maryland,
California, New York, Virginia, Florida, Georgia and Illinois, respectively.
Because of the relative geographic concentration of the Loans within these
States, delinquencies and losses on the Loans may be higher than would be the
case if the Loans were more geographically diversified. Adverse economic
conditions in these States or geographic regions (which may or may not affect
real property values) may affect the ability of the related borrowers to make
timely payments of their scheduled monthly payments of principal and interest
and, accordingly, the actual rates of delinquencies, defaults and losses on
such Loans could be higher than those currently experienced in the home
lending industry for similar types of loans. In addition, with respect to
the Loans in these States, certain of the Mortgaged Properties may be more
susceptible to certain types of special hazards that are not covered by any
casualty insurance, such as earthquakes, floods and other natural disasters
and major civil disturbances, than residential properties located in other
parts of the country. In general, declines in one or more of the related
residential real estate markets may adversely affect the values of the
Mortgaged Properties securing such Loans such that the outstanding principal
balances of such Loans, together with the outstanding principal amount of any
senior lien mortgage loans on such Mortgaged Properties, will exceed the
value of such Mortgaged Properties to an increasing degree. Accordingly, the
actual rates of delinquencies, foreclosures and losses on such Loans could be
higher than those currently experienced in the home lending industry in
general.
SUBSEQUENT LOANS
The ability of Cityscape to acquire or originate loans subsequent to the
date hereon and on or prior to October 31, 1997 that meet the requirements
for transfer during the Pre-Funding Period under the Sale and Servicing
Agreement is and will be affected by a variety of factors, including interest
rates, employment levels, the rate of inflation and consumer perception of
economic conditions generally. On the Distribution Date following the Due
Period in which the termination of the Pre-Funding Period occurs, if the Pre-
Funded Amount at the end of the Pre-Funding Period is less than $100,000, any
such Pre-Funded Amount will be distributed to holders of the Classes of Notes
then entitled to receive principal on such Distribution Date in reduction of
the related Class Principal Balances, thus resulting in a partial redemption
of the related Notes on such date. On the Distribution Date following the
Due Period in which the termination of the Pre-Funding Period occurs, if the
Pre-Funded Amount at the end of the Pre-Funding Period is greater than or
equal to $100,000 (such event, a "Pre-Funding Pro Rata Distribution
Trigger"), such Pre-Funded Amount will be distributed to the holders of all
Classes of Notes and the Residual Interest (which initially is represented by
the Overcollateralization Amount on the Closing Date), pro rata, based on the
Original Class Principal Balances thereof and the Residual Interest in
relation to the sum of the Original Pool Principal Balance and the Original
Pre-Funded Amount.
NO SERVICER DELINQUENCY ADVANCES
In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. As a result of the
foregoing, the amount of interest received on the Loans during any Due Period
may be less than the amount of interest distributable on the Notes on the
related Distribution Date. Such an occurrence will cause the Class Principal
Balances of the Classes of Notes to decrease at a slower rate relative to the
Pool Principal Balance, resulting in a reduction of the Overcollateralization
Amount and, in some circumstances, an Allocable Loss Amount. However, the
Servicer will make such reasonable and customary expense advances with
respect to the Loans as generally would be required in accordance with its
servicing practices. See "Description of the Transfer and Servicing
Agreements--Servicing" herein.
DEPENDENCE ON SERVICER FOR SERVICING LOANS
Pursuant to the Sale and Servicing Agreement, the Servicer will perform
the daily loan servicing functions for the Loans that include, without
limitation, the collection of payments from the Loans, the remittance of
funds from such collections for distribution to the holders of the Notes, the
bookkeeping and accounting for such collections, all other servicing
activities relating to the Loans, the preparation of the monthly servicing
and remittance reports pursuant to the Sale and Servicing Agreement and the
maintenance of all records and files pertaining to such servicing activities.
Upon the Servicer's failure to remedy an Event of Default under the Sale and
Servicing Agreement, a majority of the holders of the Notes or the Indenture
Trustee or the Owner Trustee on behalf of the Trust may remove the Servicer
and appoint a successor servicer pursuant to the terms of the Sale and
Servicing Agreement. Absent such a replacement, the holders of the Notes
will be dependent upon the Servicer to adequately and timely perform its
servicing obligations and remit to the Indenture Trustee the funds from the
payments of principal and interest received on the Loans. The manner in
which the Servicer, and each Subservicer, as applicable, performs its
servicing obligations will affect the amount and timing of the principal and
interest payments received on the Loans. The principal and interest payments
received on the Loans are the sole source of funds for the distributions due
to the holders of the Notes under the Sale and Servicing Agreement.
Accordingly, the holders of the Notes will be dependent upon the Servicer to
adequately and timely perform its servicing obligations and such performance
will affect the amount and timing of distributions to the holders of the
Notes. See "Cityscape Corp.--Servicing Experience" herein.
REALIZATION UPON DEFAULTED LOANS
Substantially all of the Loans are secured by junior liens, and the
related loans secured by senior liens are not included in the Pool. The
primary risk with respect to any Loan secured by a junior lien is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related Mortgaged Property to satisfy fully both of the
loan(s) secured by senior lien(s) and the Loan. In accordance with the loan
servicing practices of the Servicer for home loans secured by junior liens,
the Servicer may, in connection with any Defaulted Loan, (i) pursue the
foreclosure of a Defaulted Loan, (ii) satisfy the senior mortgage(s) at or
prior to the foreclosure sale of the Mortgaged Property, or (iii) advance
funds to keep the senior mortgage(s) current. The Trust will have no source
of funds to satisfy the senior mortgage(s) or make payments due to the senior
mortgagee(s), and, therefore, holders of the Notes should not expect that any
senior mortgage(s) will be kept current by the Trust for the purpose of
protecting any junior lien Loan. See "Certain Legal Aspects of the Loans--
Junior Mortgages; Rights of Senior Mortgagees" in the Prospectus.
Furthermore, it is unlikely that any of the foregoing methods of realizing
upon a defaulted junior lien Loan will be an economically viable alternative
with respect to any Loans having a Combined Loan-to-Value Ratio that exceeds
100% at the time of default. As a result, the Servicer may, in accordance
with accepted servicing procedures, pursue alternative methods of servicing
Defaulted Loans to maximize proceeds therefrom, including without limitation,
the modification of Defaulted Loans, which, among other things, may include
the abatement of accrued interest or the reduction of a portion of the
outstanding Principal Balance of such Defaulted Loans. The costs incurred in
the collection and liquidation of Defaulted Loans in relation to the smaller
Principal Balances thereof are proportionately higher than first-lien single-
family mortgage loans, and because substantially all of the Loans will have
Combined Loan-to-Value Ratios at the time of origination that exceed 100%,
losses sustained from Defaulted Loans are likely to be more severe (and could
be total losses) in relation to the outstanding Principal Balance of such
Defaulted Loans. In fact, no assurance can be given that any proceeds, or a
significant amount of proceeds, will be recovered from the liquidation of
Defaulted Loans.
LEGAL CONSIDERATIONS
The Initial Loans have been transferred from Cityscape Corp. to the
Transferor, an affiliate of Cityscape Corp. and transferred from the
Transferor to the Depositor. Each such transfer will be treated by Cityscape
Corp., the Transferor and the Depositor, as applicable, as a sale of the
Initial Loans. Cityscape Corp. has warranted that its transfer to the
Transferor is a sale of Cityscape Corp.'s interest in the Loans. The
Transferor has warranted that its transfer to the Depositor is a sale of the
Transferor's interest in the Initial Loans. In the event of an insolvency of
Cityscape Corp. or the Transferor, the receiver or bankruptcy trustee of such
entity may attempt to recharacterize the related sale of the Initial Loans as
a borrowing by such entity secured by a pledge of the Initial Loans and
possible reductions could occur in the amounts thereof available for
distribution on the Notes. The Depositor has warranted in the Sale and
Servicing Agreement that the transfer of the Initial Loans to the Trust is a
valid transfer of all of the Depositor's right, title and interest in the
Initial Loans to the Trust.
CERTAIN OTHER LEGAL CONSIDERATIONS
The underwriting, origination, servicing and collection of the Loans are
subject to a variety of State and Federal laws, public policies and
principles of equity. For example, the Federal District Court for the
Eastern District of Virginia recently announced a decision indicating that
Federal law prohibited lenders from paying independent mortgage brokers a
premium for loans with above-market interest rates. Depending on the
provisions of applicable law and the specific facts and circumstances
involved, violations of these laws, policies or principles may limit the
ability of the Servicer to collect all or part of the principal or interest
on the Loans, may entitle the borrower to a refund of amounts previously
paid, and, in addition, could subject the Servicer to damages and
administrative sanctions. If the Servicer is unable to collect all or part
of the principal or interest on any Loans because of a violation of the
aforementioned laws, public policies or general principles of equity, then
the Trust may be delayed or unable to make all distributions owed to the
holders of the Notes to the extent any related losses are not otherwise
covered by amounts available from the credit enhancement provided for the
Notes. Furthermore, depending upon whether damages and sanctions are
assessed against the Servicer or the Transferor, such violations may
materially impact (i) the financial ability of the Servicer to continue to
act in such capacity or (ii) the ability of the Transferor or Cityscape to
repurchase or replace Defective Loans. See "Risk Factors--Certain Other
Legal Considerations Regarding the Loans" in the Prospectus. Cityscape will
be required to repurchase or replace any Loan which did not comply with
applicable State and Federal laws and regulations as of the Closing Date.
See "--Limitations on Repurchase or Replacement of Defective Loans" below.
LIMITATIONS ON REPURCHASE OR REPLACEMENT OF DEFECTIVE LOANS
Pursuant to the Sale and Servicing Agreement, the Transferor and
Cityscape each has agreed to cure in all material respects any breach of the
Transferor's or Cityscape's representations and warranties set forth in the
Sale and Servicing Agreement with respect to Defective Loans. If the
Transferor or Cityscape cannot cure such breach within a specified period of
time, the Transferor or Cityscape is required to repurchase such Defective
Loans from the Trust or substitute other loans for such Defective Loans.
Although a significant portion of the Loans will have been acquired from
unaffiliated correspondent lenders, the Transferor and Cityscape will make
the representations and warranties for all such Loans. For a summary
description of the Transferor's or Cityscape's representations and
warranties, see "The Agreements--Assignment of the Trust Fund Assets" in the
Prospectus.
No assurance can be given that, at any particular time, the Transferor
or Cityscape will be capable, financially or otherwise, of repurchasing or
replacing any Defective Loan(s) in the manner described above. If the
Transferor or Cityscape repurchases, or is obligated to repurchase, any
defective home loan(s) from any other series of asset backed securities, the
financial ability of the Transferor or Cityscape to repurchase any Defective
Loan(s) from the Trust may be adversely affected. In addition, other events
relating to the Transferor or Cityscape and its home lending can occur that
would adversely affect the financial ability of the Transferor or Cityscape
to repurchase Defective Loans from the Trust, including, without limitation,
the sale or other disposition of all or any significant portion of its
assets. Further, as a result of the substantial growth in its loan
origination activity, Cityscape's operations have been funded primarily from
borrowings and loan sales (including fundings provided by the Underwriters or
affiliates thereof) and the net proceeds of periodic securities offerings.
Were such external sources of funding to become unavailable or were they to
prove insufficient to meet Cityscape's needs, the financial ability of
Cityscape to perform its obligations in connection with the related
transaction, including the obligation to repurchase or replace Defective
Loans from the Trust, may be adversely affected. If the Transferor or
Cityscape is unable to repurchase or replace a Defective Loan, then the
Servicer, on behalf of the Trust, will utilize customary servicing practices
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. Cityscape Corp., in its capacity
as seller of the Loans to the Transferor, has agreed to be bound by the same
requirements as the Transferor with respect to Defective Loans. See
"Cityscape Corp." herein.
THE TRUST
GENERAL
The Trust, Cityscape Home Loan Owner Trust 1997-4, will be a business
trust formed under the laws of the State of Delaware pursuant to the Trust
Agreement for the transactions described in this Prospectus Supplement.
After its formation, the Trust will not engage in any activity other than (i)
acquiring, holding and managing the Loans and the other assets of the Trust
and proceeds therefrom, (ii) issuing the Notes and the Residual Interest,
(iii) making payments on the Notes and the Residual Interest 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 Interest represents the residual interest in the assets of
the Trust. The Residual Interest, together with the Notes, will be delivered
by the Trust to the Depositor as consideration for the Initial Loans pursuant
to the Sale and Servicing Agreement.
On the Closing Date, the Trust will purchase Initial Loans having an
aggregate principal balance of approximately $151,169,569.92 as of the
Initial Cut-Off Date (the "Original Pool Principal Balance") from the
Depositor pursuant to a sale and servicing agreement dated as of August 31,
1997 (the "Sale and Servicing Agreement"), among the Trust, the Depositor,
the Transferor, the Servicer, the Indenture Trustee and the Co-Owner Trustee.
On or prior to October 31, 1997, the Trust may purchase additional loans (the
"Subsequent Loans" and together with the Initial Loans, the "Loans") having
an aggregate unpaid principal balance of up to approximately $48,830,430.08
(the "Original Pre-Funded Amount").
The assets of the Trust will consist primarily of the Pool of Loans,
which will be secured by Mortgages. See "The Pool" herein. The assets of
the Trust will also include (i) payments of interest and principal received
after the applicable Cut-Off Date in respect of the Loans; (ii) amounts on
deposit in the Collection Account (excluding investment earnings thereon),
Note Distribution Account, Pre-Funding Account, Capitalized Interest Account
and Certificate Distribution Account; and (iii) 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
its applicable Cut-Off Date (the "Cut-Off Date Principal Balance"). With
respect to any date, the "Pool Principal Balance" will be equal to the
aggregate of the Principal Balances of all Loans as of the last day of the
preceding Due Period. The "Principal Balance" of a Loan on any day is equal
to the outstanding unpaid principal balance of the Loan as of the last day of
the preceding Due Period (after giving effect to all payments received
thereon and the allocation of any Net Loan Losses thereto pursuant to clause
(B) of the definition thereof); provided, however, that any Loan that became
a Liquidated Loan during the preceding Due Period shall have a Principal
Balance of zero. With respect to any Distribution Date, any Loans
repurchased in the month of such Distribution Date prior to the related
Determination Date in such month shall be deemed (i) to have been repurchased
during the related Due Period and (ii) to have a Principal Balance of zero as
of the end of such related Due Period.
The Servicer will 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" herein.
The Trust's principal offices are located in Wilmington, Delaware, in
care of Wilmington Trust Company, as Owner Trustee, at the address set forth
below under "--The Owner Trustee and Co-Owner Trustee."
THE OWNER TRUSTEE AND CO-OWNER TRUSTEE
Wilmington Trust Company will act 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 U.S. Bank National
Association, dba First Bank 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.
THE POOL
GENERAL
The Pool initially will consist of the Initial Loans to be conveyed to
the Trust on the Closing Date. All of the Loans will be home loans for which
the related proceeds were used to finance (i) property improvements, (ii) the
acquisition of personal property such as home appliances or furnishings,
(iii) debt consolidation, (iv) the refinancing of one- to two-family
residential properties (which may include cash-out to the borrower) or (v) a
combination of property improvements, debt consolidation and other consumer
purposes. Substantially all of the Mortgages for the Loans will be junior
(i.e., second, third, etc.) in priority to one or more senior liens on the
related Mortgaged Properties, which will consist primarily of owner-occupied
single-family residences. None of the home loans are insured or guaranteed
by a governmental agency or instrumentality. Substantially all of the Loans
will be secured by liens on Mortgaged Properties in which the borrowers have
little or no equity therein (i.e., the related Combined Loan-to-Value Ratios
exceed 100%) at the time of origination of such Loans. The Subsequent Loans
are not expected to vary materially from the Initial Loans.
Cityscape originates and purchases loans principally through two
channels: (i) originations through an extensive network of independent
mortgage brokers and (ii) purchases on a flow basis through its wholesale
loan acquisition program from selected financial institutions and mortgage
bankers known as loan correspondents.
For a description of the underwriting criteria applicable to the Loans,
See "Cityscape Corp.--Underwriting Criteria" herein. All of the Initial
Loans will be sold by Cityscape to the Transferor and by the Transferor to
the Depositor, whereupon the Depositor will sell the Loans to the Trust
pursuant to the Sale and Servicing Agreement. Pursuant to the Indenture, the
Trust will pledge and assign the Loans to the Indenture Trustee for the
benefit of the holders of the Notes. The Trust will be entitled to all
payments of interest and principal received after the applicable Cut-Off
Dates in respect of the Loans.
PAYMENTS ON THE LOANS
The Loans generally provide for a schedule of payments which, if timely
paid, will be sufficient to amortize fully the principal balance of the
related Loan on or before its maturity date. The Loans have scheduled
monthly payment dates which occur throughout a month. Each Loan bears
interest at a fixed rate of interest (the "Loan Rate"). Interest with
respect to the Loans will accrue on an "actuarial interest" method. No Loan
provides for deferred interest or negative amortization.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day of each month which is fixed at the
time of origination, and payments received after a grace period following
such scheduled day are subject to late charges. For example, a scheduled
payment on a Loan received either earlier or later (other than delinquent)
than the scheduled due date thereof will not affect the amortization schedule
or the relative application of such payment to principal and interest in
respect of such Loan.
CHARACTERISTICS OF LOANS
The following is a brief description of certain terms of the Initial
Loans to be included in the Pool as of the Closing Date. This subsection
describes generally the characteristics of the Initial Loans. Prior to the
Closing Date, the Seller may remove any of the Initial Loans intended for
inclusion in the Pool, substitute comparable loans therefor, or add
comparable loans thereto; however, the aggregate principal balance of Initial
Loans so replaced, added or removed will not exceed 3.0% of the Original Pool
Principal Balance. To the extent that, prior to the Closing Date, loans are
so replaced, added or removed, an amount equal to the aggregate principal
balance of such loans will be added to or deducted from the Pre-Funded Amount
on the Closing Date, as applicable. As a result, the statistical information
presented below regarding the Initial Loans proposed to be included in the
Pool as of the date of this Prospectus Supplement may vary in certain
respects from comparable information based on the actual composition of the
Pool at the Closing Date. The Subsequent Loans are not expected to vary
materially from the Initial Loans. In addition, the Transferor and Cityscape
each has the option, and in some cases, the obligation, to repurchase or
replace certain Loans under certain circumstances as set forth herein under
"Cityscape Corp.--Repurchase or Substitution of Loans." A schedule of the
Initial Loans included in the Pool as of the Closing Date will be attached to
the Sale and Servicing Agreement to be delivered to the Indenture Trustee
upon delivery of the Notes.
The Initial Loans to be included in the Pool will have the
characteristics set forth below and in the tables that follow.
INITIAL LOAN STATISTICS
The Initial Loans will consist of 3,780 Loans secured by mortgages or
deeds of trust on Mortgaged Properties located in 40 States and the District
of Columbia. As of the Initial Cut-Off Date, Initial Loans representing
0.26% of the Original Pool Principal Balance are secured by first liens,
Initial Loans representing 95.42% of the Original Pool Principal Balance are
secured by second liens, and the remaining Initial Loans are secured by third
liens on the related Mortgaged Properties. As of the Initial Cut-Off Date,
the aggregate Principal Balance of the Initial Loans was approximately
$151,169,569.92 (the "Original Pool Principal Balance"). The Initial Loans
bear interest at fixed Loan Rates which ranged from approximately 11.25% to
approximately 16.99% per annum as of the Initial Cut-Off Date. The weighted
average Loan Rate for the Initial Loans was approximately 14.18% per annum
as of the Initial Cut-Off Date. The lowest Cut-Off Date Principal Balance of
any Initial Loan was approximately $8,453.23 and the highest was
approximately $75,000. The average Cut-Off Date Principal Balance of the
Initial Loans was approximately $39,991.95. The weighted average remaining
term to stated maturity of the Initial Loans as of the Initial Cut-Off Date
was approximately 218 months. As of the Initial Cut-Off Date, the weighted
average number of months that have elapsed since origination of the Initial
Loans was approximately 1 month. The lowest and highest Combined Loan-to-
Value Ratios of the Initial Loans at origination were approximately 67.48%
and 126.11%, respectively. The weighted average Combined Loan-to-Value Ratio
of the Initial Loans as of the Initial Cut-Off Date was approximately
117.79%.
All of the Initial Loans are fully amortizing loans having original
stated maturities of not more than 20 years. No Initial Loan is scheduled to
mature later than September 1, 2017.
As of the Initial Cut-Off Date, Initial Loans representing approximately
0.07% of the Original Pool Principal Balance were between 30 and 59 days past
due, and no Loan was 60 or more days past due.
As of the Initial Cut-Off Date, 100% of the Mortgaged Properties were
owner-occupied. As of the Initial Cut-Off Date, the obligors on Initial
Loans representing approximately 88.95% of the Original Pool Principal
Balance had "A" credit ratings and approximately 11.05% had "B" credit
ratings under Cityscape's "Sav*-A-Loan" program.
The following tables are based on certain statistical characteristics
with respect to the Initial Loans. The sum of the percentages in the
following tables may not equal the total due to rounding.
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
% of
Original
Number of Aggregate Cut-Off Pool
Initial Date Principal Principal
State Loans Balance Balance
Arizona 8 $ 282,612.08 0.19%
Arkansas 1 37,500.00 0.02
California 278 12,691,737.25 8.40
Colorado 88 4,079,695.23 2.70
Connecticut 84 3,208,946.70 2.12
Delaware 45 1,954,164.89 1.29
District of Columbia 15 653,974.81 0.43
Florida 320 11,310,443.80 7.48
Georgia 281 10,098,149.89 6.68
Hawaii 1 24,912.68 0.02
Idaho 4 86,786.27 0.06
Illinois 233 10,094,401.18 6.68
Indiana 89 3,011,529.25 1.99
Iowa 10 320,184.60 0.21
Kansas 14 507,297.31 0.34
Kentucky 46 1,738,790.50 1.15
Louisiana 2 53,438.07 0.04
Maine 2 61,175.70 0.04
Maryland 527 22,651,605.35 14.98
Massachusetts 120 5,355,812.05 3.54
Michigan 77 3,026,331.71 2.00
Minnesota 74 2,510,013.93 1.66
Mississippi 14 416,075.28 0.28
Missouri 33 1,157,206.36 0.77
Montana 1 29,909.60 0.02
Nebraska 8 183,214.42 0.12
New Hampshire 26 994,962.50 0.66
New Jersey 98 4,260,919.67 2.82
New Mexico 5 171,049.29 0.11
New York 291 12,025,438.54 7.95
North Carolina 159 5,965,676.88 3.95
Ohio 9 372,350.72 0.25
Oregon 2 96,451.11 0.06
Pennsylvania 190 7,049,443.08 4.66
Rhode Island 50 1,726,350.16 1.14
South Carolina 192 6,861,881.41 4.54
Tennessee 2 88,118.54 0.06
Utah 26 1,065,352.17 0.70
Virginia 273 11,471,655.18 7.59
Washington 4 133,161.71 0.09
Wisconsin 78 3,340,850.05 2.21
TOTAL . . . . . . . . . . . . 3,780 $151,169,569.92 100.00%
MORTGAGED PROPERTY TYPES
% of
Number of Aggregate Cut-Off Original Pool
Initial Date Principal
Mortgaged Property Types Loans Principal Balance Balance
Single Family . . . . . . . . . . . . . 3,714 $148,489,964.42 98.23%
66 2,679,605.50 1.77
Two-Family . . . . . . . . . . . . . .
3,780 $151,169,569.92 100.00%
TOTAL . . . . . . . . . . . . . .
COMBINED LOAN-TO-VALUE RATIOS
Aggregate Cut-Off % of Original
Number of Date Pool Principal
Range of Combined Loan-to- Initial Principal Balance Balance
Value Ratios Loans
67.48 - 70.00 1 $ 30,390.41 0.02%
75.01 - 80.00 1 19,000.00 0.01
80.01 - 85.00 6 131,188.28 0.09
85.01 - 90.00 15 446,216.42 0.30
90.01 - 95.00 34 1,250,321.81 0.83
95.01 - 100.00 83 2,737,809.20 1.81
100.01 - 105.00 210 7,860,477.64 5.20
105.01 - 110.00 368 13,000,993.07 8.60
110.01 - 115.00 524 20,017,603.10 13.24
115.01 - 120.00 651 26,602,448.22 17.60
120.01 - 125.00 1,881 78,778,848.94 52.11
6 294,272.83 0.19
125.01 - 126.11
3,780 $151,169,569.92 100.00%
TOTAL . . . . . . . . . . . .
As of the Cut-Off Date, the Weighted Average Combined Loan-to-Value Ratio of
the Initial Loans was 117.79%.
LOAN RATES
% of
Original
Number of Aggregate Cut-Off Pool
Initial Date Principal
Range of Loan Rates Loans Principal Balance Balance
11.2500 - 11.2500% 1 $ 31,764.47 0.02%
12.5001 - 12.7500 1 58,891.68 0.04
12.7501 - 13.0000 212 7,698,530.58 5.09
13.2501 - 13.5000 861 34,801,788.24 23.02
13.5001 - 13.7500 22 1,019,819.19 0.67
13.7501 - 14.0000 1,434 59,699,754.83 39.49
14.0001 - 14.2500 12 476,817.92 0.32
14.2501 - 14.5000 321 11,523,559.43 7.62
14.5001 - 14.7500 84 4,004,606.77 2.65
14.7501 - 15.0000 309 12,328,777.96 8.16
15.0001 - 15.2500 41 1,750,404.41 1.16
15.2501 - 15.5000 174 7,221,587.71 4.78
15.5001 - 15.7500 20 702,780.70 0.46
15.7501 - 16.0000 237 8,162,429.69 5.40
16.0001 - 16.2500 3 91,225.65 0.06
16.2501 - 16.5000 16 652,917.36 0.43
16.5001 - 16.7500 5 168,507.20 0.11
16.7501 - 16.9900 27 775,406.13 0.51
TOTAL . . . . . . . . . . . . 3,780 $151,169,569.92 100.00%
As of the Cut-Off Date, the Weighted Average Mortgage Rate of the Initial
Loans was 14.18% per annum.
LOAN SEASONING
% of Original
Number of Aggregate Cut-Off Pool
Initial Date Principal
Months Elapsed Since Origination Loans Principal Balance Balance
0 993 $ 39,895,556.35 26.39%
1 1,419 56,683,774.73 37.50
2 1,007 39,687,878.05 26.25
3 233 9,704,871.52 6.42
4 51 2,079,180.10 1.38
5 40 1,642,337.87 1.09
6 21 883,308.44 0.58
7 1 59,314.78 0.04
9 1 44,591.76 0.03
10 2 52,231.86 0.03
11 5 211,976.69 0.14
12 4 117,174.70 0.08
13 2 98,919.84 0.07
1 8,453.23 0.01
17
3,780 $151,169,569.92 100.00%
TOTAL . . . . . . . . . . . . . .
As of the Cut-Off Date, the Weighted Average Months Since Origination of the
Initial Loans was 1 month.
CUT-OFF DATE PRINCIPAL BALANCES
% of Original
Number of Aggregate Cut-Off Pool
Range of Cut-Off Date Principal Initial Date Principal
Balances Loans Principal Balance Balance
$8,453.23 - 10,000.00 7 $ 68,029.32 0.05%
10,000.01 - 15,000.00 85 1,173,543.32 0.78
15,000.01 - 20,000.00 234 4,265,680.16 2.82
20,000.01 - 25,000.00 429 10,000,666.38 6.62
25,000.01 - 30,000.00 510 14,368,858.82 9.51
30,000.01 - 35,000.00 472 15,624,317.81 10.34
35,000.01 - 40,000.00 448 16,980,834.24 11.23
40,000.01 - 45,000.00 329 14,111,513.51 9.33
45,000.01 - 50,000.00 318 15,274,221.26 10.10
50,000.01 - 55,000.00 213 11,223,808.42 7.42
55,000.01 - 60,000.00 286 16,761,601.78 11.09
60,000.01 - 65,000.00 125 7,899,469.87 5.23
65,000.01 - 70,000.00 101 6,865,734.38 4.54
223 16,551,290.65 10.95
70,000.01 - 75,000.00
3,780 $151,169,569.92 100.00%
TOTAL . . . . . . . . . . . . . .
As of the Cut-Off Date, the average Cut-Off Date Principal Balance of the
Initial Loans was $39,991.95
ORIGINAL TERMS TO MATURITY
% of Original
Aggregate Cut-Off Pool
Range of Cut-Off Date Principal Number of Initial Date Principal
Balances Loans Principal Balance Balance
120 Months . . . . . . . . . . . 4 $ 79,854.48 0.05%
180 Months . . . . . . . . . . . 1,480 52,256,900.79 34.57%
2,296 98,832,814.65 65.38
240 Months . . . . . . . . . . .
3,780 $151,169,569.92 100.00%
TOTAL . . . . . . . . . . .
As of the Cut-Off Date, the Weighted Average Original Term to Maturity of the
Initial Loans was 219 months
REMAINING TERMS TO MATURITY
Number of Aggregate Cut-Off % of Original
Range of Remaining Terms to Initial Date Pool Principal
Maturity Loans Principal Balance Balance
103 - 108 2 $ 22,848.60 0.02%
109 - 120 2 57,005.88 0.04
169 - 180 1,480 52,256,900.79 34.57
217 - 228 5 201,699.17 0.13
2,291 98,631,115.48 65.25
229 - 240
3,780 $151,169,569.92 100.00%
TOTAL . . . . . . . .
As of the Cut-Off Date, the Weighted Average Remaining Term to Maturity of
the Initial Loans was 218 Months.
LIEN PRIORITY
% of
Number of Aggregate Cut-Off Original Pool
Initial Date Principal
Lien Position Loans Principal Balance Balance
First Lien . . . . . . . . . . . 6 $ 386,892.26 0.26%
Second Lien . . . . . . . . . . . 3,636 144,238,651.13 95.42
138 6,544,026.53 4.33
Third Lien . . . . . . . . . . .
3,780 $151,169,569.92 100.00%
TOTAL . . . . . . . . . . .
DELINQUENCY STATUS
% of
Number of Aggregate Cut-Off Original Pool
Initial Date Principal
Delinquency Status Loans Principal Balance Balance
0 to 29 Days . . . . . . . . . . 3,777 $151,064,019.92 99.93%
3 105,550.00 0.07
30 to 59 Days . . . . . . . . . .
3,780 $151,169,569.92 100.00%
TOTAL . . . . . . . . . . .
JUNIOR LIEN RATIOS(1)
% of Original
Number of Aggregate Cut-Off Pool
Initial Date Principal Principal
Range of Junior Lien Ratios Loans Balance Balance
<= 0.00 6 $ 386,892.26 0.26%
0.01 - 10.00 14 204,938.85 0.14
10.01 - 20.00 624 17,273,144.86 11.43
20.01 - 30.00 1,619 60,525,328.77 40.04
30.01 - 40.00 1,014 46,976,923.25 31.08
40.01 - 50.00 366 18,533,763.52 12.26
50.01 - 60.00 109 5,640,898.76 3.73
60.01 - 70.00 21 1,250,389.05 0.83
70.01 - 80.00 6 302,798.17 0.20
1 74,492.43 0.05
80.01 - 81.78
3,780 $151,169,569.92 100.00%
TOTAL . . . . . . . . . . . . .
- ------------------
(1) Calculated as the ratio of the initial principal balance of the junior
lien to the aggregate loan balances of all liens on the related
Mortgaged Property at the time of origination of the junior lien.
As of the Cut-Off Date, the Weighted Average Junior Lien Ratio of the Initial
Loans was 30.93%.
CONVEYANCE OF SUBSEQUENT LOANS
The Sale and Servicing Agreement permits the Trust to purchase from
Cityscape, subsequent to the date hereof and prior to October 31, 1997,
Subsequent Loans in an amount not to exceed approximately $48,830,430.08 in
aggregate principal balance for inclusion in the Trust. Accordingly, the
statistical characteristics of the Pool after giving effect to the
acquisition of any Subsequent Loans will likely differ from the information
specified above (which are based exclusively on the Initial Loans). The date
or dates on which the Trust acquires the Subsequent Loans are referred to
herein as "Subsequent Transfer Dates." Any Subsequent Loans conveyed to the
Trust Fund will be subject to the approval of the Rating Agencies and are not
expected to vary materially in the aggregate from the Initial Loans.
CITYSCAPE CORP.
GENERAL
Cityscape Corp. ("Cityscape"), the Servicer under the Sale and Servicing
Agreement, is a New York corporation that is a wholly-owned subsidiary of
Cityscape Financial Corp., a publicly-traded Delaware corporation, and is a
full service mortgage banker engaged in the business of originating, selling
and servicing mortgage loans on one- to four-family residential properties
and small mixed-use properties, with an emphasis on non-conforming first and
second mortgages. Cityscape was incorporated in New York in 1985 and
currently is licensed as a mortgage banker or registered, as required, in 46
States (including New York, Illinois, Maryland, New Jersey, Indiana,
Pennsylvania, Massachusetts, Connecticut, California and Virginia) and the
District of Columbia.
Cityscape has its principal offices at 565 Taxter Road, Elmsford, New
York 10523 (telephone number (914) 592-6677). It currently has approximately
914 employees including professionals and support staff. For the years ended
December 31, 1994, 1995 and 1996, Cityscape originated or purchased $154
million, $418 million and $1.3 billion of loans, respectively. Cityscape's
net worth as of December 31, 1994, 1995 and 1996 was $3,176,738, $50,657,221
and $83,476,527, respectively.
As of June 30, 1997, the Servicer was servicing a loan portfolio
(including loans it has retained for its own account, but excluding those
master serviced on behalf of others) of approximately $2,128,232,383. This
loan portfolio consisted of 37,075 loans with an average principal balance of
approximately $57,403.
As a publicly-traded company, Cityscape Financial Corp. is required to
file periodic reports with the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934, as amended. Cityscape Financial Corp.
will furnish without charge to each person to whom this Prospectus Supplement
is delivered, upon written or oral request, a copy of the most recent
periodic filings made with the Securities and Exchange Commission. Requests
should be directed to Cheryl P. Carl, Senior Vice President, Cityscape
Financial Corp., 565 Taxter Road, Elmsford, New York 10523 (telephone number
(914) 592-6677).
The Servicer may resign only in accordance with the terms of the Sale
and Servicing Agreement. No removal or resignation will become effective
until the Indenture Trustee or a successor servicer has assumed the
Servicer's responsibilities and obligations in accordance therewith.
The Servicer may not assign its obligations under the Sale and Servicing
Agreement unless it first obtains the written consent of the Indenture
Trustee; provided, however, that any assignee must meet the eligibility
requirements for a successor servicer set forth in the Sale and Servicing
Agreement. Notwithstanding anything in the preceding sentence to the
contrary, the Servicer may delegate certain of its obligations to a sub-
servicer pursuant to a sub-servicing agreement. A sub-servicer must meet
certain eligibility requirements, as set forth in the Sale and Servicing
Agreement, and each sub-servicing agreement shall require servicing of the
Loans consistent with the terms of the Sale and Servicing Agreement.
SERVICING EXPERIENCE
The Servicer commenced servicing home equity loans in 1994 and commenced
servicing Sav*-A-Loan home loans in 1996. Since 1996, the Servicer has
substantially increased the volume of home equity loans as well as Sav*-A-
Loan home loans that it has originated and serviced.
The following tables set forth certain information relating to the
delinquency and loan loss experience for the Sav*-A-Loan home loans included
in the Servicer's servicing portfolio for the periods shown. Although the
delinquency and loan loss information set forth below reflects the historical
experience of the Servicer with respect to such loans, such experience may be
affected by the substantial expansion and relative lack of seasoning of the
Servicer's Sav*-A-Loan home loan portfolio (as a result of which many of such
loans were not outstanding long enough to give rise to some or all of the
periods of delinquency indicated in the tables below). Accordingly, there
can be no assurance that the future experience of the Loans in the Trust will
be comparable to that reflected in the tables below.
DELINQUENCY AND FORECLOSURE EXPERIENCE
AS OF JUNE 30, 1997
NUMBER OF LOANS PRINCIPAL BALANCE OF LOANS
Sav*-A-Loan Portfolio . . . . . . . . 11,942 $455,075,558
Past Due Loans
One Payment Past Due . . . . . . 64 $1,979,168
Two Payments Past Due . . . . . 22 $862,076
Three or more Payments
Past Due . . . . . . . . . . 50 $1,663,684
Total Past Due Loans . . . . . . . . 136 $4,504,928
Foreclosures Pending . . . . . . . . 0 $0
REO Properties . . . . . . . . . . . 1 $54,958
Aggregate Past Due Loans, Foreclosures
Pending, REO Properties . . . . . 137 $4,559,886
As A % of Portfolio . . . . . . . . . 1.1% 1.0%
LOAN CHARGE-OFF EXPERIENCE
THREE-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED
MARCH 31, 1997 JUNE 30, 1997
Portfolio/(1)/ at Period End . . . . . . $263,775,039 $455,075,558
Average Outstanding/(2)/ . . . . . . . . $216,604,141 $378,875,829
Number of Loans Outstanding . . . . . . . 6,964 11,942
Gross Losses/(3)/ . . . . . . . . . . . . $0 $113,743
Loan Recoveries . . . . . . . . . . . . . $0 $0
Net Loan Charge-Offs . . . . . . . . . . $0 $113,743
Foreclosures Pending . . . . . . . . . . $0 $0
Net Loan Charge-Offs as a percentage
of average outstanding . . . . . . . . 0% 0%
Net Loan Charge-Offs as a percentage
of servicing portfolio at period end . 0% 0%
- -----------------------
/(1)/Portfolio consisting of Sav*-A-Loan product only.
/(2)/"Average Outstanding" for each period presented is the arithmetic
average of the principal balances of the loans in the Servicer's Sav*-A-Loan
servicing portfolio outstanding at the close of business on the final
business day of each month during such period. With respect to REO
Properties, the Servicer generally will determine the fair market value by
reference to the unpaid principal balance thereof.
/(3)/"Gross Losses" means the outstanding principal balance plus any
unreimbursed Servicing Advances with respect to each liquidated loan.
While the above delinquency and foreclosure and loan loss charge-off
experience illustrate Cityscape's experiences for the periods indicated, as
stated above, there can be no assurance that the delinquency and foreclosure
and loan charge-off experiences of the Loans will be similar. The
statistical data in the tables is based on information for a limited period
and on home loans which have been recently originated. The loss experience
with home loans such as these typically increases as the portfolio seasons.
Accordingly, the information set forth above should not be considered to
reflect the credit quality of the Loans included in the Trust or as a basis
of assessing the likelihood, amount or severity of future losses on the
Loans.
UNDERWRITING CRITERIA
All Loans underwritten by Cityscape will have been underwritten pursuant
to Cityscape's "Sav*-A-Loan" underwriting requirements. Generally, the
"Sav*-A-Loan" underwriting standards of Cityscape place a greater emphasis on
the creditworthiness of the borrower than on the underlying collateral in
evaluating the likelihood that a borrower will be able to repay a Loan.
UNDERWRITING GUIDELINES FOR SAV*-A-LOANS. Cityscape's "Sav*-A-Loan"
program is designed for homeowners who may have little or no equity in their
property, but who possess good to excellent credit histories and provable
income, who use the proceeds for home improvements or debt consolidation.
Under the "Sav*-A-Loan" program, Cityscape obtains credit information with
respect to each applicant from two sources and generally does not permit the
ratio of total monthly debt obligations to monthly gross income to exceed
45%. The applicant must generally fall within one of the two highest credit
classifications established by Cityscape. The principal amount of the "Sav*-
A-Loans" purchased or originated by Cityscape generally ranges from a minimum
of $10,000 to a maximum of $75,000. None of the loans originated under the
"Sav*-A-Loan" program will have Combined Loan-to-Value Ratios in excess of
approximately 125%. Each such home loan must be secured by a first, second
or third lien on the related property. The property must be a completed and
owner-occupied one- or two-family property and must have been occupied for at
least six months.
Cityscape considers factors pertaining to the applicant's current
employment, stability of employment and income, financial resources, and
analysis of credit, reflecting not only the ability to pay, but also the
willingness to repay contractual obligations. The property's age, condition,
location, value and continued marketability are additional factors considered
in each risk analysis.
Cityscape's underwriting standards are designed to provide a program for
all qualified applicants in an amount and for a period of time consistent
with their ability to repay. All of Cityscape's underwriting determinations
are made without regard to sex, marital status, race, color, religion, age or
national origin. Each application is evaluated on its individual merits,
applying the guidelines set forth below, to ensure that each application is
considered on an equitable basis.
Cityscape has put into place a credit policy that provides a number of
guidelines to assist the underwriters in the credit review and decision
process. Cityscape's underwriting guidelines provide for the evaluation of a
loan applicant's creditworthiness through the use of a FICO score,
verification of employment and a review of the debt service-to-income ratio
of the applicant. Income is verified through various means, including
without limitation applicant interviews, written verifications with
employers, receipt and review of pay stubs or tax returns. The borrower must
demonstrate sufficient levels of disposable income to satisfy debt repayment
requirements.
In response to changes and developments in the consumer finance area as
well as the refinement of the Company's credit evaluation methodology,
Cityscape's underwriting requirements for the Sav*-A-Loan program may change
from time to time, which in certain instances may result in more stringent
and in other instances less stringent underwriting requirements. Depending
upon the date on which the Loans were originated or purchased by Cityscape,
such Loans included in the Pool may have been originated or purchased by
Cityscape under different underwriting requirements, and accordingly, certain
Loans included in the Pool may have different loan characteristics from other
Loans. Furthermore, to the extent that certain Loans were originated or
purchased by Cityscape under less stringent underwriting requirements, such
Loans may be more likely to experience higher rates of delinquencies,
defaults and losses than those Loans originated or purchased under more
stringent underwriting requirements.
Cityscape generally requires one of the following to be obtained for
each home loan: (i) a Uniform Residential Appraisal Report in compliance with
FNMA or FHLMC guidelines (a "Full Appraisal"), or (ii) a Second Mortgage
Property Value Analysis Report, typically referred to as a "Drive-By
Appraisal Report" which consists exclusively of an exterior inspection of the
property without examination of the interior. A Drive-By Appraisal Report is
required if the borrower has held the Mortgaged Property for more than one
year and the related Mortgage is a first or second mortgage; if the Mortgage
is a third mortgage, a Full Appraisal is required. Cityscape does not
require an appraisal if the borrower has owned the Mortgaged Property for one
year or less; however, Cityscape uses the purchase price set forth on the
HUD-1 form relating to the purchase of the Mortgaged Property to ascertain
the value of the Mortgaged Property.
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, bankruptcies and
similar instances of adverse credit that can be discovered by a search of
public records. An applicant's recent credit performance weighs heavily in
the evaluation of risk by Cityscape. The credit report is used to evaluate
the borrower's payment record and must be current at the time of application.
A lack of credit history will not necessarily preclude a loan if the borrower
has sufficient equity in the property.
Cityscape requires title insurance coverage issued by an approved ALTA
title insurance company on all property securing loans it originates or
purchases which are greater than or equal to $25,000. The loan originator
and its assignees are generally named as the insured. Title insurance
policies indicate the lien position of the mortgage loan and protect
Cityscape against loss if the title or lien position is not as indicated.
With respect to loans of less than $25,000, Cityscape requires that a title
report be completed. The applicant is also required to secure hazard and, in
certain instances, flood insurance in an amount sufficient to cover the
replacement costs of the Mortgaged Property.
Cityscape has established classifications with respect to the credit
profiles of loans based on certain of the borrower's characteristics. Each
loan applicant is placed into one of two letter ratings ("A" and "B",),
depending upon a number of factors including the applicant's credit history,
based on credit bureau reports and employment status. Terms of loans made by
Cityscape, as well as the maximum Combined Loan-to-Value Ratio and debt
service to income ratios (calculated by dividing fixed monthly debt payments
by gross monthly income), vary depending upon the classification of the
borrower. The criteria currently used by Cityscape in classifying loan
applicants can be generalized as follows:
"A" Risk. Under the "A" risk category, a loan applicant must have
generally repaid installment or revolving debt according to its terms.
- Existing mortgage loans: required to be current at the
time the application is submitted, with a maximum of one
(or two on a case-by-case basis) 30-day late payment(s)
within the last 24 months being acceptable.
- Non-mortgage credit: minor derogatory items are allowed,
but a letter of explanation is required; any recent open
collection accounts or open charge-offs, judgments or
liens would generally disqualify a loan applicant from
this category.
- Bankruptcy filings: No prior bankruptcy generally
allowed (or, on a case-by-case basis, must have been
discharged more than 5 years prior to closing).
- Maximum Combined Loan-to-Value Ratio: up to 125%.
- Debt service-to-income ratio: generally 45% or less.
"B" Risk. Under the "B" risk category, a loan applicant must have
generally repaid installment or revolving debt according to its terms.
- Existing mortgage loans: required to be current at the
time the application is submitted, with a maximum of two
30-day late payments within the last 24 months being
acceptable.
- Non-mortgage credit: some prior defaults may have
occurred, but major credit paid or installment debt paid
as agreed may offset some delinquency; any open charge-
offs, judgments or liens would generally disqualify a
loan applicant from this category.
- Bankruptcy filings: must have been discharged more than
three years prior to closing with credit re-established.
- Maximum Combined Loan-to-Value Ratio: up to 125%.
- Debt service-to-income ratio: generally 45% or less.
REPURCHASE OR SUBSTITUTION OF LOANS
The Servicer has an option either to repurchase any Loan incident to
foreclosure, default or imminent default thereof (a "Defaulted Loan") or to
remove such Defaulted Loan and substitute a Qualified Substitute Loan;
provided that the aggregate of the Loan Balances of such Loans may not exceed
10% of the Maximum Collateral Amount. See "Loan Program--Representations by
Sellers; Repurchases or Substitutions" in the Prospectus.
Each of Cityscape and the Transferor 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 any Loan or as to
which a document deficiency exists (each, a "Defective 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 but not
including the due date in the Due Period relating to the Distribution Date on
which such Purchase Price is to be distributed, computed at the Loan Rate.
In lieu of repurchasing a Defective Loan, each of Cityscape and the
Transferor may replace such Defective Loan with one or more Qualified
Substitute Loans. If the aggregate outstanding principal balance of the
Qualified Substitute Loan(s) is less than the outstanding Principal Balance
of the Defective Loan(s), either Cityscape or the Transferor will also remit
for distribution to the holders of the Notes an amount (a "Substitution
Adjustment") 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 differs from the Loan Rate for the Defective Loan which it replaces
(each, a "Deleted Loan") by no more than two percentage points, (ii) has a
principal balance (after application of all payments received on or prior to
the date of such substitution) equal to or less than the Principal Balance of
the Deleted Loan as of such date, (iii) has a lien priority no lower than the
Deleted Loan, (iv) 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 (v) has a borrower with a comparable credit
grade classification than the borrower with respect to the Deleted Loan.
No assurance can be given that, at any particular time, Cityscape will
be capable, financially or otherwise, of repurchasing Defective Loans or
substituting Qualified Substitute Loans for Defective Loans in the manner
described above. If Cityscape repurchases, or is obligated to repurchase,
Defective Loans from any additional series of asset backed securities, the
financial ability of Cityscape to repurchase Defective Loans from the Trust
may be adversely affected. In addition, other events relating to Cityscape
and its mortgage lending and consumer finance operations can occur that would
adversely affect the financial ability of Cityscape 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 Cityscape 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. See "Risk
Factors--Adequacy of Credit Enhancement" and "--Limitations on Repurchase or
Replacement of Defective Loans" herein.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Notes will be provided by (i) the
subordination of distributions in respect of the Residual Interest (as well
as the subordination of certain Classes of Notes to other Classes of Notes,
as described herein) and (ii) the Overcollateralization Amount, which results
from the limited acceleration of the principal amortization of the Notes
relative to the amortization of the Loans by the application of Excess
Spread, as described herein.
SUBORDINATION AND ALLOCATION OF LOSSES
Distributions of interest on the Notes will be made first to the Senior
Notes and then to the Class M-1, Class M-2 and Class B Notes, in that order,
such that no interest will be paid on the Class B Notes until all required
interest payments have been made on the Mezzanine and Senior Notes and no
interest will be paid on the Mezzanine Notes until all required interest
payments have been made on the Senior Notes. In addition, distributions of
principal of the Notes will be made first to the Senior Notes, then to the
Class M-1 Notes, Class M-2 Notes and Class B Notes, in that order. Any
distributions of principal to the Classes of Senior Notes will be made
sequentially in the order of increasing numerical Class designations (other
than the Class A-5 Notes, which will be entitled to receive principal in the
priorities set forth below under "Description of the Notes--Distributions on
the Notes"). All Allocable Loss Amounts applied in reduction of the Class
Principal Balances of the Mezzanine Notes will be applied first to the Class
M-2 Notes and then to the Class M-1 Notes, until their respective Class
Principal Balances have been reduced to zero. In addition, no Allocable Loss
Amounts will be applied in reduction of the Class Principal Balance of any
Class of Mezzanine Notes until the Class Principal Balance of the Class B
Notes has been reduced to zero. Further, no Allocable Loss Amounts will be
applied in reduction of the Class Principal Balance of the Class B Notes
until the Overcollateralization Amount has been reduced to zero. No
Allocable Loss Amounts will be applied to the Classes of Senior Notes. The
rights of the holders of the Residual Interest to receive any distributions
on any Distribution Date generally will be subordinated to the rights of the
holders of the Notes. The subordination described above is intended to
enhance the likelihood of the regular receipt of interest and principal due
to the holders of the Classes of Notes and to afford such holders protection
against losses on the Loans, with the greatest amount of such enhancement and
protection being provided to the Classes of Senior Notes, a lesser amount of
such enhancement and protection being provided to the Class M-1 Notes and, in
particular, the Class M-2 Notes, and the least amount of such enhancement and
protection being provided to the Class B Notes. See "Risk Factors--Adequacy
of Credit Enhancement Limitations" herein.
On each Distribution Date, the "Allocable Loss Amount" will be equal to
the excess, if any, of (a) the aggregate of the Class Principal Balances of
all Classes of Notes (after giving effect to all distributions on such
Distribution Date) over (b) the Pool Principal Balance and the Pre-Funded
Amount, each as of the end of the preceding Due Period.
On each Distribution Date, the "Net Loan Losses" will be equal to the
sum of (A) with respect to the Loans that become Liquidated Loans during the
immediately preceding Due Period, an amount (but not less than zero)
determined as of the related Determination Date equal to: (i) the aggregate
uncollected Principal Balances of such Liquidated Loans as of the last day of
such Due Period, minus (ii) the aggregate amount of any recoveries
attributable to principal from whatever source received during any Due
Period, with respect to such Liquidated Loans, including any Due Period
subsequent to the Due Period wherein such Loan became a Liquidated Loan, and
including without limitation any Net Liquidation Proceeds, any Insurance
Proceeds, any Released Mortgaged Property Proceeds, any post liquidation
proceeds, any payments from the related Obligor and any payments made in
connection with the repurchase of or substitution for a Defective Loan, less
the amount of any expenses incurred in connection with such recoveries; and
(B) any reduction to the Principal Balances of any Loans resulting from an
order issued by a court of appropriate jurisdiction in an insolvency
proceeding.
OVERCOLLATERALIZATION
As of any Distribution Date, the "Overcollateralization Amount" will
equal the excess of the sum of the Pool Principal Balance and the Pre-Funded
Amount, each as of the end of the previous Due Period, over the aggregate of
the sum of the Class Principal Balances of all Classes of Notes (after giving
effect to all distributions on the Classes of Notes and the Residual Interest
on such Distribution Date). On the Closing Date, the Overcollateralization
Amount will be equal to $2,000,000. A limited acceleration of the principal
amortization of the Notes relative to the principal amortization of the Loans
has been designed to increase the Overcollateralization Amount over time by
making additional distributions of principal to the holders of the Notes from
the distribution of Excess Spread until the Overcollateralization Amount is
at least equal to the Overcollateralization Target Amount. The
"Overcollateralization Target Amount" equals (A) with respect to any
Distribution Date occurring prior to the Stepdown Date, the greater of (x)
7.75% of the Maximum Collateral Amount and (y) the Net Delinquency
Calculation Amount, and (B) with respect to any other Distribution Date, the
greater of (x) 15.50% of the Pool Principal Balance as of the end of the
related Due Period and (y) the Net Delinquency Calculation Amount; provided,
however, that the Overcollateralization Target Amount will in no event be
less than 0.50% of the Maximum Collateral Amount.
If on any Distribution Date an Overcollateralization Deficiency (as
defined herein) exists, distributions of Excess Spread, if any, will be made
as an additional distribution of principal to the holders of the Notes, to be
allocated among the Classes of Notes in the order of priority set forth under
"Description of the Notes--Distributions on the Notes" herein. Such
distributions of Excess Spread are intended to accelerate the amortization of
the Class Principal Balances of all Classes of Notes relative to the
amortization of the Loans, thereby increasing the Overcollateralization
Amount. The relative percentage of the aggregate of the Class Principal
Balances of the Classes of Notes to the Pool Principal Balance will decrease
as a result of the application of Excess Spread to reduce such Class
Principal Balances.
On any Distribution Date with respect to which the Overcollateralization
Deficiency Amount is equal to zero, all or a portion of the Excess Spread may
be distributed to the holders of the Residual Interest rather than as
principal to the holders of the Notes, thereby ceasing the acceleration of
principal amortization of the Notes in relation to the principal amortization
of the Pool, until such time as the Overcollateralization Deficiency Amount
is greater than zero (i.e., due to a reduction in the Overcollateralization
Amount as a result of Net Loan Losses or delinquencies or due to an increase
in the Overcollateralization Target Amount as a result of the failure to
satisfy certain delinquency criteria).
While the application of Excess Spread in the manner specified above has
been designed to produce and maintain a given level of overcollateralization,
there can be no assurance that Excess Spread will be generated in sufficient
amounts to ensure that such overcollateralization level will be achieved or
maintained at all times. In particular, a high rate of delinquencies on the
Loans during any Due Period could cause the amount of interest received on
the Loans during such Due Period to be less than the amount of interest
distributable on the Notes on the related Distribution Date. In such a case,
the Class Principal Balances of the Classes of Notes would decrease at a
slower rate relative to the Pool Principal Balance, resulting in a reduction
of the Overcollateralization Amount and, in some circumstances, an Allocable
Loss Amount. In addition, Net Loan Losses will reduce the
Overcollateralization Amount to zero before Allocable Loss Amounts are
applied in reduction of the Class Principal Balances of certain Classes of
Notes. See "Risk Factors--Adequacy of Credit Enhancement" herein.
DESCRIPTION OF THE NOTES
GENERAL
The Cityscape Home Loan Owner Trust 1997-4 (the "Trust") will issue
eight Classes of Home Loan Asset Backed Notes (collectively, the "Notes")
having the designations and aggregate initial principal amounts specified on
the cover hereof pursuant to an Indenture to be dated as of August 31, 1997
(the "Indenture"), between the Trust and the Indenture Trustee. The Trust
will also issue an instrument representing the residual interest (the
"Residual Interest") in the Trust pursuant to the terms of a Trust Agreement
dated as of August 31, 1997 (the "Trust Agreement"), among the Depositor, the
Transferor, the Co-Owner Trustee and the Owner Trustee. The Notes are
secured by the assets of the Trust pursuant to the Indenture.
On the 25th day of each month or, if such day is not a Business Day, the
first Business Day immediately following, commencing in October 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
related Record Date, the portion of the aggregate distribution to be made to
each Noteholder as described below. The "Record Date" with respect to any
Distribution Date shall be the close of business on the last Business Day of
the month preceding the month in which such Distribution Date occurs. Prior
to any termination of the book-entry provisions, distributions on the Book
Entry Securities will be made to Beneficial Owners 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 $100,000 and integral multiples of $1,000 in excess
thereof.
DISTRIBUTIONS ON THE NOTES
For the definitions of certain of the defined terms used in the
following subsections, See "--Related Definitions" below.
AVAILABLE COLLECTION AMOUNT. Distributions on the Notes on each
Distribution Date will be made from the Available Collection Amount. The
Servicer will calculate the Available Collection Amount on the fourteenth
calendar day of each month or, if such day is not a Business Day, then the
immediately preceding Business Day (each such day, a "Determination Date").
With respect to each Distribution Date, the "Available Collection Amount" is
the sum of (i) all amounts received on the Loans or required to be paid by
Cityscape or the Transferor during the related Due Period (exclusive of
amounts not required to be deposited by the Servicer in the Collection
Account and amounts permitted to be withdrawn by the Indenture Trustee from
the Collection Account) as reduced by any portion thereof that may not be
withdrawn therefrom pursuant to an order of a United States bankruptcy court
of competent jurisdiction imposing a stay pursuant to Section 362 of the
United States Bankruptcy Code; (ii) with respect to the final Distribution
Date or an early redemption or termination of the Notes pursuant to the Sale
and Servicing Agreement, the Termination Price; (iii) the Purchase Price paid
for any Loans required to be purchased and the Substitution Adjustment to be
deposited to the Collection Account in connection with any substitution, in
each case prior to the related Determination Date; and (iv) the Capitalized
Interest Requirement (as defined herein), if any, with respect to such
Distribution Date.
Distributions of Interest. Interest on the Class Principal Balance of
-------------------------
each Class of Notes will accrue thereon at the applicable per annum Note
Interest Rate, and will be payable to the holders of such Class of Notes
monthly on each Distribution Date, commencing in October 1997. Interest on
the Class A-1 Notes with respect to a given Distribution Date will accrue
based on the actual number of days included in the period commencing on the
immediately preceding Distribution Date (or the Closing Date in the case of
the first Distribution Date) and ending on the day immediately preceding such
given Distribution Date and will be calculated based on a 360-day year.
Interest on each Class of Notes other than the Class A-1 Notes will be
calculated on the basis of a 360-day year of twelve 30-day months.
With respect to any Distribution Date, interest distributions on the
Notes will be made from the Available Collection Amount (plus, if applicable,
the amount, if any, of Pre-Funding Earnings and, on the Distribution Date
relating to the Due Period in which the termination of the Pre-Funding Period
occurred, the amount on deposit in the Pre-Funding Account at such time) net
of the Trust Fees and Expenses (the "Available Distribution Amount").
Interest payments will be made, first, to the Classes of Senior Notes, pro
rata, based on the amount of interest distributable in respect of each such
Class calculated at the related Note Interest Rate, second, to the Classes of
Mezzanine Notes, sequentially, in the order of their numerical Class
designation, and then to the Class B Notes. Under certain circumstances, the
amount available for interest payments could be less than the amount of
interest payable on all Classes of Notes on any Distribution Date. In such
event, each affected Class will receive its ratable share (based upon the
aggregate amount of interest due to such Class) of the remaining amount
available to be distributed as interest after the payment of all interest due
on each Class having a higher interest payment priority. In addition, any
such interest deficiency will be carried forward as a Noteholders' Interest
Carry-Forward Amount for such Class and will be distributed to holders of
each such Class of Notes on subsequent Distribution Dates to the extent that
sufficient funds are available. Any such interest deficiency could occur,
for example, if delinquencies or losses realized on the Loans were
exceptionally high or were concentrated in a particular month. Interest will
accrue on any Noteholders' Interest Carry-Forward Amount for any Class at the
applicable Note Interest Rate.
Distributions of Principal. Principal distributions will be made to the
--------------------------
holders of the Notes on each Distribution Date in an amount generally equal
to the sum of (i) the Regular Principal Distribution Amount (less, in certain
circumstances, the excess of the Overcollateralization Amount over the
Overcollateralization Target Amount) and (ii) to the extent of the
Overcollateralization Deficiency Amount, any Excess Spread for such
Distribution Date.
Distribution Priorities.
-----------------------
A. On each Distribution Date, the Regular Distribution Amount will be
distributed in the following order of priority:
(i) to the holders of the Senior Notes, the Senior Noteholders'
Interest Distributable Amount for such Distribution Date allocated to
each Class of Senior Notes, pro rata, based on the amount interest
distributable in respect of each such Class based on the related Note
Interest Rate;
(ii) sequentially, to the holders of the Class M-1 and Class M-2
Notes, in that order, the Class M-1 Noteholders' Interest Distributable
Amount and the Class M-2 Noteholders' Interest Distributable Amount,
respectively, for such Distribution Date;
(iii) to the holders of the Class B Notes, the Class B
Noteholders' Interest Distributable Amount for such Distribution Date;
(iv) if with respect to such Distribution Date the Pre-Funding Pro
Rata Distribution Trigger has occurred, the amount on deposit in the
Pre-Funding Account at the end of the Pre-Funding Period will be
distributed as principal to all Classes of Notes and the Residual
Interest (which initially is represented by the Overcollateralization
Amount on the Closing Date), pro rata, based on the Original Class
Principal Balances thereof and the Residual Interest in relation to the
sum of the Original Pool Principal Balance and the Original Pre-Funded
Amount;
(v) first, to the Class A-5 Notes, an amount equal to the Class A-
5 Priority Principal Distribution Amount until the Class Principal
Balance of the Class A-5 Notes is reduced to zero; and, second, 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, in an amount necessary to reduce the
aggregate Class Principal Balance of the Senior Notes to the Senior
Optimal Principal Balance for such Distribution Date,
(vi) sequentially, to the holders of the Class M-1 and the Class
M-2 Notes, in that order, in an amount necessary to reduce the Class
Principal Balances thereof to the Class M-1 Optimal Principal Balance
and the Class M-2 Optimal Principal Balance, respectively, for such
Distribution Date;
(vii) to the holders of the Class B Notes, in an amount
necessary to reduce the Class Principal Balance thereof to zero;
(viii) sequentially, to the Class M-1, Class M-2 and Class B
Notes, in that order, until their respective Loss Reimbursement
Deficiencies have been paid in full; and
(ix) any remaining amount to the holders of the Residual Interest.
B. On each Distribution Date, the Indenture Trustee shall distribute
the Excess Spread, if any, in the following order of priority (in each case
after giving effect to all payments specified in paragraph A. above):
(i) in an amount equal to the Overcollateralization Deficiency
Amount, if any, as follows:
(A) first, to the Class A-5 Notes, an amount equal to the
Class A-5 Priority Excess Spread Distribution Amount, until the
Class Principal Balance of the Class A-5 Notes is reduced to zero
and second, 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, in an amount necessary to reduce the aggregate Class
Principal Balance of the Senior Notes to the Senior Optimal
Principal Balance for such Distribution Date;
(B) sequentially, to the holders of the Class M-1 and Class
M-2 Notes, in that order, until the respective Class Principal
Balances thereof have been reduced to the Class M-1 Optimal
Principal Balance and Class M-2 Optimal Principal Balance,
respectively, for such Distribution Date; and
(C) to the holders of the Class B Notes until the Class
Principal Balance thereof has been reduced to zero; and
(ii) sequentially, to the Class M-1, Class M-2 and Class B Notes,
in that order, until their respective Loss Reimbursement Deficiencies,
if any, have been paid in full; and
(iii) any remaining amount to the holders of the Residual
Interest.
Notwithstanding the priorities specified above, on any Distribution Date
as to which the Class Principal Balances of each of the Class M-1, Class M-2
and Class B Notes and the Overcollateralization Amount have been reduced to
zero, distributions of principal on the Classes of Senior Notes on such
Distribution Date will be applied to such Classes pro rata based on their
respective Class Principal Balances.
RELATED DEFINITIONS
For purposes hereof, the following terms shall have the following
meanings:
Business Day: Any day other than (i) a Saturday or a Sunday or (ii) a
------------
day on which banking institutions in New York City or in the city in which
the corporate trust office of the Indenture Trustee is located are authorized
or obligated by law or executive order to be closed.
Class A Excess Spread Distribution Amount: With respect to any
-----------------------------------------
Distribution Date, the least of (i) the excess of (x) the Class Principal
Balance of all Senior Notes (after giving effect to all distributions
specified in A. above) over (y) the Senior Optimal Principal Balance for such
Distribution Date, (ii) the Overcollateralization Deficiency Amount for such
Distribution Date, and (iii) the Excess Spread for such Distribution Date.
Class A Principal Distribution Amount: With respect to any Distribution
-------------------------------------
Date, the lesser of (i) the Regular Principal Distribution Amount and (ii)
the excess of (x) the aggregate Class Principal Balance of all Senior Notes
(prior to giving effect to distributions on such Distribution Date, other
than any distributions in respect of the Pre-Funded Amount on the
Distribution Date on which a Pre-Funding Pro Rata Distribution Trigger has
occurred) over (y) the Senior Optimal Principal Balance for such Distribution
Date.
Class A-5 Priority Excess Spread Distribution Amount: With respect to
----------------------------------------------------
any Distribution Date, the lesser of (A) the product of (x) the applicable
Class A-5 Priority Percentage for such Distribution Date and (y) the Class A-
5 Pro Rata Excess Spread Distribution Amount for such Distribution Date and
(B) the Class A Excess Spread Distribution Amount.
Class A-5 Pro Rata Excess Spread Distribution Amount: With respect to
----------------------------------------------------
any Distribution Date, an amount equal to the product of (x) a fraction, the
numerator of which is the Class Principal Balance of the Class A-5 Notes
immediately prior to such Distribution Date and the denominator of which is
the aggregate of the Class Principal Balances of the Classes of Senior Notes
immediately prior to such Distribution Date and (y) the Class A Excess Spread
Distribution Amount.
Class A-5 Priority Percentage: With respect to each Distribution Date,
-----------------------------
the percentage specified below:
Distribution Date Priority Percentage
--------------------------------------------
October 1997-September 2000 0%
October 2000-September 2002 45%
October 2002-September 2003 80%
October 2003-September 2004 100%
October 2004 and thereafter 300%
Class A-5 Priority Principal Distribution Amount: With respect to any
------------------------------------------------
Distribution Date, the lesser of (A) the product of (x) the applicable Class
A-5 Priority Percentage for such Distribution Date and (y) the Class A-5 Pro
Rata Principal Distribution Amount for such Distribution Date and (B) the
Class A Principal Distribution Amount.
Class A-5 Pro Rata Principal Distribution Amount: With respect to any
------------------------------------------------
Distribution Date, an amount equal to the product of (x) a fraction, the
numerator of which is the Class Principal Balance of the Class A-5 Notes
immediately prior to such Distribution Date and the denominator of which is
the aggregate Class Principal Balances of the Classes of Senior Notes
immediately prior to such Distribution Date and (y) the Class A Principal
Distribution Amount.
Class B Noteholders' Interest Carry-Forward Amount: With respect to any
--------------------------------------------------
Distribution Date and the Class B Notes, the excess of (A) the Class B
Noteholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Class B Noteholders' Interest Carry-
Forward Amount for preceding Distribution Date over (B) the amount in respect
of interest that is actually distributed to such Notes on such preceding
Distribution Date, plus accrued interest thereon, to the extent legally
permissible, from such preceding Distribution Date at the Class B Note
Interest Rate.
Class B Noteholders' Interest Distributable Amount: With respect to any
--------------------------------------------------
Distribution Date and the Class B Notes, the sum of the Class B Noteholders'
Monthly Interest Distributable Amount for such Distribution Date and the
Class B Noteholders' Interest Carry-Forward Amount for such Distribution
Date.
Class B Noteholders' Monthly Interest Distributable Amount: With
----------------------------------------------------------
respect to each Distribution Date and the Class B Notes, the aggregate amount
of interest accrued during the related Interest Period at the Class B Note
Interest Rate on the Class Principal Balance of the Class B Notes immediately
preceding such Distribution Date.
Class M-1 Noteholders' Interest Carry-Forward Amount: With respect to
----------------------------------------------------
any Distribution Date and the Class M-1 Notes, the excess of (A) the Class M-
1 Noteholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Class M-1 Noteholders' Interest Carry-
Forward Amount for preceding Distribution Date over (B) the amount in respect
of interest that is actually distributed to such Notes on such preceding
Distribution Date, plus accrued interest thereon, to the extent legally
permissible, from such preceding Distribution Date at the Class M-1 Note
Interest Rate.
Class M-1 Noteholders' Interest Distributable Amount: With respect to
----------------------------------------------------
any Distribution Date and the Class M-1 Notes, the sum of the Class M-1
Noteholders' Monthly Interest Distributable Amount for such Distribution Date
and the Class M-1 Noteholders' Interest Carry-Forward Amount for such
Distribution Date.
Class M-1 Noteholders' Monthly Interest Distributable Amount: With
------------------------------------------------------------
respect to each Distribution Date and the Class M-1 Notes, the aggregate
amount of interest accrued during the related Interest Period at the Class M-
1 Note Interest Rate on the Class Principal Balance of the Class M-1 Notes
immediately preceding such Distribution Date.
Class M-1 Optimal Principal Balance: With respect to any Distribution
-----------------------------------
Date prior to the Stepdown Date, zero; and with respect to any other
Distribution Date, the Pool Principal Balance as of the preceding
Determination Date minus the sum of (i) the aggregate Class Principal Balance
of the Senior Notes (after taking into account distributions made on such
Distribution Date in reduction of the Class Principal Balances of the Classes
of Senior Notes made prior to such determination) and (ii) the greater of (x)
the sum of (1) 25.5% of the Pool Principal Balance as of the preceding
Determination Date and (2) the Overcollateralization Target Amount for such
Distribution Date (calculated without giving effect to the proviso in the
definition thereof) and (y) 0.50% of the Maximum Collateral Amount; provided,
however, that the Class M-1 Optimal Principal Balance shall never be less
than zero or greater than the Original Class Principal Balance of the Class
M-1 Notes.
Class M-2 Noteholders' Interest Carry-Forward Amount: With respect to
----------------------------------------------------
any Distribution Date and the Class M-2 Notes, the excess of (A) the Class M-
2 Noteholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Class M-2 Noteholders' Interest Carry-
Forward Amount for preceding Distribution Date over (B) the amount in respect
of interest that is actually distributed to such Notes on such preceding
Distribution Date, plus accrued interest thereon, to the extent legally
permissible, from such preceding Distribution Date at the Class M-2 Note
Interest Rate.
Class M-2 Noteholders' Interest Distributable Amount: With respect to
----------------------------------------------------
any Distribution Date and the Class M-2 Notes, the sum of the Class M-2
Noteholders' Monthly Interest Distributable Amount for such Distribution Date
and the Class M-2 Noteholders' Interest Carry-Forward Amount for such
Distribution Date.
Class M-2 Noteholders' Monthly Interest Distributable Amount: With
------------------------------------------------------------
respect to each Distribution Date and the Class M-2 Notes, the aggregate
amount of interest accrued during the related Interest Period at the Class M-
2 Note Interest Rate on the Class Principal Balance of the Class M-2 Notes
immediately preceding such Distribution Date.
Class M-2 Optimal Principal Balance: With respect to any Distribution
-----------------------------------
Date prior to the Stepdown Date, zero; and with respect to any other
Distribution Date, the Pool Principal Balance as of the preceding
Determination Date minus the sum of (i) the aggregate Class Principal Balance
of the Senior Notes (after taking into account any distributions made on such
Distribution Date in reduction of the Class Principal Balances of the Classes
of Senior Notes made prior to such determination) plus the Class Principal
Balance of the Class M-1 Notes (after taking into account any distributions
made on such Distribution Date in reduction of the Class Principal Balance of
the Class M-1 Notes prior to such determination) and (ii) the greater of
(x) the sum of (1) 12.0% of the Pool Principal Balance as of the preceding
Determination Date and (2) the Overcollateralization Target Amount for such
Distribution Date (without giving effect to the proviso in the definition
thereof) and (y) 0.50% of the Maximum Collateral Amount; provided, however,
that the Class M-2 Optimal Principal Balance shall never be less than zero or
greater than the Original Class Principal Balance of the Class M-2 Notes.
Excess Spread: With respect to any Distribution Date, the excess of (a)
-------------
the Available Distribution Amount over (b) the Regular Distribution Amount.
Insurance Proceeds: With respect to any Loan, the proceeds paid to the
------------------
Servicer by any insurer pursuant to any insurance policy covering a Loan,
Mortgaged Property or REO Property or any other insurance policy that relates
to a Loan, net of any expenses which are incurred by the Servicer in
connection with the collection of such proceeds and not otherwise reimbursed
to the Servicer, but excluding the proceeds of any insurance policy that are
to be applied to the restoration or repair of the Mortgaged Property or
released to the borrower in accordance with accepted loan servicing
procedures.
Interest Period: With respect to the Class A-1 Notes for a given
---------------
Distribution Date, the actual number of days included in the period
commencing on the immediately preceding Distribution Date (or the Closing
Date in the case of the first Distribution Date) and ending on the day
immediately preceding such given Distribution Date calculated based on a 360-
day year. With respect to the Classes of Notes other than the Class A-1
Notes for a given Distribution Date, the calendar month preceding the month
of such Distribution Date based on a 360-day year consisting of twelve 30-day
months.
Liquidated Loan: With respect to any date of determination and any Loan
---------------
as to which the Servicer has determined that all recoverable liquidation and
insurance proceeds have been received, which will be deemed to occur upon the
earlier of: (a) the liquidation of the related Mortgaged Property acquired
through foreclosure or similar proceedings, (b) the Servicer's determination
in accordance with customary accepted practices that no further amounts are
collectible from the Loan or (c) any portion of a scheduled monthly payment
of principal and interest is in excess of 180 days past due.
Loss Reimbursement Deficiency: As of any date of determination and as
-----------------------------
to the Class M-1 Notes, Class M-2 Notes or Class B Notes, the amount of
Allocable Loss Amounts, together with interest thereon, applied to the
reduction of the Class Principal Balance of such Class and not reimbursed
pursuant to the Sale and Servicing Agreement.
Net Delinquency Calculation Amount: With respect to any Distribution
----------------------------------
Date, the excess, if any, of (x) the product of 2.5 and the Six-Month Rolling
Delinquency Average over (y) the aggregate of the amounts of Excess Spread
for the three preceding Distribution Dates.
Net Liquidation Proceeds: With respect to any Distribution Date, any
------------------------
cash amounts received from Liquidated Loans during the related Due Period,
whether through trustee's sale, foreclosure sale, disposition of Mortgaged
Properties or otherwise (other than Insurance Proceeds and Released Mortgaged
Property Proceeds), and any other cash amounts received in connection with
the management of the Mortgaged Properties from Defaulted Loans, in each
case, net of any reimbursements to the Servicer made from such amounts for
any unreimbursed Servicing Compensation and Servicing Advances (including
nonrecoverable Servicing Advances) made and any other fees and expenses paid
in connection with the foreclosure, conservation and liquidation of the
related Liquidated Loans or Mortgaged Properties pursuant to the Sale and
Servicing Agreement.
Note Interest Rate: With respect to each Class of Notes, the per annum
------------------
rate set forth or described below:
Class A-1: The lesser of (a) One-Month LIBOR plus 0.14% and (b)
12.00%./(*)/
Class A-2: 6.77%.
Class A-3: 7.09%.
Class A-4: 7.44%./(**)/
Class A-5: 7.01%./(**)/
Class M-1: 7.56%./(**)/
Class M-2: 7.71%./(**)/
Class B: 7.94%.
- ---------------
/(*)/For the first Distribution Date, the Class A-1 Note Interest Rate shall
be 5.79625%.
/(**)/On any Distribution Date after the first Distribution Date on which the
holders of the Residual Interest are permitted to effect an early termination
of the Trust as described herein under "--Optional Termination of the Trust,"
the Note Interest Rates for the Class A-4 Notes, Class A-5 Notes, Class M-1
Notes and Class M-2 Notes shall be 7.94%, 7.51%, 8.06% and 8.21%,
respectively.
Noteholders' Interest Carry-Forward Amount: With respect to any
------------------------------------------
Distribution Date, any of the Senior Noteholders' Interest Carry-Forward
Amount, the Class M-1 Interest Carry-Forward Amount, the Class M-2 Interest
Carry-Forward Amount or the Class B Interest Carry-Forward Amount.
Noteholders' Interest Distributable Amount: With respect to any
------------------------------------------
Distribution Date, the sum of the Senior Noteholders' Interest Distributable
Amount, the Class M-1 Interest Distributable Amount, the Class M-2 Interest
Distributable Amount and the Class B Interest Distributable Amount.
Overcollateralization Amount: With respect to any Distribution Date,
----------------------------
the amount equal to the excess of (a) the sum of the Pool Principal Balance
and the Pre-Funded Amount, each as of the end of the preceding Due Period,
over (b) the aggregate of the Class Principal Balances of the Classes of
Notes (after giving effect to distributions on the Notes and the Residual
Interest on such Distribution Date).
Overcollateralization Deficiency Amount: With respect to any date of
---------------------------------------
determination, the excess, if any, of the Overcollateralization Target Amount
over the Overcollateralization Amount (such Overcollateralization Amount to
be calculated after giving effect to all payments on the Notes and the
Residual Interest on such Distribution Date as specified in A. above).
Overcollateralization Target Amount: (A) With respect to any
-----------------------------------
Distribution Date occurring prior to the Stepdown Date, an amount equal to
the greater of (x) 7.75% of the Maximum Collateral Amount and (y) the Net
Delinquency Calculation Amount; and (B) with respect to any other
Distribution Date, an amount equal to the greater of (x) 15.5% of the Pool
Principal Balance as of the end of the related Due Period and (y) the Net
Delinquency Calculation Amount; provided, however, that the
Overcollateralization Target Amount shall in no event be less than 0.50% of
the Maximum Collateral Amount.
Regular Distribution Amount: With respect to any Distribution Date, the
---------------------------
lesser of (a) the Available Distribution Amount and (b) the sum of (i) the
aggregate of the Noteholders' Interest Distributable Amounts, (ii) the
Regular Principal Distribution Amount and (iii) if such Distribution Date
relates to the Due Period in which the Pre-Funding Period ended and at the
termination of such Pre-Funding Period a Pre-Funding Pro Rata Distribution
Trigger had occurred, the amount on deposit in the Pre-Funding Account on
such date.
Regular Principal Distribution Amount: On each Distribution Date, an
-------------------------------------
amount equal to the lesser of:
(A) the sum of (i) each payment of principal collected by the Servicer
during the related Due Period, (ii) all partial and full principal
prepayments applied by the Servicer during such related Due Period, (iii) the
principal portion of all Net Liquidation Proceeds, Insurance Proceeds and
Released Mortgaged Property Proceeds received during the related Due Period,
(iv) that portion of the purchase price of any repurchased Loan which
represents principal, (v) the principal portion of any Substitution
Adjustments required to be deposited in the Collection Account as of the
related Determination Date, (vi) on the Distribution Date in which the Trust
is to be terminated pursuant to the Sale and Servicing Agreement, that
portion of the Termination Price to be applied to the payment of principal of
the Notes and (v) if such Distribution Date relates to the Due Period in
which the Pre-Funding Period ended and at the termination of such Pre-Funding
Period a Pre-Funding Pro Rata Distribution Trigger had not occurred, the
amount on deposit in the Pre-Funding Account on such date; and
(B) the aggregate of the Class Principal Balances of the Classes of
Notes immediately prior to such Distribution Date.
Released Mortgaged Property Proceeds: With respect to any Distribution
------------------------------------
Date, the proceeds received by the Servicer in connection with (i) a taking
of an entire Mortgaged Property by exercise of the power of eminent domain or
condemnation or (ii) any release of part of the Mortgaged Property from the
lien of the related Mortgage, whether by partial condemnation, sale or
otherwise, which in either case are not released to the borrower in
accordance with applicable law, accepted mortgage servicing procedures and
the Sale and Servicing Agreement.
Senior Noteholders' Interest Carry-Forward Amount: With respect to any
-------------------------------------------------
Distribution Date and the Senior Notes, the excess of (A) the Senior
Noteholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Senior Noteholders' Interest Carry-
Forward Amount for preceding Distribution Date over (B) the amount in respect
of interest that is actually distributed to such Notes on such preceding
Distribution Date, plus accrued interest thereon, to the extent legally
permissible, from such preceding Distribution Date at the related Note
Interest Rate.
Senior Noteholders' Interest Distributable Amount: With respect to any
-------------------------------------------------
Distribution Date and the Senior Notes, the sum of the Senior Noteholders'
Monthly Interest Distributable Amount for such Distribution Date and the
Senior Noteholders' Interest Carry-Forward Amount for such Distribution Date.
Senior Noteholders' Monthly Interest Distributable Amount: With respect
---------------------------------------------------------
to each Distribution Date and the Classes of Senior Notes, the aggregate
amount of interest accrued during the related Interest Period at the
respective Note Interest Rates on the Class Principal Balances of the Classes
of Senior Notes immediately preceding such Distribution Date.
Senior Optimal Principal Balance: With respect to any Distribution Date
--------------------------------
prior to the Stepdown Date, zero; with respect to any other Distribution
Date, an amount equal to the Pool Principal Balance as of the preceding
Determination Date minus the greater of (a) the sum of (1) 55.0% of the Pool
Principal Balance as of the preceding Determination Date and (2) the
Overcollateralization Target Amount for such Distribution Date (without
giving effect to the proviso in the definition thereof) and (b) 0.50% of the
Maximum Collateral Amount; provided, however, that the Senior Optimal
Principal Balance shall never be less than zero or greater than aggregate
Class Principal Balance of the Senior Notes as of the Closing Date.
Six-Month Rolling Delinquency Average: With respect to any Distribution
-------------------------------------
Date, the average of the applicable 60-Day Delinquency Amounts for each of
the six immediately preceding Due Periods, where the 60-Day Delinquency
Amount for any Due Period is the aggregate of the Principal Balances of all
Loans that are 60 or more days delinquent, in foreclosure or REO Property as
of the end of such Due Period.
Stepdown Date: The first Distribution Date occurring after September
-------------
2000 as to which all of the following conditions exist:
(1) the Pool Principal Balance has been reduced to an amount less than
or equal to 50% of the Maximum Collateral Amount;
(2) the Net Delinquency Calculation Amount is less than 7.75% of the
Maximum Collateral Amount; and
(3) the aggregate Class Principal Balance of the Senior Notes (after
giving effect to distributions of principal on such Distribution Date) will
be able to be reduced on such Distribution Date (such determination to be
made by the Indenture Trustee prior to making actual distributions on such
Distribution Date) to the excess of (i) the Pool Principal Balance as of the
preceding Determination Date over (ii) the greater of (a) the sum of (1)
55.0% of the Pool Principal Balance as of the preceding Determination Date
and (2) the Overcollateralization Target Amount for such Distribution Date
(such Overcollateralization Target Amount calculated without giving effect to
the proviso in the definition thereof and calculated pursuant only to clause
(B) in the definition thereof) and (b) 0.50% of the Maximum Collateral
Amount.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Interest Period (each such date, an "Interest
Determination Date"), the Indenture Trustee will determine the London
interbank offered rate for one-month United States dollar deposits ("One-
Month LIBOR") for such Interest Period for the Class A-1 Notes on the basis
of the offered rates of the Reference Banks for one-month United States
dollar deposits, as such rates appear on the Telerate Page 3750, as of 11:00
a.m. (London time) on such Interest Determination Date. As used in this
section, "LIBOR Business Day" means a day on which banks are open for dealing
in foreign currency and exchange in London and New York City; "Telerate Page
3750" means the display page currently so designated on the Dow Jones
Telerate Service (or such other page as may replace that page on that service
for the purpose of displaying comparable rates or prices); and "Reference
Banks" means leading banks selected by the Indenture Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market
(i) with an established place of business in London, (ii) whose quotations
appear on the Telerate Page 3750 on the Interest Determination Date in
question, (iii) which have been designated as such by the Indenture Trustee
and (iv) not controlling, controlled by, or under common control with, the
Depositor, Cityscape or any successor Servicer.
On each Interest Determination Date, One-Month LIBOR for the related
Interest Period for the Class A-1 Notes will be established by the Indenture
Trustee as follows:
(a) If on such Interest Determination Date two or more Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Interest Period will be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations, One-Month LIBOR for the
related Interest Period will be the higher of (x) One-Month LIBOR as
determined on the previous Interest Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate" will be the rate per
annum that the Indenture Trustee determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 0.0625%) of the one-month United States dollar lending rates
which New York City banks selected by the Indenture Trustee are quoting
on the relevant Interest Determination Date to the principal London
offices of leading banks in the London interbank market or, in the event
that the Indenture Trustee can determine no such arithmetic mean, (ii)
the lowest one-month United States dollar lending rate which New York
City banks selected by the Indenture Trustee are quoting on such
Interest Determination Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination Date
by the Indenture Trustee and the Indenture Trustee's calculation of the rate
of interest applicable to the Class A-1 Notes for the related Interest Period
will (in the absence of manifest error) be final and binding.
APPLICATION OF ALLOCABLE LOSS AMOUNTS
Following any reduction of the Overcollateralization Amount to zero, any
Allocable Loss Amounts will be applied, sequentially, in reduction of the
Class Principal Balances of the Class B, Class M-2 and Class M-1 Notes, in
that order, until their respective Class Principal Balances have been reduced
to zero. The Class Principal Balances of the Classes of Senior Notes will
not be reduced by any application of Allocable Loss Amounts. The reduction
of the Class Principal Balance of any applicable Class of Notes by the
application of Allocable Loss Amounts entitles such Class to reimbursement in
an amount equal to the Loss Reimbursement Deficiency. Each such Class of
Notes will be entitled to receive its Loss Reimbursement Deficiency, or any
portion thereof, in accordance with the payment priorities specified herein.
Payment in respect of Loss Reimbursement Deficiencies will not reduce the
Class Principal Balance of each related Class. The Loss Reimbursement
Deficiency with respect to any Class will remain outstanding until the
earlier of (x) the payment in full of such amount to the holders of such
Class and (y) the occurrence of the applicable Final Maturity Date (although
there is no guarantee that such amounts will be paid on such date).
PRE-FUNDING ACCOUNT
On the Closing Date, approximately $48,830,430.08 (the "Original Pre-
Funded Amount") will be deposited in an account (the "Pre-Funding Account"),
which account will be in the name of the Indenture Trustee and shall be part
of the Trust and which amount will be used to acquire Subsequent Loans.
During the Pre-Funding Period, the amount on deposit in the Pre-Funding
Account (net of investment earnings thereon) (the "Pre-Funded Amount") will
be reduced by the amount thereof used to purchase Subsequent Loans in
accordance with the Sale and Servicing Agreement. The "Pre-Funding Period"
is the period commencing on the Closing Date and ending generally on the
earlier to occur of (i) the date on which the amount on deposit in the Pre-
Funding Account (net of any investment earnings thereon) are less than
$100,000 and (ii) October 31, 1997. On the Distribution Date following the
Due Period in which the termination of the Pre-Funding Period occurs, if the
Pre-Funded Amount at the end of the Pre-Funding Period is less than $100,000,
any such Pre-Funded Amount will be distributed to holders of the Classes of
Notes then entitled to receive principal on such Distribution Date in
reduction of the related Class Principal Balances, thus resulting in a
partial redemption of the related Notes on such date. On the Distribution
Date following the Due Period in which the termination of the Pre-Funding
Period occurs, if the Pre-Funded Amount at the end of the Pre-Funding Period
is greater than or equal to $100,000 (such event, a "Pre-Funding Pro Rata
Distribution Trigger"), such Pre-Funded Amount will be distributed to the
holders of all Classes of Notes and the Residual Interest (which initially is
represented by the Overcollateralization Amount on the Closing Date), pro
rata, based on the Original Class Principal Balances thereof and the Residual
Interest in relation to the sum of the Original Pool Principal Balance and
the Original Pre-Funded Amount.
Amounts on deposit in the Pre-Funding Account will be invested in
eligible investments. All interest and any other investment earnings on
amounts on deposit in the Pre-Funding Account will be deposited in the Note
Distribution Account.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, a portion of the sales proceeds of the Notes will
be deposited in an account (the "Capitalized Interest Account") for
application by the Indenture Trustee on the Distribution Dates in October
1997 and November 1997 to cover shortfalls in interest on the Notes that may
arise due to the utilization of the Pre-Funding Account as described herein.
Any amounts remaining in the Capitalized Interest Account at the end of the
Pre-Funding Period will be paid to Cityscape.
OPTIONAL TERMINATION OF THE TRUST
The holders of an aggregate percentage interest in the Residual Interest
in excess of 50% (the "Majority Residual Interestholders") may, at their
option, effect an early termination of the Trust on or after any Distribution
Date on which the Pool Principal Balance declines to 10% or less of the
Maximum Collateral Amount, by purchasing all of the Loans at a price equal to
or greater than the Termination Price. The "Termination Price" shall be an
amount equal to the sum of (i) the then outstanding Principal Balances of the
Loans plus all accrued and unpaid interest thereon, (ii) any Trust Fees and
Expenses due and unpaid on such date and (iii) any unreimbursed Servicing
Advances including such Servicing Advances deemed to be nonrecoverable. The
proceeds from such sale will be distributed in the order and priority set
forth above under "--Distribution Priorities".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, Sale and
Servicing Agreement, the Administration Agreement, the Custodial Agreement
and the Trust Agreement (collectively, the "Transfer and Servicing
Agreements"). Forms of certain of the Transfer and Servicing Agreements have
been filed as exhibits to the Registration Statement. 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 "The Agreements" in the Prospectus, to which
description reference is hereby made.
SALE AND ASSIGNMENT OF THE LOANS
On the Closing Date, the Depositor will sell, convey, transfer and
assign the Loans to the Trust. The Trust concurrently with the sale,
conveyance, transfer and assignment of the Loans, will deliver (or cause to
be delivered), the Notes to the Depositor in exchange for the Loans. The
Trust will pledge and assign the Loans to the Indenture Trustee in exchange
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 Depositor will deliver (or cause to be delivered), as
to each Loan, to the Indenture Trustee or to the Custodian, the related Note
endorsed in blank or to the order of the Indenture Trustee, without recourse,
any assumption and modification agreements and the Mortgage with evidence of
recording indicated thereon (except for any Mortgage not returned from the
public recording office), an assignment of the Mortgage in blank or in the
name of the Indenture Trustee, in recordable form, and any intervening
assignments of the Mortgage (each, an "Indenture Trustee's Loan File").
Assignments to the Indenture Trustee of the Mortgages will be recorded in
order to protect the Trust and the Indenture Trustee's interest in the Loans
against the claims of certain creditors of Cityscape or subsequent
purchasers. Cityscape will deliver or cause to be delivered to the Indenture
Trustee after recordation the assignments of the Mortgages and the Mortgages.
In the event that Cityscape cannot deliver the Mortgage or any assignment
with evidence of recording thereon concurrently with the conveyance thereof
under the Sale and Servicing Agreement because it has or they have not yet
been returned by the public recording office or because such office retains
the original thereof, then Cityscape will deliver or cause to be delivered to
the Indenture Trustee or the Custodian a certified true photocopy of such
Mortgage or assignment. Cityscape will deliver or cause to be delivered to
the Indenture Trustee or the Custodian any such Mortgage or assignment with
evidence of recording indicated thereon upon receipt thereof from the public
recording office. The Indenture Trustee or the Custodian will agree, for the
benefit of the holders of the Notes, to review (or cause to be reviewed) each
Indenture Trustee's Loan File within 10 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 its services pursuant to the Sale and Servicing
Agreement, the Servicer is entitled to the Servicing Fee and additional
servicing compensation and reimbursement as described under "Servicing"
below. 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.
SERVICING
In consideration for the performance of the daily loan servicing
functions for the Loans, the Servicer is entitled to a monthly fee (the
"Servicing Fee") equal to 0.50% (50 basis points) per annum (the "Servicing
Fee Rate") of the Pool Principal Balance as of the first day of the
immediately preceding Due Period. See "Risk Factors--Dependence on Servicer
for Servicing Loans" herein. The Servicer will pay the fees of any
Subservicer out of the amounts it receives as the Servicing Fee. In addition
to the Servicing Fee, the Servicer is entitled to retain additional servicing
compensation in the form of assumption and other administrative fees, release
fees, insufficient funds charges, late payment charges and any other
servicing-related penalties and fees (collectively such additional
compensation and Servicing Fee, the "Servicing Compensation").
In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. However, the Servicer will
make reasonable and customary expense advances with respect to the Loans
(each, a "Servicing Advance") in accordance with their servicing obligations
under the Sale and Servicing Agreement and will be entitled to receive
reimbursement for such Servicing Advances as described herein. For example,
with respect to a Loan, such Servicing Advances may include costs and
expenses advanced for the preservation, restoration and protection of any
Mortgaged Property, including advances to pay delinquent real estate taxes
and assessments. Any Servicing Advances previously made and determined by
the Servicer to be nonrecoverable, in accordance with accepted servicing
procedures will be reimbursable from amounts in the Collection Account prior
to distributions to Noteholders.
As described in the Prospectus under "The Agreements--Certain Matters
Affecting the Master Servicer and the Depositor", an Event of Default shall
occur under the Sale and Servicing Agreement if any of the following were to
occur: (i) any failure of the 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 any failure by the Servicer to pay when due any amount
payable by it under the Sale and Servicing Agreement; (ii) any failure by the
Servicer duly to observe or perform in any material respect any other of its
covenants or agreements in the Sale and Servicing Agreement, which failure
continues unremedied for thirty business days after notice; (iii) certain
events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings relating to the Servicer and certain
actions by the Servicer indicating insolvency, reorganization or inability to
pay its obligations or the Servicer shall dissolve or liquidate, in whole or
part, in any material respect or (iv) the loss experience on the Loans
exceeding certain levels set forth in the Sale and Servicing Agreement.
COLLECTION ACCOUNT, NOTE DISTRIBUTION ACCOUNT AND CERTIFICATE DISTRIBUTION
ACCOUNT
The Servicer is required to use its best efforts to deposit in an
Eligible Account (the "Collection Account"), within two Business Days of
receipt, all payments received after the Cut-Off Date on account of principal
and interest, all Net Liquidation Proceeds, Insurance Proceeds, Released
Mortgaged Property Proceeds, post liquidation proceeds, any amounts payable
in connection with the repurchase or substitution of any Loan and any amount
required to be deposited in the Collection Account in connection with the
termination of the Notes. The foregoing requirements for deposit in the
Collection Account will be exclusive of payments on account of principal and
interest collected on the Loans on or before the applicable Cut-Off Date.
Withdrawals will be made from the Collection Account only for the purposes
specified in the Sale and Servicing Agreement (including the payment of
Servicing Compensation). 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.
The Servicer will establish and maintain with the Indenture Trustee an
account, in the name of the Indenture Trustee on behalf of the Noteholders,
into which amounts released from the Collection Account for distribution to
the Noteholders will be deposited and from which all distributions to the
Noteholders will be made (the "Note Distribution Account").
On the Business Day prior to each Distribution Date, the Indenture
Trustee will deposit into the Note Distribution Account the Available
Collection Amount by making the appropriate withdrawals from the Collection
Account. On each Distribution Date, the Indenture Trustee will make
withdrawals from the Note Distribution Account for application of the amounts
specified below in the following order of priority:
(i) to provide for the payment of certain fees of the Trust in the
following order: (a) to the Indenture Trustee, an amount equal to the
Indenture Trustee Fee and all unpaid Indenture Trustee Fees from prior
Due Periods and (b) to the Servicer on behalf of the Owner Trustee, an
amount equal to the Owner Trustee Fee and all unpaid Owner Trustee Fees
from prior Due Periods; and
(ii) to provide for the payments to the holders of the Notes, the
Residual Interestholders and the Servicer of the amounts specified
herein under "Description of the Notes--Distributions on the Notes."
INCOME FROM ACCOUNTS
So long as no Event of Default will have occurred and be continuing,
amounts on deposit in the Note Distribution Account (together with the
Collection Account, the "Accounts") will be invested by the Indenture
Trustee, as directed by the Servicer, in one or more Permitted Investments
(as defined in the Sale and Servicing Agreement) bearing interest or sold at
a discount. No such investment in any Account will mature later than the
Business Day immediately preceding the next Distribution Date. All income or
other gain from investments in any Account will be deposited in such Account
immediately on receipt, unless otherwise specified herein.
WITHDRAWALS FROM THE COLLECTION ACCOUNT
The Indenture Trustee, at the direction of the Servicer shall make the
following withdrawals from the Collection Account, in no particular order of
priority: (i) to withdraw any amount not required to be deposited in the
Collection Account or deposited therein in error; (ii) on each Distribution
Date, to pay to the Servicer any accrued and unpaid Servicing Compensation
not otherwise withheld as permitted by the Sale and Servicing Agreement;
(iii) on each Distribution Date, to pay to the Servicer any unreimbursed
Servicing Advances; provided, however, that the Servicer's right to
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reimbursement for unreimbursed Servicing Advances shall be limited to late
collections on the related Loans, including, without limitation, late
collections constituting Liquidation Proceeds, Released Mortgaged Property
Proceeds, Insurance Proceeds, post liquidation proceeds and such other
amounts as may be collected by the Servicer from the related Obligor or
otherwise relating to the Loan in respect of which such unreimbursed amounts
are owed; (iv) on each Distribution Date, to reimburse the Servicer for any
Servicing Advances determined by the Servicer in good faith to have become
nonrecoverable Servicing Advances; and (v) make payments as set forth in the
Sale and Servicing Agreement.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Notes in their own names or as pledgees. For the purpose
of meeting the legal requirements of certain jurisdictions, the 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.
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
Sale and Servicing Agreement and 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 Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Servicer will be obligated to appoint a successor thereto.
The Servicer may 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, or 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.
Any resignation or removal of the Owner Trustee or Indenture Trustee and
appointment of a successor thereto will not become effective until acceptance
of the appointment by such successor.
The Trust Agreement and Indenture will provide that the Owner Trustee
and Indenture Trustee will be entitled to indemnification by the Transferor
or Cityscape, and will be held harmless against, any loss, liability or
expense incurred by the Owner Trustee or Indenture Trustee not resulting from
its own willful misfeasance, bad faith or negligence (other than by reason of
a breach of any of its representations or warranties to be set forth in the
Trust Agreement, the Indenture or the Sale and Servicing Agreement, 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 Notes or of any Loans or related
documents, and will not be accountable for the use or application by the
Depositor or the Servicer of any funds paid to the Depositor or the Servicer
in respect of the Notes, the Loans, or the investment of any monies by the
Servicer before such monies are deposited into the Accounts. 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 or the
Sale and Servicing Agreement.
The Indenture Trustee will make no representations as to the validity or
sufficiency of the Indenture, 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 or the Servicer of
any funds paid to the Depositor or the Servicer in respect of the Notes or
the Loans, or the investment of any monies by the Servicer before such monies
are deposited into any of the Accounts. So long as no Event of Default under
the Indenture has occurred and is continuing, the Indenture Trustee will be
required to perform only those duties specifically required of it under the
Indenture or the Sale and Servicing Agreement. Generally, those duties will
be limited to the receipt of the various certificates, reports or other
instruments required to be furnished to the Indenture Trustee under the
Indenture, in which case it will only be required to examine them to
determine whether they conform to the requirements of the Indenture. The
Indenture Trustee will not be charged with knowledge of a failure by the
Servicer to perform its duties under the Trust Agreement, Sale and Servicing
Agreement or Administration Agreement which failure constitutes an Event of
Default under the Indenture unless the Indenture Trustee obtains actual
knowledge of such failure as will be specified in the Indenture or the Sale
and Servicing Agreement.
The Indenture Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Indenture or to make any investigation
of matters arising thereunder or to institute, conduct or defend any
litigation thereunder or in relation thereto at the request, order or
direction of any of the Noteholders, unless such Noteholders have offered to
the Indenture Trustee reasonable security or indemnity against the costs,
expenses and liabilities that may be incurred therein or thereby. No
Noteholder will have any right under the Indenture to institute any
proceeding with respect to the Indenture, unless such holder previously has
given to the Indenture Trustee written notice of the occurrence of an Event
of Default and (i) the Event of Default arises from the Servicer's failure to
remit payments when due or (ii) Noteholders evidencing not less than 25% of
the voting interests of each 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 distributions will be
made on any Class of Senior Notes until the Class Principal Balance of each
Class of Senior Notes having a lower numerical designation has been reduced
to zero, and no principal distributions will be made on the Mezzanine Notes
until all required principal distributions have been made in respect of the
Senior Notes. In addition, except as otherwise provided, no distributions of
principal with respect to the Class B Notes will be made until the required
principal distributions have been made in respect of all Classes of Senior
Notes and Mezzanine Notes. See "Description of the Notes--Distributions on
the Notes" herein. As the rate of payment of principal of each Class of
Notes depends primarily on the rate of payment (including prepayments) of the
Loans, final payment of any Class of Notes could occur significantly earlier
than the 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 subordination of the Class B Notes to the Senior Notes and Mezzanine
Notes will provide limited protection to the holders of the Senior and
Mezzanine Notes against losses on the Loans. Accordingly, the yield on the
Class B Notes will be extremely sensitive to the delinquency and loss
experience of the Loans and the timing of any such delinquencies and losses
as well as the amount of Excess Spread from time to time. If the actual rate
and amount of delinquencies and losses experienced by the Loans exceed the
rate and amount of such delinquencies and losses assumed by an investor, the
yield to maturity on the Class B Notes may be lower than anticipated.
The effective yield to the holders of any Class of Notes (other than the
Class A-1 Notes) will be lower than the yield otherwise produced by the
applicable Note Interest Rate, because the distribution of the interest
accrued during each Interest 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 Notes--Distributions on
the Notes" herein. This delay will result in funds being passed through to
the holders of the Notes (other than the Class A-1 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 application of Excess Spread to reduce the Class
Principal Balances of the Notes to the extent described herein under
"Description of Credit Enhancement--Overcollateralization," and, under
certain circumstances, the delinquency rate experienced by 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 Maximum Collateral Amount, the Majority Residual Interestholders may
effect an early termination of the Trust, resulting in a redemption of the
Notes. See "Description of the Notes--Optional Termination of the Trust"
herein.
The "weighted average life" of a Note refers to the average amount of
time that will elapse from September 16, 1997 (the "Settlement Date") to the
date each dollar in respect of principal of such Note is repaid. The
weighted average lives of the Notes will be influenced by, among other
factors, the rate at which principal reductions occur on the Loans, the
extent to which high rates of delinquencies on the Loans during any Due
Period result in interest collections on the Loans in amounts less than the
amount of interest distributable on the Notes, the rate at which Excess
Spread is distributed to holders of the Notes as described herein, and the
extent to which any reduction of the Overcollateralization Amount is paid to
the holders of the Residual Interest 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 actual
average lives of the Notes. If the Loans experience delinquencies and
certain 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 actual average lives of the Notes than would otherwise be
the case. However, to the extent that the Principal Balances from Liquidated
Loans are included in the principal distributions on the Notes, then the
holders of the Notes will experience an acceleration in the receipt of
principal distributions which in certain instances may result in shorter
actual average lives of the Notes than would otherwise be the case. Interest
shortfalls on the Loans due to principal prepayments in full and in part and
any resulting shortfall in amounts distributable on the Notes will be covered
to the extent of amounts available from the credit enhancement provided for
the Notes. See "Risk Factors--Adequacy of Credit Enhancement" herein.
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, with the Servicer's consent, upon the sale of the
Mortgaged Property. Certain of the Loans are subject to prepayment
penalties, which may reduce the amount or the likelihood of prepayments on
such Loans. The remaining Loans may be prepaid in full or in part at any
time without penalty. 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, if any, 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. Cityscape makes 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 yields on Notes purchased at discounts but will
decrease the yields on Notes purchased at premiums, which distributions of
principal may be attributable to scheduled payments and prepayments of
principal as a result of repurchases and liquidations or write-offs due to
default, casualty or insurance on the Loans and to the application of 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. Certain factors may influence such delinquencies and defaults,
including origination and underwriting standards, Combined 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 home loans
similar to the Loans. The rate of default on Loans with high Combined
Loan-to-Value Ratios, secured by junior liens may be higher than that of home
loans with lower Combined 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 generally are paid to certain Classes of
Notes before other Classes, holders of the Class B Notes and, to a lesser
extent, the Classes of Mezzanine Notes bear a greater risk of losses from
delinquencies and defaults on the Loans than holders of the Classes of Notes
having higher priorities for payment of principal. See "Description of
Credit Enhancement--Subordination and Allocation of Losses" herein.
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 the types of Loans included in the Pool
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 a substantial 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 and, therefore, a lower
prepayment rate may result from 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.
EXCESS SPREAD AND REDUCTION OF OVERCOLLATERALIZATION AMOUNT
An overcollateralization feature has been designed to accelerate the
principal amortization of the Notes relative to the principal amortization of
the Loans. If on any Distribution Date, the Overcollateralization Target
Amount exceeds the Overcollateralization Amount, any Excess Spread will be
distributed to the holders of the Classes of Notes in the order and amounts
specified herein under "Description of the Notes--Distributions on the Notes-
- -Distribution Priorities." If the Overcollateralization Amount equals the
Overcollateralization Target Amount for such Distribution Date, Excess Spread
otherwise distributable to the holders of the Notes as described above will
instead be distributed in respect of Loss Reimbursement Deficiencies, if any,
and thereafter to the holders of the Residual Interest. On the Stepdown Date
and on each Distribution Date thereafter as to which the
Overcollateralization Amount is or, after taking into account all other
distributions to be made on such Distribution Date, would be at least equal
to the Overcollateralization Target Amount, amounts otherwise distributable
as principal to the holders of the Notes on such Distribution Date in
reduction of their Class Principal Balances may, under certain circumstances,
instead be distributed in respect of the applicable Classes in payment of
their respective Loss Reimbursement Deficiencies and thereafter to the
holders of the Residual Interest, thereby reducing the rate of and under
certain circumstances delaying the principal amortization with respect to the
Notes, until the Overcollateralization Amount is reduced to the
Overcollateralization Target Amount.
In particular, high rates of delinquencies on the Loans during any Due
Period may cause the amount of interest received on the Loans during such Due
Period to be less than the amount of interest distributable on the Notes on
the related Distribution Date. Such an occurrence will cause the Class
Principal Balances of the Notes to decrease at a slower rate relative to the
Pool Principal Balance, resulting in a reduction of the Overcollateralization
Amount and, in some circumstances, an Allocable Loss Amount. As described
herein, the yield to maturity on a Note purchased at a premium or a discount
will be affected by the extent to which any amounts are paid to the holders
of the Residual Interest in lieu of payment to the holders of the Classes of
Notes in reduction of their Class Principal Balances. If the actual
distributions of any such amounts to the holders of the Residual Interest
occur sooner than anticipated by an investor who purchases a Note at a
discount, the actual yield to such investor may be lower than such investor's
anticipated yield. If the actual distributions of any such amounts to the
holders of the Residual Interest occur later than anticipated by an investor
who purchases a Note at a premium, the actual yield to such investor may be
lower than such investor's anticipated yield. The amount payable to the
holders of the Residual Interest in reduction of the Overcollateralization
Amount, if any, on any Distribution Date will be affected by the
Overcollateralization Target Amount, and by the actual default and
delinquency experience of the Pool and the principal amortization of the
Pool.
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 DATES
The "Final Maturity Date" for each Class of Notes as set forth in the
"Summary of Terms" herein has been calculated as the thirteenth Distribution
Date following the Due Period in which the latest maturing Loan is scheduled
to mature. The actual maturity of any Class of Notes may be substantially
earlier than the Final Maturity Date set forth herein.
WEIGHTED AVERAGE LIVES OF THE NOTES
The following information is given solely to illustrate the effect of
prepayments of the Loans on the weighted average lives of the Notes under
certain stated assumptions and is not a prediction of the prepayment rate
that might actually be experienced by the Loans. Weighted average life
refers to the average amount of time that will elapse from the date of
delivery of a security until each dollar of principal of such security will
be repaid to the investor. The weighted average lives of the Notes will be
influenced by the rate at which principal of the 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,
insurance or other dispositions, substitutions and repurchases by or on
behalf of the Transferor or Cityscape), the rate at which Excess Spread is
distributed to holders of the Notes as described herein, the delinquency rate
of the Loans from time to time and the extent to which any amounts are
distributed to the holders of the Residual Interest 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 4.0% per
annum of the outstanding principal balance of such loans in the first month
of the life of the loans and an additional approximate 0.9091% (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% 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). Correspondingly, 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 Transferor nor the Depositor makes any representations about the
appropriateness of the Prepayment Assumption or the CPR model.
MODELING ASSUMPTIONS. For purposes of preparing the tables below, the
following assumptions (the "Modeling Assumptions") have been made:
(i) all scheduled principal and interest payments on the Loans are
timely received on the first day of a Due Period, no delinquencies or
losses occur on the Loans and all Loans have a payment date that occurs
during the first Due Period; it is assumed that the scheduled payments
of interest include 30 days' accrued interest;
(ii) the scheduled payments on the Loans have been calculated on
the outstanding Principal Balance (prior to giving effect to
prepayments), the Loan Rate and the remaining term to stated maturity
such that the Loans will fully amortize by their remaining term to
stated maturity;
(iii) all scheduled payments of interest and principal in
respect of the Loans have been made through the applicable Cut-Off Date
for purposes of calculating remaining term to stated maturity;
(iv) all Loans prepay monthly at the specified percentages of the
Prepayment Assumption, no optional or other early termination of the
Notes occurs (except with respect to the calculation of the "Weighted
Average Life -- To Call (Years)" figures in the following tables) and no
substitutions or repurchases of the Loans occur;
(v) all prepayments in respect of the Loans are received on the
last day of each month commencing in the month of the Closing Date;
(vi) the Settlement Date for the Notes is September 16, 1997 and
each year will consist of 360 days;
(vii) cash distributions are received by the holders of the
Notes on the 25th day of each month, commencing in October 1997;
(viii) the Overcollateralization Target Amount will be as
defined herein;
(ix) the Pre-Funding Pro Rata Distribution Trigger does not occur;
(x) the Note Interest Rate for the Class A-1 Notes is and remains
5.79625% and the Note Interest Rate for each other Class of Notes is as
set forth herein;
(xi) the additional fees deducted from the interest collections in
respect of the Loans include the Indenture Trustee Fee and the Servicing
Fee;
(xii) no reinvestment income from any Account is earned and
available for distribution;
(xiii) Sub-Pools 4 and 5 (specified in the table below) are
transferred to the Trust in September 1997 with principal payments on
such Loans being received by the Servicer in October 1997 and passed
through to holders of the Notes on the Distribution Date in November
1997;
(xiv) sufficient funds will be available in the Capitalized
Interest Account to cover any shortfalls in interest due to the Pre-
Funding Account and the transfer of Loans described in clause (xiii);
(xv) interest will accrue on the Notes for each related
Distribution Date based on the related Interest Period; and
(xvi) the Pool consists of Loans having the following
characteristics:
ASSUMED LOAN CHARACTERISTICS
Remaining Original
Term to Term to
Cut-Off Date Loan Maturity Maturity
Sub-Pool Principal Balance Rate (Months) (Months)
1 $ 79,854.48 15.2217% 110 120
2 52,256,900.79 14.1673 179 180
3 98,832,814.65 14.1931 239 240
4 16,888,819.55 14.1673 179 180
5 31,941,610.53 14.1931 239 240
The tables on the following pages indicate the weighted average lives of
each Class of Notes corresponding to the specified percentages of the
Prepayment Assumption.
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-1 Notes: $61,000,000
Date 0% 50% 75% 100% 150% 200%
Initial Percent . . . . . . 100 100 100 100 100 100
September 1998. . . . . . . 73 58 51 43 28 12
September 1999. . . . . . . 68 32 14 0 0 0
September 2000. . . . . . . 62 7 0 0 0 0
September 2001. . . . . . . 56 0 0 0 0 0
September 2002. . . . . . . 48 0 0 0 0 0
September 2003. . . . . . . 40 0 0 0 0 0
September 2004. . . . . . . 31 0 0 0 0 0
September 2005. . . . . . . 22 0 0 0 0 0
September 2006. . . . . . . 12 0 0 0 0 0
September 2007. . . . . . . 0 0 0 0 0 0
Weighted Average Life(2) --
To Maturity (Years) 4.71 1.53 1.20 1.01 0.80 0.69
To Call (Years) 4.71 1.53 1.20 1.01 0.80 0.69
- -----------------------------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance 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 one
decimal place.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
Class A-2 Notes: $46,000,000
Date 0% 50% 75% 100% 150% 200%
Initial Percent . . . . . 100 100 100 100 100 100
September 1998. . . . . . . 100 100 100 100 100 100
September 1999. . . . . . . 100 100 100 97 54 14
September 2000. . . . . . . 100 100 76 45 0 0
September 2001. . . . . . . 100 81 41 6 0 0
September 2002. . . . . . . 100 54 10 0 0 0
September 2003. . . . . . . 100 30 0 0 0 0
September 2004. . . . . . . 100 8 0 0 0 0
September 2005. . . . . . . 100 0 0 0 0 0
September 2006. . . . . . . 100 0 0 0 0 0
September 2007. . . . . . . 98 0 0 0 0 0
September 2008. . . . . . . 78 0 0 0 0 0
September 2009. . . . . . . 53 0 0 0 0 0
September 2010. . . . . . . 22 0 0 0 0 0
September 2011. . . . . . . 3 0 0 0 0 0
September 2012. . . . . . . 0 0 0 0 0 0
Weighted Average Life(2) --
To Maturity (Years) 12.09 5.31 3.85 3.03 2.14 1.68
To Call (Years) 12.09 5.31 3.85 3.03 2.14 1.68
(1) The percentages in this table have been rounded to the nearest whole----
------------------------- number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance 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 one
decimal place.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
Class A-3 Notes: $11,000,000
Date 0% 50% 75% 100% 150% 200%
Initial Percent . . . . . . 100 100 100 100 100 100
September 1998. . . . . . . 100 100 100 100 100 100
September 1999. . . . . . . 100 100 100 100 100 100
September 2000. . . . . . . 100 100 100 100 57 0
September 2001. . . . . . . 100 100 100 100 0 0
September 2002. . . . . . . 100 100 100 44 0 0
September 2003. . . . . . . 100 100 67 14 0 0
September 2004. . . . . . . 100 100 41 0 0 0
September 2005. . . . . . . 100 99 30 0 0 0
September 2006. . . . . . . 100 79 15 0 0 0
September 2007. . . . . . . 100 57 0 0 0 0
September 2008. . . . . . . 100 34 0 0 0 0
September 2009. . . . . . . 100 11 0 0 0 0
September 2010. . . . . . . 100 0 0 0 0 0
September 2011. . . . . . . 100 0 0 0 0 0
September 2012. . . . . . . 64 0 0 0 0 0
September 2013. . . . . . . 36 0 0 0 0 0
September 2014. . . . . . . 4 0 0 0 0 0
September 2015. . . . . . . 0 0 0 0 0 0
Weighted Average Life(2) --
To Maturity (Years) 15.64 10.34 7.13 5.08 3.24 2.39
To Call (Years) 15.64 10.34 7.13 5.08 3.24 2.39
- -----------------------------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance 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 one
decimal place.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
Class A-4 Notes: $13,500,000
Date 0% 50% 75% 100% 150% 200%
Initial Percent . . . . . . 100 100 100 100 100 100
September 1998. . . . . . . 100 100 100 100 100 100
September 1999. . . . . . . 100 100 100 100 100 100
September 2000. . . . . . . 100 100 100 100 100 0
September 2001. . . . . . . 100 100 100 100 97 0
September 2002. . . . . . . 100 100 100 100 66 0
September 2003. . . . . . . 100 100 100 100 48 0
September 2004. . . . . . . 100 100 100 92 36 0
September 2005. . . . . . . 100 100 100 88 36 0
September 2006. . . . . . . 100 100 100 78 34 0
September 2007. . . . . . . 100 100 98 67 29 0
September 2008. . . . . . . 100 100 84 55 22 0
September 2009. . . . . . . 100 100 69 44 16 0
September 2010. . . . . . . 100 90 55 34 12 0
September 2011. . . . . . . 100 71 42 24 8 0
September 2012. . . . . . . 100 52 30 17 5 0
September 2013. . . . . . . 100 41 23 12 3 0
September 2014. . . . . . . 100 31 16 8 0 0
September 2015. . . . . . . 73 20 10 5 0 0
September 2016. . . . . . . 38 10 5 0 0 0
September 2017. . . . . . . 0 0 0 0 0 0
Weighted Average Life(2) --
To Maturity (Years) 18.68 15.73 13.88 11.84 7.69 2.76
To Call (Years) 18.45 14.84 12.80 10.67 6.56 2.76
(1) The percentages in this table have been rounded to the nearest whole----
------------------------- number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance 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 one
decimal place.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
Class A-5 Notes: $11,500 000
Date 0% 50% 75% 100% 150% 200%
Initial Percent. . . . . . 100 100 100 100 100 100
September 1998. . . . . . . 100 100 100 100 100 100
September 1999. . . . . . . 100 100 100 100 100 100
September 2000. . . . . . . 100 100 100 100 100 80
September 2001. . . . . . . 98 92 88 82 88 80
September 2002. . . . . . . 97 84 75 71 78 80
September 2003. . . . . . . 93 69 59 62 63 71
September 2004. . . . . . . 87 51 51 51 48 49
September 2005. . . . . . . 69 26 32 28 26 34
September 2006. . . . . . . 52 18 19 15 11 23
September 2007. . . . . . . 36 12 11 8 4 16
September 2008. . . . . . . 22 7 6 4 2 10
September 2009. . . . . . . 11 4 3 2 1 7
September 2010. . . . . . . 4 2 2 1 0 4
September 2011. . . . . . . 1 1 1 0 0 0
September 2012. . . . . . . 1 0 0 0 0 0
September 2013. . . . . . . 0 0 0 0 0 0
Weighted Average Life(2) --
To Maturity (Years) 9.26 7.21 7.00 6.76 6.73 7.20
To Call (Years) 9.26 7.20 6.99 6.75 6.61 5.96
- -----------------------------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance 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 one
decimal place.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
Class M-1 Notes: $29,500,000
Date 0% 50% 75% 100% 150% 200%
Initial Percent . . . . . 100 100 100 100 100 100
September 1998. . . . . . 100 100 100 100 100 100
September 1999. . . . . . 100 100 100 100 100 100
September 2000. . . . . . 100 100 100 100 100 100
September 2001. . . . . . 100 100 100 100 79 81
September 2002. . . . . . 100 100 100 90 61 48
September 2003. . . . . . 100 100 94 75 46 27
September 2004. . . . . . 100 100 81 62 35 19
September 2005. . . . . . 100 93 69 51 27 13
September 2006. . . . . . 100 82 59 42 20 9
September 2007. . . . . . 100 72 49 34 15 6
September 2008. . . . . . 100 61 41 27 11 4
September 2009. . . . . . 100 52 33 21 8 3
September 2010. . . . . . 100 42 26 16 5 1
September 2011. . . . . . 89 33 19 11 4 0
September 2012. . . . . . 70 24 14 8 2 0
September 2013. . . . . . 59 19 10 6 0 0
September 2014. . . . . . 47 14 7 4 0 0
September 2015. . . . . . 33 9 5 2 0 0
September 2016. . . . . . 17 4 2 0 0 0
September 2017. . . . . . 0 0 0 0 0 0
Weighted Average Life(2) --
To Maturity (Years) 16.74 12.63 10.67 9.04 6.67 5.69
To Call (Years) 16.64 12.22 10.17 8.50 6.12 5.22
(1) The percentages in this table have been rounded to the nearest whole----
------------------------- number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance 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 one
decimal place.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
Class M-2 Notes: $13,500,000
Date 0% 50% 75% 100% 150% 200%
Initial Percent . . . . . 100 100 100 100 100 100
September 1998. . . . . . 100 100 100 100 100 100
September 1999. . . . . . 100 100 100 100 100 100
September 2000. . . . . . 100 100 100 100 100 100
September 2001. . . . . . 100 100 100 100 79 56
September 2002. . . . . . 100 100 100 90 61 39
September 2003. . . . . . 100 100 94 75 46 27
September 2004. . . . . . 100 100 81 62 35 19
September 2005. . . . . . 100 93 69 51 27 13
September 2006. . . . . . 100 82 59 42 20 9
September 2007. . . . . . 100 72 49 34 15 6
September 2008. . . . . . 100 61 41 27 11 4
September 2009. . . . . . 100 52 33 21 8 1
September 2010. . . . . . 100 42 26 16 5 0
September 2011. . . . . . 89 33 19 11 3 0
September 2012. . . . . . 70 24 14 8 0 0
September 2013. . . . . . 59 19 10 6 0 0
September 2014. . . . . . 47 14 7 4 0 0
September 2015. . . . . . 33 9 5 0 0 0
September 2016. . . . . . 17 4 0 0 0 0
September 2017. . . . . . 0 0 0 0 0 0
Weighted Average Life(2)
To Maturity (Years) 16.74 12.62 10.66 9.02 6.65 5.30
To Call (Years) 16.64 12.22 10.17 8.50 6.12 4.86
- -----------------------------
(1) The percentages in this table have been rounded to the nearest whole
number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance 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 one
decimal place.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
Class B Notes: $12,000,000
Date 0% 50% 75% 100% 150% 200%
Initial Percent . . . . . 100 100 100 100 100 100
September 1998. . . . . . 100 100 100 100 100 100
September 1999. . . . . . 100 100 100 100 100 100
September 2000. . . . . . 100 100 100 100 100 100
September 2001. . . . . . 100 100 100 100 51 0
September 2002. . . . . . 100 100 100 77 10 0
September 2003. . . . . . 100 100 86 42 0 0
September 2004. . . . . . 100 100 56 13 0 0
September 2005. . . . . . 100 84 30 0 0 0
September 2006. . . . . . 100 59 6 0 0 0
September 2007. . . . . . 100 35 0 0 0 0
September 2008. . . . . . 100 12 0 0 0 0
September 2009. . . . . . 100 0 0 0 0 0
September 2010. . . . . . 100 0 0 0 0 0
September 2011. . . . . . 74 0 0 0 0 0
September 2012. . . . . . 31 0 0 0 0 0
September 2013. . . . . . 7 0 0 0 0 0
September 2014. . . . . . 0 0 0 0 0 0
Weighted Average Life(2)
To Maturity (Years) 14.71 9.46 7.36 5.89 4.14 3.38
To Call (Years) 14.71 9.46 7.36 5.89 4.14 3.38
(1) The percentages in this table have been rounded to the nearest whole----
------------------------- number.
(2) The weighted average life of a Class is determined by (a) multiplying
the amount of each distribution of principal thereof by the number of
years from the date of issuance 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 one
decimal place.
The amortization 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 amortization
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. See
"Risk Factors--Additional Prepayment and Yield Considerations" herein.
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 Servicer,
the Depositor, the Underwriters, the Transferor 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, counsel to the Trust and the
Underwriters ("Tax Counsel"), 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.
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 Notes.
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.
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. 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.
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 Notes 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 Notes
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
Notes. 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
Servicer 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 Asset 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 Asset 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.
Without regard to whether the Notes are treated as an equity interest
under the Plan Asset Regulation, the acquisition or holding of the Notes by
or on behalf of a Plan could be considered to give rise to a prohibited
transaction if such Plan is deemed to be a prohibited loan to a party in
interest with respect to such Plan. Certain exemptions from the prohibited
transaction rules could be applicable to the purchase and holding of the
Notes by a Plan depending on the type and circumstances of the plan fiduciary
making the decision to acquire the Notes. Included among these exemptions
are: Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding certain
transactions entered into by insurance company pooled separate accounts; PTCE
95-60, regarding certain transactions entered into by insurance company
general accounts; PTCE 96-23, regarding certain transactions effected by "in-
house asset managers"; PTCE 91-38, regarding certain transactions entered
into by bank collective investment funds; and PTCE 84-14, regarding certain
transactions effected by "qualified professional asset managers."
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, Greenwich (an affiliate of the Depositor)
and Bear, Stearns & Co. Inc., the Depositor has agreed to sell to the
Underwriters, and each of the Underwriters has severally agreed to purchase
from the Depositor, the principal amount of the Notes set forth below
opposite their respective names. Distribution of the Notes will be made by
the Underwriters 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 Underwriters may be deemed to have received
compensation from the Depositor in the form of underwriting discounts.
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5
UNDERWRITER NOTES NOTES NOTES NOTES NOTES
Greenwich Capital
Markets, Inc. . . . . . $45,000,000 $46,000,000 $11,000,000 $13,500,000 $11,500,000
Bear, Stearns & Co.
Inc. . . . . . . . . . 16,000,000
Total . . . . . . $61,000,000 $46,000,000 $11,000,000 $13,500,000 $11,500,000
CLASS M-1 CLASS M-2 CLASS B
UNDERWRITER NOTES NOTES NOTES
Greenwich Capital
Markets, Inc. . . . . . . $22,500,000 $13,500,000 $12,000,000
Bear, Stearns & Co. Inc. 7,000,000
Total . . . . . . $29,500,000 $13,500,000 $12,000,000
The Depositor has been advised by the Underwriters that they intend to
make a market in the applicable Classes of Notes; however, they have no
obligation to do so. Accordingly, there can be no assurance that a secondary
market for the Notes will develop or, if it does develop, that it will
continue.
The Underwriters propose to offer the applicable Classes of Notes in
part directly to purchasers at the initial public offering prices set forth
on the cover page of this Prospectus Supplement and in part to certain
securities dealers at such prices less concessions not to exceed 0.12%,
0.165%, 0.19%, 0.24%, 0.19%, 0.30%, 0.36% and 0.45% of the respective Class
Principal Balances of the Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class M-1, Class M-2 and Class B Notes. The Underwriters may allow, and
such dealers may reallow, concessions not to exceed 0.096%, 0.132%, 0.152%,
0.192%, 0.152%, 0.24%, 0.288% and 0.36% of the respective Class Principal
Balances of the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class
M-1, Class M-2 and Class B Notes to certain brokers and dealers. After the
Notes are released for sale to the public, the offering price and other
selling terms may be varied by the Underwriters.
Until the distribution of the Notes, is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling
group members to bid for and purchase the Notes. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the Notes. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Notes.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Depositor nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the prices of the Notes.
In addition, neither the Depositor nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
After the initial public offering of the Notes, the public offering
price and such concessions may be changed.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
An affiliate of Greenwich and the Depositor has significant contractual
relations with Cityscape and provides periodic funding of its origination of
mortgage loans, including the Loans. Accordingly, a portion of the proceeds
payable to Cityscape will be paid to such affiliate in connection with the
sale of the Loans. LEGAL INVESTMENT MATTERS
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 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 for the Depositor and for the
Underwriters by Brown & Wood LLP, New York, New York. Certain legal matters
will be passed upon for Cityscape by Dewey Ballantine, New York, New York.
RATINGS
It is a condition to the issuance of the Notes that each of the Class
A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Notes be rated "AAA" by
Standard & Poor's and DCR; and that the Class M-1 Notes be rated "AA" by
Standard & Poor's and DCR, the Class M-2 Notes be rated "A-" by Standard &
Poor's and "A" by DCR and the Class B Notes be rated "BBB-" by Standard &
Poor's and "BBB" by DCR.
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 of principal payments on
the Notes resulting from rapid prepayments of the Loans or the application of
Excess Spread as described herein, or in the event that the Trust is
terminated prior to the Final Maturity Date of the Classes of Notes. The
ratings on the Notes do not address the ability of the Trust to acquire
Subsequent Loans, any potential redemption with respect thereto or the effect
on yield resulting therefrom.
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.
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") securedprimarily by subordinate liens on one-
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.
September 9, 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 cla ss 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.
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/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
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.
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, to the extent provided herein and in the related Prospectus
Supplement.
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 the Primary Insurer good and merchantable title to and possession of the
Property.
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 five (5) 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 thirty (30) 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 thirty (30) 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,
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 each Class of Notes of such Series.
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, as amended on June 11, 1996 (the "OID
Regulations"). A holder should be aware, however, that the OID Regulations
do not adequately address certain issues relevant to prepayable securities,
such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero
if it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than
a substantial amount of a particular class of Debt Securities is sold for
cash on or prior to the Closing Date, the issue price for such class will be
treated as the fair market value of such class on the Closing Date. The
issue price of a Debt Security also includes the amount paid by an initial
Debt Security holder for accrued interest that relates to a period prior to
the issue date of the Debt Security. The stated redemption price at maturity
of a Debt Security includes the original principal amount of the Debt
Security, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are
unconditionally payable only if a late payment or nonpayment is expected to
be penalized or reasonable remedies exist to compel payment. Certain Debt
Securities may provide for default remedies in the event of late payment or
nonpayment of interest. In the opinion of Tax Counsel, the interest on such
Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID
Regulations, where Debt Securities do not provide for default remedies, the
interest payments will be included in the Debt Security's stated redemption
price at maturity and taxed as OID. Interest is payable at a single fixed
rate only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on Debt Securities with
respect to which deferred interest will accrue, will not constitute qualified
stated interest payments, in which case the stated redemption price at
maturity of such Debt Securities includes all distributions of interest as
well as principal thereon. Where the interval between the issue date and the
first Distribution Date on a Debt Security is either longer or shorter than
the interval between subsequent Distribution Dates, all or part of the
interest foregone, in the case of the longer interval, and all of the
additional interest, in the case of the shorter interval, will be included in
the stated redemption price at maturity and tested under the de minimis rule
described below. In the case of a Debt Security with a long first period
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.
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 finalized regulations
(the "Mark-to-Market Regulations") which provide that a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the possible application of the Mark to Market
Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS
in a unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As further specified in the related Prospectus Supplement, if
a REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to
a Series of Securities will be classified for federal income tax purposes as
a grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not
as an association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of
the principal and interest payments on the Loans. In such circumstances, a
holder will be considered to have purchased a pro rata undivided interest in
each of the Loans. In other cases ("Stripped Securities"), sale of the
Securities will produce a separation in the ownership of all or a portion of
the principal payments from all or a portion of the interest payments on the
Loans.
In the opinion of Tax Counsel, each holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the 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
Security holders as OID, in the manner described above for Interest Weighted
Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations
of the applicable Code provisions. Among other possibilities, the Internal
Revenue Service could contend that (i) in certain Series, each non-Interest
Weighted Security is composed of an unstripped undivided ownership interest
in Loans and an installment obligation consisting of stripped principal
payments; (ii) the non-Interest Weighted Securities are subject to the
contingent payment provisions of the Proposed Regulations; or (iii) each
Interest Weighted Stripped Security is composed of an unstripped undivided
ownership interest in Loans and an installment obligation consisting of
stripped interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income
tax purposes.
Character as Qualifying Loans. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the character
of the Securities, for federal income tax purposes, will be the same as the
Loans. The IRS could take the position that the Loans character is not
carried over to the Securities in such circumstances. Pass-Through
Securities will be, and, although the matter is not free from doubt, Stripped
Securities should be considered to represent "real estate assets" within the
meaning of Section 856(c)(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. 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%. The Taxpayer Relief
Act of 1997 reduces the maximum rates on long-term capital gains recognized
on capital assets held by individual taxpayers for more than eighteen months
as of the date of disposition (and would further reduce the maximum rates on
such gains in the year 2001 and thereafter for certain individual taxpayers
who meet specified conditions). Prospective investors should consult their
tax advisors concerning these tax law changes.
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 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 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. Pursuant to final Treasury regulations issued
May 9, 1997 under section 708 of the Cod a sale or exchange of 500 percent or
more of the capital and profits in the Issuer within a 12-month tax period
would cause a deemed contribution of assets of the Issuer (the "old
partnership") to a new partnership (the "new partnership") in exchange for
interest in the new partnership. Such interests would be deemed distributed
to the partners of the old partnership in liquidation thereof, which would
not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an
amount equal to the difference between the amount realized and the seller's
tax basis in the Certificates sold. A Certificateholder's tax basis in a
Certificate will generally equal the holder's cost increased by the holder's
share of Trust Fund income (includible in income) and decreased by any
distributions received with respect to such Certificate. In addition, both
the tax basis in the Certificates and the amount realized on a sale of a
Certificate would include the holder's share of the Notes and other
liabilities of the Trust Fund. A holder acquiring Certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in
such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the 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.
No dealer, salesman or other person has
been authorized to give any information or CITYSCAPE HOME LOAN
to make any representations other than OWNER TRUST 1997-4
those contained in or incorporated by
reference in this Prospectus Supplement or
the Prospectus and, if given or made, such
information or representations must not be $61,000,000 Class A-1,
relied upon. This Prospectus Supplement and Variable Rate Home Loan Asset Backed Notes
the Prospectus do not constitute an offer
to sell or a solicitation of an offer to $46,000,000 Class A-2,
buy any securities other than the 6.77% Home Loan Asset Backed Notes
securities offered hereby, nor an offer of
the securities in any state or jurisdiction $11,000,000 Class A-3,
in which, or to any person to whom, such 7.09% Home Loan Asset Backed Notes
offer would be unlawful. The delivery of
this Prospectus Supplement or the $13,500,000 Class A-4,
Prospectus at any time does not imply that 7.44% Home Loan Asset Backed Notes
information herein or therein is correct as
of any time subsequent to its date. $11,500,000 Class A-5,
7.01% Home Loan Asset Backed Notes
TABLE OF CONTENTS
Page $29,500,000 Class M-1,
PROSPECTUS SUPPLEMENT 7.56% Home Loan Asset Backed Notes
Incorporation of Certain Documents by
Reference . . . . . . . . . . . . . . . ii $13,500,000 Class M-2,
Summary of Terms . . . . . . . . . . . S-1 7.71% Home Loan Asset Backed Notes
Risk Factors . . . . . . . . . . . . S-11
The Trust . . . . . . . . . . . . . . S-16 $12,000,000 Class B,
The Pool . . . . . . . . . . . . . . S-17 7.94% Home Loan Asset Backed Notes
Cityscape Corp. . . . . . . . . . . . S-25
Description of Credit Enhancement . . S-29
Description of the Notes . . . . . . S-31 FINANCIAL ASSET
Description of Transfer and Servicing SECURITIES CORP.
Agreements . . . . . . . . . . . . . S-41 (DEPOSITOR)
Prepayment and Yield Considerations . S-45
Certain Federal Income Tax Consequences S-60
State Tax Consequences . . . . . . . S-60
ERISA Considerations . . . . . . . . S-60 PROSPECTUS SUPPLEMENT
Method of Distribution . . . . . . . S-62
______________________
Legal Investment Matters . . . . . . S-63
Legal Matters . . . . . . . . . . . . S-63 GREENWICH CAPITAL
GREENWICH CAPITAL
Ratings . . . . . . . . . . . . . . . S-63 MARKETS, INC.
MARKETS, INC.
Prospectus BEAR, STEARNS & CO. INC.
Prospectus BEAR, STEARNS & CO. INC.
Prospectus Supplement or Current Report on
Form 8-K . . . . . . . . . . . . . . . . 2
______________________
Incorporation of Certain Information by September 9, 1997
Reference . . . . . . . . . . . . . . . . 2
Available Information . . . . . . . . . . 2
Reports to Securityholders . . . . . . . 3