PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 28, 1998)
$261,648,739
OCWEN OCWEN MORTGAGE LOAN ASSET BACKED
[LOGO] CERTIFICATES, SERIES 1998-OFS3
$226,326,000 CLASS A VARIABLE PASS-THROUGH RATE
$ 16,353,000 CLASS M-1 VARIABLE PASS-THROUGH RATE
$ 10,465,000 CLASS M-2 VARIABLE PASS-THROUGH RATE
$ 8,504,739 CLASS B VARIABLE PASS-THROUGH RATE
Distributions payable on the 25th day of each month, commencing in October 1998
FINANCIAL ASSET SECURITIES CORP.
Depositor
-------------------------
LMAC, INC.
Seller
-------------------------
OCWEN FINANCIAL SERVICES, INC.
Master Servicer
-------------------------
The Ocwen Mortgage Loan Asset Backed Certificates, Series 1998-OFS3
(collectively, the "Certificates") consist of (i) the Class A Certificates (the
"Senior Certificates"), (ii) the Class M-1 Certificates and the Class M-2
Certificates (collectively, the "Mezzanine Certificates"), (iii) the Class B
Certificates (the "Subordinate Certificates" and, together with the Senior
Certificates and the Mezzanine Certificates, the "Offered Certificates"), (iv)
the Class OC Certificates and (v) the Class R Certificates (the "Residual
Certificates"). Only the Offered Certificates are offered hereby.
Distributions on the Offered Certificates will be made on the 25th day of
each month or, if such day is not a business day, on the next succeeding
business day, beginning in October 1998 (each, a "Distribution Date"). As
described more fully herein, interest payable with respect to each Distribution
Date will accrue on the Offered Certificates during the period commencing on the
immediately preceding Distribution Date (or, in the case of the first period,
commencing on the Closing Date) and ending on the day preceding the current
Distribution Date. Interest will be calculated on the basis of a 360-day year
and the actual number of days in the applicable Accrual Period, will be based on
the then outstanding Certificate Principle Balance of the related Class and the
then applicable Pass-Through Rate thereon.
(cover continued on next page)
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE OFFERED
CERTIFICATES, SEE THE INFORMATION UNDER "RISK FACTORS" BEGINNING ON PAGE S-9
HEREIN AND IN THE PROSPECTUS BEGINNING ON PAGE 14.
-----------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT INTERESTS IN OR
OBLIGATIONS OF THE DEPOSITOR, SELLER, MASTER SERVICER, TRUSTEE OR ANY AFFILIATE
THEREOF, EXCEPT TO THE EXTENT PROVIDED HEREIN. NEITHER THE MORTGAGE LOANS NOR
THE CERTIFICATES ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
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 SUPPLEMENT OR THE PROSPECTUS. 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.
----------------------------
The Offered Certificates are being offered by Greenwich Capital Markets,
Inc. (the "Underwriter") from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Depositor with respect to the Offered Certificates are expected to be
approximately $260,994,617, before deducting issuance expenses payable by the
Depositor, estimated to be $455,000.
The Offered Certificates are offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter, and subject
to approval of certain legal matters by counsel. It is expected that delivery of
the Offered Certificates will be made in book-entry form through the facilities
of The Depository Trust Company, Cedel Bank, societe anonyme, and the Euroclear
System on or about September 29, 1998 (the "Closing Date").
----------------------------
[GREENWICH LOGO]
September 28, 1998
ii
THE YIELDS TO MATURITY OF THE OFFERED CERTIFICATES MAY VARY FROM THE
ANTICIPATED YIELDS TO THE EXTENT ANY SUCH CERTIFICATES ARE PURCHASED AT A
DISCOUNT OR PREMIUM AND TO THE EXTENT THE RATE AND TIMING OF PAYMENTS THEREON
ARE SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) OF THE MORTGAGE LOANS. THE YIELD TO INVESTORS ON THE OFFERED
CERTIFICATES WILL ALSO BE SENSITIVE TO, AMONG OTHER THINGS, THE LEVEL OF THE
LONDON INTERBANK OFFERED RATE FOR ONE-MONTH UNITED STATES DOLLAR DEPOSITS
("ONE-MONTH LIBOR"). CERTIFICATEHOLDERS SHOULD CONSIDER, IN THE CASE OF ANY
OFFERED CERTIFICATES 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 OFFERED CERTIFICATES
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. SEE "RISK FACTORS--YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS" HEREIN.
The Certificates represent in the aggregate the entire beneficial ownership
interest in a Trust Fund (the "Trust Fund") consisting primarily of a pool (the
"Mortgage Pool") of conventional, one- to four-family, first lien mortgage loans
having original terms to maturity ranging from 10 years to 30 years (the
"Mortgage Loans"). The Mortgage Loans were originated or acquired by Ocwen
Financial Services, Inc. (the "Originator"), a subsidiary of Ocwen Financial
Corporation, in the ordinary course of its business. LMAC, Inc. (the "Seller"),
a wholly-owned finance subsidiary of Ocwen Financial Services, Inc., will
acquire the Mortgage Loans from the Originator in a transaction contemporaneous
with the transfer of the Mortgage Loans from the Seller to the Depositor. The
Depositor will acquire the Mortgage Loans from the Seller pursuant to a Mortgage
Loan Purchase Agreement, dated as of September 1, 1998 (the "Purchase
Agreement"), between the Depositor and the Seller. The Trust Fund will be
created pursuant to a Pooling and Servicing Agreement, dated as of September 1,
1998 (the "Pooling and Servicing Agreement"), among the Depositor, Ocwen
Financial Services, Inc., as Master Servicer, LMAC, Inc., as Seller, and Norwest
Bank Minnesota, National Association, as Trustee. The Mortgage Pool consists of
fixed-rate Mortgage Loans ("Fixed Rate Mortgage Loans") having an aggregate
principal balance as of September 1, 1998 (the "Cut-off Date"), after
application of scheduled payments due on or prior to the Cut-off Date, whether
or not received, of approximately $70,414,758.90 and adjustable-rate Mortgage
Loans ("Adjustable Rate Mortgage Loans") having an aggregate principal balance
as of the Cut-off Date, after application of scheduled payments due on or prior
to the Cut-off Date whether or not received, of approximately $191,234,079.71 in
each case subject to a permitted variance as described herein under "The
Mortgage Pool." Each Adjustable Rate Mortgage Loan provides for semiannual
adjustment to the Loan Rate thereon based on six-month London interbank offered
rates for United States dollar deposits (the "Index") and for corresponding
adjustments to the monthly payment amount due thereon, in each case subject to
the limitations described herein; provided that in the case of 0.34% of the
Adjustable Rate Mortgage Loans, the first adjustment for such Mortgage Loan will
occur after an initial period of one year following origination, in the case of
84.60% of the Adjustable Rate Mortgage Loans, two years following origination,
in the case of 0.28% of the Adjustable Rate Mortgage Loans, three years
following origination, and in the case of 0.80% of the Adjustable Rate Mortgage
Loans, five years following origination, each by aggregate principal balance of
the Adjustable Rate Mortgage Loans as of the Cut-off Date.
The interests of the owners of the Offered Certificates will initially be
represented by book-entries on the records of The Depository Trust Company (the
"Depository"), Cedel Bank, societe anonyme, and the Euroclear System and
participating members thereof. No person acquiring a beneficial interest in such
a Certificate will be entitled to receive a physical certificate representing
such Certificate, except in the limited circumstances described herein.
See "Description of the Certificates--Book-Entry Certificates" herein.
For federal income tax purposes, the Trust Fund will include multiple
segregated asset pools, with respect to which elections will be made to treat
each as a "real estate mortgage investment conduit" (a "REMIC"). As described
more fully herein and in the Prospectus, the Offered Certificates and the Class
OC Certificates, which are not offered hereby, will constitute beneficial
ownership of the "regular interests" in the Master REMIC. The Class R
Certificates will constitute the beneficial ownership of the "residual
interests" in the Master REMIC and each Subsidiary REMIC. See "Certain Material
Federal Income Tax Consequences" herein and "Certain Material Federal Income Tax
Considerations" in the Prospectus.
The Underwriter intends to make a secondary market in the Offered
Certificates but has no obligation to do so. There is currently no secondary
market for the Offered Certificates and there can be no assurance that such a
market will develop or, if it does develop, that it will continue.
This Prospectus Supplement does not contain complete information about the
offering of the Offered Certificates. Additional information is contained in the
Prospectus dated September 28, 1998 (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 Offered Certificates may not
be consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, 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 Offered
Certificates, which risks and uncertainties are discussed under "Risk Factors"
and "Yield, Prepayment and Maturity Considerations." As a consequence, no
assurance can be given as to the actual distributions on, or the yield of, any
Class of Offered Certificates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Securities and Exchange Commission (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 Offered Certificates. 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 to John P. Graham, Vice
President, Financial Asset Securities Corp., in writing, at 600 Steamboat Road,
Greenwich, Connecticut 06830.
SUMMARY OF TERMS
This Summary of Terms 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 in this Summary of
Terms are defined elsewhere in this Prospectus Supplement or in the Prospectus.
Trust Fund............... Ocwen Mortgage Loan Trust 1998-OFS3 (the "Trust
Fund") will be formed pursuant to a pooling and
servicing agreement (the "Pooling and Servicing
Agreement") to be dated as of September 1, 1998
(the "Cut-off Date") among Financial Assets
Securities Corp., as depositor (the "Depositor"),
Ocwen Financial Services, Inc., as master servicer
(the "Master Servicer"), Ocwen Federal Bank FSB,
as special servicer (the "Special Servicer"),
LMAC, Inc., as seller (the "Seller"), and Norwest
Bank Minnesota, National Association, as trustee
(the "Trustee"). The property of the Trust Fund
will include: a pool of closed-end fixed and
adjustable rate mortgage loans (the "Mortgage
Loans"), secured primarily by first deeds of trust
or mortgages on residential properties that are
primarily one- to four-family properties (the
"Mortgaged Properties"); payments in respect of
the Mortgage Loans due after the Cut-off Date;
property that secured a Mortgage Loan which has
been acquired by foreclosure or deed in lieu of
foreclosure; an assignment of the Depositor's
rights under the Purchase Agreement; rights under
certain hazard insurance policies covering the
Mortgaged Properties; and certain other property,
as described more fully herein.
The Trust property initially will include the
scheduled principal balance of each Mortgage Loan
as of the Cut-off Date after the application of
scheduled payments due on or prior to the Cut-off
Date, whether or not received. With respect to any
date, the "Pool Principal Balance" will be equal
to the aggregate of the Principal Balances of all
Mortgage Loans as of such date. The "Cut-off Date
Principal Balance" with respect to each Mortgage
Loan is the unpaid principal balance thereof as of
the Cut-off Date after the application of
scheduled payments due on or prior to the Cut-off
Date, whether or not received. The "Principal
Balance" of a Mortgage Loan (other than a
Liquidated Mortgage Loan (as defined herein)) on
any day is equal to its Cut-off Date Principal
Balance minus all collections or advances in
respect of delinquent scheduled payments applied
in reduction of the Cut-off Date Principal Balance
of such Mortgage Loan. The Principal Balance of a
Liquidated Mortgage Loan after the Due Period in
which such Mortgage Loan becomes a Liquidated
Mortgage Loan shall be zero.
Title of Certificates.... Ocwen Mortgage Loan Asset Backed Certificates,
Series 1998-OFS3 (the "Certificates"), consisting
of (i) the Class A Certificates (the "Senior
Certificates"), (ii) the Class M-1 and Class M-2
Certificates (collectively, the "Mezzanine
Certificates"), (iii) the Class B Certificates
(the "Subordinate Certificates" and, together with
the Senior Certificates and the Mezzanine
Certificates, the "Offered Certificates"), (iv)
the Class OC Certificates and (v) the Class R
Certificates (the "Residual Certificates"). The
Senior Certificates, the Mezzanine Certificates
and the Subordinate Certificates are collectively
referred to herein as the "Offered Certificates."
Only the Offered Certificates are offered hereby.
The aggregate original principal balance of each
Class of Offered Certificates (each such balance,
an "Original Certificate Principal Balance" and,
as such balance is reduced from time to time, the
"Certificate Principal Balance") is set forth on
the cover page hereof. The Class R Certificates
will have an Original Certificate Principal
Balance of $100 and will accrue interest thereon
at the Pass-Through Rate applicable to the Class A
Certificates.
The 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 the Underwriter. See "The Depositor"
in the Prospectus and "Method of Distribution"
herein. None of the Depositor, National
Westminster Bank plc or any of their respective
affiliates or any other person or entity will
insure or guarantee or otherwise be obligated with
respect to the Certificates.
Seller................... LMAC, Inc. (the "Seller"), a wholly-owned, limited
purpose finance subsidiary of Ocwen Financial
Services, Inc. Ocwen Financial Services, Inc. is a
subsidiary of Ocwen Financial Corporation. As of
the date hereof, the Seller's corporate
headquarters are located at 1675 Palm Beach Lakes
Boulevard, West Palm Beach, Florida 33401 and its
telephone number is (561) 682-8000.
Master Servicer.......... Ocwen Financial Services, Inc. (the "Master
Servicer"), a Florida corporation and a subsidiary
of Ocwen Financial Corporation. As of the date
hereof the Master Servicer's corporate
headquarters are located at 1675 Palm Beach Lakes
Boulevard, West Palm Beach, Florida 33401 and its
telephone number is (561) 682-8000. See "The
Master Servicer" herein.
Subservicer and
Special Servicer....... Ocwen Federal Bank FSB, a federally chartered
savings bank. The Subservicer and Special Servicer
is an affiliate of the Seller. See "Ocwen Federal
Bank FSB" herein.
Trustee.................. Norwest Bank Minnesota, National Association, a
national banking association, will act as trustee
(the "Trustee").
Cut-off Date............. September 1, 1998.
Closing Date............. On or about September 29, 1998.
The Mortgage Loans....... The Mortgage Loans have original terms to maturity
ranging from 10 years to 30 years. The Mortgage
Pool consists of fixed-rate Mortgage Loans (the
"Fixed Rate Mortgage Loans") and adjustable-rate
Mortgage Loans (the "Adjustable Rate Mortgage
Loans"). Approximately 773 of the Mortgage Loans
are Fixed Rate Mortgage Loans having an aggregate
principal balance as of the Cut-off Date, after
application of scheduled payments due on or prior
to the Cut-off Date whether or not received, of
approximately $70,414,758.90. As of the Cut-off
Date, approximately $8,574,161.43 of the Fixed
Rate Mortgage Loans, comprising approximately
12.18% by aggregate principal balance of the Fixed
Rate Mortgage Loans as of the Cut-off Date, are
Balloon Loans (as defined herein). The Fixed Rate
Mortgage Loans have annualized rates at which such
Mortgage Loans bear interest ("Loan Rates") that
are fixed and range from 6.375% per annum to
18.050% per annum with a weighted average Loan
Rate as of the Cut-off Date of approximately
10.019% per annum. As of the Cut-off Date, the
Fixed Rate Mortgage Loans will have a weighted
average remaining term to maturity of
approximately 318 months. Approximately 0.44% of
the Mortgage Loans are secured by Mortgages in a
second lien position, all of which are Fixed Rate
Mortgage Loans.
Approximately 1,432 of the Mortgage Loans are
Adjustable Rate Mortgage Loans having an aggregate
principal balance as of the Cut-off Date, after
application of scheduled payments due on or prior
to the Cut-off Date whether or not received, of
approximately $191,234,079.71. Each Adjustable
Rate Mortgage Loan provides for semi-annual
adjustment to the Loan Rate thereon and for
corresponding adjustments to the monthly payment
amount due thereon, in each case on each
adjustment date applicable thereto (each such
date, an "Adjustment Date"); provided that in the
case of 0.34% of the Adjustable Rate Mortgage
Loans, the first adjustment for such Mortgage Loan
will occur after an initial period of one year
following origination, in the case of 84.60% of
the Adjustable Rate Mortgage Loans, two years
following origination, in the case of 0.28% of the
Adjustable Rate Mortgage Loans, three years
following origination, and in the case of 0.80% of
the Adjustable Rate Mortgage Loans, five years
following origination, each by aggregate principal
balance of the Adjustable Rate Mortgage Loans as
of the Cut-off Date (each such Mortgage Loan
described in the preceding proviso, a "Delayed
First Adjustment Mortgage Loan"). On each
Adjustment Date for each Adjustable Rate Mortgage
Loan, the Loan Rate thereon will be adjusted to
equal the sum, rounded to the nearest multiple of
0.125%, of the Index (as described below) and a
fixed percentage amount (the "Gross Margin"),
subject to periodic and lifetime limitations as
described herein. See "The Mortgage Pool" herein.
None of the Adjustable Rate Mortgage Loans permit
the related mortgagor to convert the adjustable
Loan Rate thereon to a fixed Loan Rate. As of the
Cut-off Date, the Adjustable Rate Mortgage Loans
have Loan Rates ranging from 6.875% per annum to
15.500% per annum, a weighted average Loan Rate of
approximately 10.524% per annum, a weighted
average next Adjustment Date in April, 2000, Gross
Margins ranging from 4.25% to 11.10% and a
weighted average Gross Margin of approximately
5.73%. As of the Cut-off Date, the Adjustable Rate
Mortgage Loans will have a weighted average
remaining term to maturity of approximately 357
months. For additional information relating to the
Mortgage Loans, see "The Mortgage Pool" herein.
The Index................ As of any Adjustment Date, the Index applicable to
the determination of the Loan Rate on each
Adjustable Rate Mortgage Loan will be the average
of the interbank offered rates for six-month
United States dollar deposits in the London market
as published in The Wall Street Journal and as
most recently available (i) as of the first
business day 45 days prior to such Adjustment
Date, (ii) as of the first business day of the
month preceding the month of such Adjustment Date
or (iii) the last business day of the second month
preceding the month in which such Adjustment Date
occurs, as specified in the related Mortgage Note.
See "The Mortgage Pool--The Index" herein.
Description of Certificates
A. Form and Registration
of Certificates... The Certificates will initially be issued in
book-entry form. Persons acquiring beneficial
ownership interests in the Certificates
("Certificate Owners") may elect to hold their
Certificate interests through The Depository Trust
Company ("DTC") in the United States, or Cedel
Bank, societe anonyme, ("Cedel") or the Euroclear
System ("Euroclear") in Europe. Transfers within
DTC, Cedel or Euroclear, as the case may be, will
be in accordance with the usual rules and
operating procedures of the relevant system. So
long as the Certificates are Book-Entry
Certificates (as defined herein), such
Certificates will be evidenced by one or more
Certificates registered in the name of Cede & Co.
("Cede"), as the nominee of DTC or one of the
relevant depositaries (collectively, the "European
Depositaries"). Cross-market transfers between
persons holding directly or indirectly through
DTC, on the one hand, and counterparties holding
directly or indirectly through Cedel or Euroclear,
on the other, will be effected in DTC through
Citibank N.A. ("Citibank") or The Chase Manhattan
Bank ("Chase"), the relevant depositaries of Cedel
or Euroclear, respectively, and each a
participating member of DTC. The Certificates
initially will be registered in the name of Cede.
The interests of the Certificateholders will be
represented by book entries on the records of DTC
and participating members thereof. No Certificate
Owner will be entitled to receive a definitive
certificate representing such person's interest,
except in the event that Definitive Certificates
(as defined herein) are issued under the limited
circumstances described under "Description of the
Certificates--Book-Entry Certificates" herein. All
references in this Prospectus Supplement to any
Certificates reflect the rights of the Certificate
Owners only as such rights may be exercised
through DTC and its participating organizations
for so long as such Certificates are held by DTC.
See "Risk Factors--Book Entry Certificates",
herein and "Annex I" hereto and "Description of
the Securities--Book-Entry Registration of
Securities" in the Prospectus.
B. Priority of
Distributions.... Distributions on the Certificates on each
Distribution Date will be based on the Available
Funds and will be made in the following order of
priority (subject to the prior payment of interest
and principal distributions to the Class R
Certificates on the first Distribution Date): (i)
to interest on each Class of Offered Certificates
in the priority and subject to the limitations
described under "Description of the
Certificates--Allocation of Available Funds"
herein; (ii) to current principal of the Classes
of Certificates then entitled to receive
distributions of principal, in the order and
subject to the priorities set forth herein under
"Description of the Certificates--Allocation of
Available Funds," in each case in an aggregate
amount up to the maximum amount of principal to be
distributed on such Classes on such Distribution
Date; (iii) to principal of the Classes of
Certificates then entitled to receive
distributions of principal in order to maintain
the Overcollateralization Target Amount (as
defined herein); (iv) to unpaid interest and the
Loss Reimbursement Entitlements in the order and
subject to the priorities described herein under
"Description of the Certificates--Allocation of
Available Funds," (v) to the Class OC Certificates
for deposit into the Excess Reserve Fund Account
first to cover any Basis Risk Shortfall Amount and
then to cover any Required Reserve Amount, and
then to be released to the Class OC Certificates,
in each case, subject to the limitations set forth
herein under "Description of the
Certificates--Allocation of Available Funds" and
(vi) any remaining amounts to the Class R
Certificates.
C. Distributions...... Distributions on the Offered Certificates will be
made on the 25th day of each month or, if such day
is not a Business Day, on the first Business Day
thereafter, commencing in October 1998 (each, a
"Distribution Date"). Distributions on each
Distribution Date will be made to holders of the
Certificates of record as of the Business Day
immediately preceding the Distribution Date (each,
a "Record Date"), except that the final
distribution on an Offered Certificate will be
made only upon presentation and surrender of such
Offered Certificate at the corporate trust office
of the Trustee. Distributions on the Mortgage
Loans will be applied to the payment of principal
and interest on the Certificates in accordance
with the priorities described below.
1. Interest....... On each Distribution Date,
to the extent funds are
available therefor, the
holders of each Class of
Offered Certificates will be
entitled to receive interest
in an amount equal to the
sum of (i) interest accrued
during the related Accrual
Period (as defined herein)
at the related Pass-Through
Rate (as defined herein) on
the Certificate Principal
Balance of such Class and
(ii) any Unpaid Interest
Shortfall Amount (as defined
herein) payable to such
Class, except that payment
of Unpaid Interest Shortfall
Amounts to the Mezzanine and
Subordinate Certificates
will be subordinated to
payments of principal due
the related Offered
Certificates on such
Distribution Date. See
"Description of the
Certificates--Allocation of
Available Funds" herein.
2. Principal...... Amounts distributable in
respect of principal of the
Offered Certificates will be
allocated to those Classes
of Offered Certificates then
entitled to receive
distributions of principal
in the order and priorities
described in "Description of
the Certificates--Allocation
of Available Funds" herein.
On each Distribution Date,
to the extent of funds
available therefor as
described herein, principal
distributions will be made
to the holders of the
Offered Certificates then
entitled to distributions of
principal in an amount equal
to the lesser of (A) the
aggregate Certificate
Principal Balances of the
Offered Certificates and (B)
the Principal Distribution
Amount for such Distribution
Date.
Pass-Through Rates....... The Pass-Through Rate for each Class of Offered
Certificates for a particular Distribution Date is
a per annum rate equal to the lesser of (a) the
sum of (i) One-Month LIBOR on the related LIBOR
Determination Date (as defined herein) and (ii)
the related Pass-Through Margin and (b) the
Available Funds Cap (as defined herein). The
Pass-Through Margins for the Class A, Class M-1,
Class M-2 and Class B Certificates will be equal
to 0.31% (31 basis points), 0.50% (50 basis
points), 0.75% (75 basis points) and 1.85% (185
basis points), respectively, until the first
Distribution Date following the Call Option Date,
and 0.62% (62 basis points), 0.75% (75 basis
points), 1.125% (112.5 basis points) and 2.775%
(277.5 basis points), respectively, on and after
such Distribution Date. As to any Distribution
Date, the "Available Funds Cap" is a rate per
annum equal to the weighted average of the Loan
Rates on the Mortgage Loans outstanding as of the
first day of the related Due Period, net of the
sum of (i) the Servicing Fee Rate and (ii) the
Trustee Fee Rate. The sum of the Servicing Fee
Rate and the Trustee Fee Rate will be
approximately 0.50875%. The "Call Option Date" is
the first Distribution Date on which the Pool
Principal Balance (as defined herein) is less than
or equal to 10% of the Maximum Collateral Amount
(as defined herein). The Pass-Through Rates for
the Class A, Class M-1, Class M-2 and Class B
Certificates for the Distribution Date in October
1998 will be 5.69672%, 5.88672%, 6.13672% and
7.23672%, respectively, per annum. See
"Description of the Certificates--Calculation of
One-Month LIBOR" herein.
If on any Distribution Date, the Pass-Through Rate
for a Class of Offered Certificates is based upon
the Available Funds Cap, the excess of (i) the
amount of interest such Class would have been
entitled to receive on such Distribution Date had
the applicable Pass-Through Rate not been subject
to the Available Funds Cap, up to the Maximum Cap,
over (ii) the amount of interest such Class of
Certificates received on such Distribution Date
based on the Available Funds Cap, together with
the unpaid portion of any such excess from prior
Distribution Dates (and interest accrued thereon
at the then applicable Pass-Through Rate, without
giving effect to the Available Funds Cap) is the
"Basis Risk Shortfall Amount" for such Class. Any
Basis Risk Shortfall Amount will be paid from and
to the extent of funds available therefor in the
Excess Reserve Fund Account (as described herein).
The ratings on the Offered Certificates do not
address the likelihood of the payment of any Basis
Risk Shortfall Amount.
The "Maximum Cap" for any Distribution Date is a
per annum rate equal to the weighted average of
the Loan Rates on the Fixed Rate Mortgage Loans
and the Maximum Loan Rates on the Adjustable Rate
Mortgage Loans, in each case outstanding as of the
first day of the related Due Period, net of the
sum of (i) the Servicing Fee Rate and (ii) the
Trustee Fee Rate.
Excess Reserve Fund
Account................ Certificateholders of each Class of Offered
Certificates will be entitled to receive payments
from the Excess Reserve Fund Account from and to
the extent of amounts available therefor in an
amount equal to any Basis Risk Shortfall Amount
for such Class of Certificates. In general, the
"Excess Reserve Fund Account" will be funded up to
the Required Reserve Amount (as defined herein) by
amounts deposited therein on the Closing Date or
otherwise payable to the Class OC Certificates.
See "Description of the Certificates--Excess
Reserve Fund Account" herein.
Credit Enhancement....... The credit enhancement provided for the benefit of
the holders of the Offered Certificates consists
solely of (a) any overcollateralization resulting
from allocation of the internal cash flows of the
Mortgage Loans, (b) the subordination provided to
the Offered Certificates by any Class or Classes
of Certificates that are subordinate thereto and
(c) the application of Allocable Loss Amounts as
defined herein.
Overcollateralization. The Pooling and Servicing
Agreement provides for limited acceleration of
principal distributions on the Offered
Certificates relative to the amortization of the
Mortgage Loans. This acceleration of principal
distributions is achieved by the application of
certain excess interest as a payment of principal
to the Offered Certificates, thereby creating
overcollateralization to the extent the Pool
Principal Balance exceeds the aggregate Class
Principal Balance of the Offered Certificates.
Once the required level of overcollateralization
is reached, and subject to the provisions
described in the next paragraph, further
application of such acceleration feature will
cease unless necessary to maintain the required
level of overcollateralization.
As described herein, subject to certain trigger
tests, the required levels of
overcollateralization may increase or decrease. An
increase would result in a temporary period of
accelerated amortization of the Offered
Certificates relative to the Mortgage Loans to
increase the actual level of overcollateralization
to its required level; a decrease would result in
a temporary period of decelerated amortization to
reduce the actual level of overcollateralization
to its required level.
Subordination. The Mezzanine and Subordinate
Certificates are subordinate in right of certain
payments to the Senior Certificates. The Class M-2
Certificates are subordinate in right of certain
payments to the Class M-1 Certificates. The
Subordinate Certificates are subordinate in right
of certain payments to the Mezzanine Certificates.
Generally, on any date on which no
overcollateralization exists, all Realized Losses
on the Mortgage Loans will be borne by the most
subordinate Class of Offered Certificates before
being borne by a Class senior thereto.
Allocation of Losses. If on any Distribution Date,
after giving effect to distributions to be made on
such date, the aggregate of the Certificate
Principal Balances of the Offered Certificates
exceeds the Pool Principal Balance as of the end
of the preceding Due Period, the Certificate
Principal Balance of the Subordinate Certificates
and the Mezzanine Certificates will be reduced, in
reverse order of seniority (first, Class B
Certificates, second, Class M-2 Certificates and
third, Class M-1 Certificates) by the amount of
the excess; any such excess is referred to as a
"Allocable Loss Amount." Thereafter, such Classes
of Certificates are only entitled to distributions
of interest and principal with respect to their
Certificate Principal Balances as so reduced, and
the amount of any Loss Reimbursement Entitlements
will be payable to the applicable Class of
Subordinate Certificates or Mezzanine Certificates
only to the extent of future excess cashflow as
described herein. The Pooling and Servicing
Agreement will not provide for the "write down" of
the Certificate Principal Balance of the Class A
Certificates.
Advances;
Compensating Interest.. The Master Servicer will be obligated to make
Advances only to the extent that such Advances, in
the Master Servicer's reasonable judgment, are
recoverable from the related Mortgage Loan.
Advances are recoverable from collections on the
Mortgage Loans. Advances will equal, on any
Distribution Date (a) scheduled interest on the
Mortgage Loans due and payable during the related
Due Period but uncollected as of the related
Determination Date (net of the Servicing Fee) and
(b) principal due and payable on the Mortgage
Loans during the related Due Period but
uncollected as of the related Determination Date,
other than a Balloon Payment. See "The Pooling and
Servicing Agreement--Advances" herein. With
respect to any Distribution Date, the related
"Determination Date" shall be the 15th day of the
calendar month in which such Distribution Date
occurs or, if such 15th day is not a business day,
the business day immediately following such 15th
day.
In addition, the Master Servicer will also be
required to pay Compensating Interest with respect
to any prepayment received on a Mortgage Loan
during the related Prepayment Period as described
herein under "The Pooling and Servicing
Agreement-- Servicing and Other Compensation and
Payment of Expenses." The Master Servicer will not
be required to pay Compensating Interest with
respect to any Distribution Date in an amount in
excess of one-half the Servicing Fee (as defined
herein) received by the Master Servicer for such
Distribution Date.
Optional Termination..... On any Distribution Date on which the Pool
Principal Balance is less than or equal to 10% of
the Maximum Collateral Amount (as defined herein),
the holder of the majority interest in the
Residual Certificates (the "Majority Residual
Interestholder") will have the option (but not the
obligation) to purchase, as a whole, the Mortgage
Loans and the REO Property, if any, and thereby
effect the early retirement of all Certificates.
In the event the Majority Residual Interestholder
does not exercise such option, the Master Servicer
will be entitled to purchase the Mortgage Loans
and the REO Property. See "Description of the
Certificates--Optional Termination" herein.
Certain Federal Income Tax
Consequences........... For federal income tax purposes, the Trust Fund
will include multiple segregated asset pools. The
Trustee will make a REMIC election with respect to
each such segregated asset pool. The Mortgage
Loans and certain other property will be held by
one REMIC (the "Initial Subsidiary REMIC"), which
will issue various Classes of uncertificated
interests that will be designated as regular and
residual interests. The Initial Subsidiary REMIC
will be part of a tiered REMIC structure in which
the regular interests issued by one REMIC will
constitute the assets of a higher tier REMIC (the
Initial Subsidiary REMIC and such other REMICs are
collectively referred to herein as the "Subsidiary
REMICs"). The Offered Certificates and the Class
OC Certificates (collectively, the "Regular
Certificates"), will represent ownership of
regular interests in a REMIC (the "Master REMIC").
In addition, each of the Offered Certificates will
represent beneficial interests in the right to
receive payments from the Excess Reserve Fund
Account (as defined herein). The Class R
Certificates will evidence ownership of the
residual interest in the Master REMIC and in each
Subsidiary REMIC. See "Certain Material Federal
Income Tax Consequences" herein and "Certain
Material Federal Income Tax Considerations" in the
Prospectus.
ERISA Considerations..... The acquisition of an Offered Certificate by an
employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or a plan or arrangement subject to
Section 4975 of the Code (as defined herein) (each
of the foregoing, a "Plan") could, in some
instances, result in a "prohibited transaction" or
other violation of the fiduciary responsibility
provisions of ERISA and Code Section 4975.
Any Plan fiduciary considering whether to purchase
any Offered Certificates on behalf of a Plan
should consult with its counsel regarding the
applicability of the provisions of ERISA and the
Code. See "ERISA Considerations" herein and in the
Prospectus.
Legal Investment......... The Offered Certificates will NOT constitute
"mortgage related securities" within the meaning
of the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA"), because some of the Mortgages
securing the Mortgage 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 Offered
Certificates. See "Legal Investments" herein and
in the Prospectus.
Ratings.................. It is a condition to the issuance of the Offered
Certificates that (i) the Class A Certificates be
rated "AAA" by Standard & Poor's, a division of
The McGraw Hill Companies, Inc. ("S&P") and Duff &
Phelps Credit Rating Company ("DCR" and, together
with S&P, the "Rating Agencies"), (ii) the Class
M-1 Certificates be rated "AA" by S&P and DCR ,
(iii) the Class M-2 Certificates be rated "A" by
S&P and DCR and (iv) the Class B Certificates be
rated "BBB" by S&P and DCR. If any other rating
agency were to rate the Offered Certificates, such
rating agency may assign a rating different from
the ratings described above. A security rating is
not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by the assigning rating
organization. A security rating does not address
the frequency of prepayments on the Mortgage Loans
or the corresponding effect on yield to investors.
See "Yield, Prepayment and Maturity
Considerations" and "Ratings" herein.
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
Yield Generally. The yields to maturity of the Offered Certificates may
vary from the anticipated yields to the extent such Certificates are purchased
at a discount or premium and to the extent the rate and timing of payments
thereon are sensitive to the rate and timing of principal payments (including
prepayments) of the Mortgage Loans. Certificateholders should consider, in the
case of any Offered Certificates 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 Offered Certificates
purchased at a premium, the risk that a faster than anticipated rate of
principal payments could result in an actual yield that is lower than the
anticipated yield. In addition, the timing of changes in the rate of Principal
Prepayments (as defined herein) on the Mortgage Loans may significantly affect
an investor's actual yield to maturity, even if the average rate of Principal
Prepayments is consistent with such investor's expectation. In general, the
earlier a Principal Prepayment on the Mortgage Loans occurs, the greater the
effect of such Principal Prepayment on an investor's yield to maturity. The
effect on an investor's yield of Principal Prepayments occurring at a rate
higher (or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Offered Certificates may not be offset
by a subsequent like decrease (or increase) in the rate of Principal
Prepayments.
Prepayment Considerations and Risks. The rates of principal distributions
on the Offered Certificates, the aggregate amounts of distributions thereon and
the yields to maturity of the Offered Certificates will be related to, among
other things, the rate and timing of payments of principal on the Mortgage
Loans. The rate of principal payments on the Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans and by the rate of
Principal Prepayments thereon (including for this purpose, prepayments resulting
from (i) refinancing, (ii) liquidations of the Mortgage Loans due to defaults,
casualties and condemnations, (iii) repurchases by the Seller or the Master
Servicer or (iv) optional purchase of the remaining Mortgage Loans in connection
with the termination of the Trust Fund). In addition, as described herein,
Mortgage Loans representing approximately 3.28% of the Pool Principal Balance as
of the Cut-off Date are Balloon Loans that generally provide for scheduled
amortization over 30 years from their respective dates of origination and a
single lump-sum payment at the end of the fifteenth year. All of the Mortgage
Loans may be prepaid in whole or in part at any time. A majority of the Mortgage
Loans are subject to prepayment charges under certain circumstances during a
six-month, one, two, three, four or five year period from origination, as
specified in the related Mortgage Note. The Mortgage Loans are subject to the
"due-on-sale" provisions included therein (insofar as such provisions are
enforceable under applicable state law). Such Principal Prepayments will,
subject to certain conditions, result in distributions to holders of the Offered
Certificates then entitled to receive principal distributions of principal that
would otherwise be distributed over the remaining terms of the Mortgage Loans.
In addition, the overcollateralization provisions of the Trust Fund will result
in a limited acceleration of principal payments to the holders of the Offered
Certificates. See "Description of the Certificates" herein. Since the rate of
payment of principal on the Mortgage Loans will depend on future events and a
variety of factors, no assurance can be given as to such rate or the rate of
Principal Prepayments.
The weighted average life of a pool of loans (as with the Mortgage Pool) is
the average amount of time that will elapse from the date such pool is formed
until each dollar of principal is scheduled to be repaid to the investors in
such pool. Because it is expected that there will be principal prepayments and
defaults on the Mortgage Loans, the actual weighted average life of the Mortgage
Loans is expected to vary substantially from the weighted average remaining term
to stated maturity of the Mortgage Loans as set forth herein under "The Mortgage
Pool--Mortgage Loan Statistics".
Defaults and Delinquent Payments. The yields to maturity of the Offered
Certificates will be sensitive to defaults and delinquent payments on the
Mortgage Loans. If a purchaser of an Offered Certificate calculates its
anticipated yield based on an assumed rate of default and amount of losses that
is lower than the default rate and amount of losses actually incurred and not
borne by a Class of Certificates subordinate thereto, its actual yield to
maturity will be lower than the yield to maturity so calculated and could, in
the event of substantial losses, be negative. The yield on each Class of Offered
Certificates in order of payment priority will be progressively more sensitive
to the rate, timing and severity of Realized Losses on the Mortgage Loans and
other shortfalls in Available Funds. In general, the earlier a loss occurs, the
greater is the effect on an investor's yield to maturity. There can be no
assurance as to the delinquency, foreclosure or loss experience with respect to
the Mortgage Loans. Investors in the Offered Certificates, and particularly the
Subordinate Certificates, should carefully consider the related risks, including
the risk that such investors may suffer a loss on their investment.
BOOK-ENTRY CERTIFICATES
Issuance of the Offered Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market since investors
may be unwilling to purchase Offered Certificates for which they cannot obtain
physical certificates. Since transactions in the Offered Certificates can be
effected only through DTC, Cedel, Euroclear, participating organizations,
indirect participants and certain banks, the ability of a Certificate Owner to
pledge an Offered Certificate to persons or entities that do not participate in
the DTC, Cedel, or Euroclear system or otherwise to take actions in respect of
such Certificates, may be limited due to lack of a physical certificate
representing the Offered Certificates. Certificate Owners may experience some
delay in their receipt of distributions of interest and principal on the Offered
Certificates since such distributions will be forwarded by the Trustee to DTC
and DTC will credit such distributions to the accounts of its Financial
Intermediary (as defined herein) which will thereafter credit them to the
accounts of Certificate Owners either directly or indirectly through indirect
participants. See "Description of the Certificates--Book-Entry Certificates"
herein.
RISK OF EARLY DEFAULTS
Substantially all of the Mortgage Loans were originated within twelve
months prior to the Cut-off Date. The weighted average remaining term to stated
maturity of the Mortgage Loans is approximately 346 months. Although little data
is available, defaults on mortgage loans, including mortgage loans similar to
the Mortgage Loans, are generally expected to occur with greater frequency in
the early years of the terms of mortgage loans.
NATURE OF COLLATERAL
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of Mortgage Loans that are delinquent and resulting shortfalls
in distributions to the Certificateholders could occur. Further, liquidation
expenses (such as legal fees, real estate taxes, and maintenance and
preservation expenses) will reduce the proceeds payable to Certificateholders
and thereby reduce the security for the Mortgage Loans. In the event any of the
Mortgaged Properties fail to provide adequate security for the related Mortgage
Loans, the Certificateholders could experience a loss.
RISK OF LIMITATIONS TO ADJUSTMENTS OF THE LOAN RATES ON THE MORTGAGE LOANS
As described herein, the Pass-Through Rates for each Class of Offered
Certificates adjusts monthly to equal the lesser of (a) the sum of (i) One-Month
LIBOR plus (ii) the related Pass-Through Margin and (b) the Available Funds Cap.
Approximately 26.91% of the Mortgage Loans (by Pool Principal Balance as of the
Cut-off Date) have fixed Loan Rates and, in addition, each of the Adjustable
Rate Mortgage Loans is subject to a Periodic Rate Cap and a Maximum Loan Rate;
consequently, the amount of interest that accrues on a Class of Offered
Certificates at the related Pass-Through Rate during any Accrual Period may be
less than the amount that would accrue at One-Month LIBOR plus the related
Pass-Through Margin, in which circumstance the value of such Class or Classes of
Offered Certificates may be temporarily or permanently reduced.
EFFECT OF BASIS RISK ON CREDIT ENHANCEMENT
Credit enhancement is provided to the Offered Certificates in part by means
of the application of the General Excess Available Amount on each Distribution
Date to make required distributions on the applicable Classes of Offered
Certificates. See "Description of the Certificates--Allocation of Available
Funds" herein. The General Excess Available Amount on any Distribution Date will
be affected by the actual amount of interest received, collected or recovered in
respect of the Mortgage Loans during the related Due Period and such amount will
be influenced by changes in the weighted average of the Loan Rates resulting
from prepayments and liquidations of the Mortgage Loans as well as from
adjustments of the Loan Rates relating to the Adjustable Rate Mortgage Loans. To
the extent the weighted average of the Pass-Through Rates on the Classes of
Offered Certificates increases relative to the weighted average of the Loan
Rates for the Mortgage Loans, it may be necessary to apply all or a portion of
the General Excess Available Amount to make required distributions of interest
on the Classes of Offered Certificates and, as a result, such General Excess
Available Amount may be unavailable for any other purpose. In addition, it is
possible that, under certain circumstances, the General Excess Available Amount
may be insufficient to cover the required distributions of interest on the
Classes of Offered Certificates.
BALLOON LOANS
Mortgage Loans representing 3.28% of the Pool Principal Balance as of the
Cut-off Date are Balloon Loans, which generally have original terms of 15 years
and provide for monthly payments based on a 30 year amortization schedule and
final monthly payments substantially greater than the preceding monthly
payments. The existence of a Balloon Payment generally will necessitate that the
related Mortgagor refinance the Mortgage Loan or sell the Mortgaged Property on
or prior to the stated maturity date. The ability of a Mortgagor to accomplish
either of these alternatives will be affected by a number of factors, including
the level of available mortgage rates at the time of sale or refinancing, the
Mortgagor's equity in the related Mortgaged Property, the financial condition of
the Mortgagor, tax laws and prevailing general economic conditions. None of the
Seller, the Master Servicer, the Depositor or the Trustee is obligated to
refinance any Mortgage Loan.
UNDERWRITING STANDARDS, LIMITED OPERATING HISTORY AND POTENTIAL DELINQUENCIES
THE ORIGINATOR'S UNDERWRITING STANDARDS ARE PRIMARILY INTENDED TO
ASSESS THE VALUE OF THE MORTGAGED PROPERTY AND TO EVALUATE THE ADEQUACY OF SUCH
PROPERTY AS COLLATERAL FOR THE MORTGAGE LOAN. THE ORIGINATOR PROVIDES LOANS
PRIMARILY TO BORROWERS WHO DO NOT QUALIFY FOR LOANS CONFORMING TO FANNIE MAE AND
FREDDIE MAC GUIDELINES BUT WHO HAVE EQUITY IN THEIR PROPERTY. WHILE THE
ORIGINATOR'S PRIMARY CONSIDERATION IN UNDERWRITING A MORTGAGE LOAN IS THE VALUE
OF THE MORTGAGED PROPERTY, THE ORIGINATOR ALSO CONSIDERS, AMONG OTHER THINGS, A
MORTGAGOR'S CREDIT HISTORY, REPAYMENT ABILITY AND DEBT SERVICE-TO-INCOME RATIO,
AS WELL AS THE TYPE AND USE OF THE MORTGAGED PROPERTY.
AS A RESULT OF THE ORIGINATOR'S UNDERWRITING STANDARDS, THE MORTGAGE
LOANS ARE LIKELY TO EXPERIENCE RATES OF DELINQUENCY, FORECLOSURE AND BANKRUPTCY
THAT ARE HIGHER, AND THAT MAY BE SUBSTANTIALLY HIGHER, THAN THOSE EXPERIENCED BY
MORTGAGE LOANS UNDERWRITTEN IN A MORE TRADITIONAL MANNER.
Furthermore, changes in the values of Mortgaged Properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated in a more traditional
manner. No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at the levels in effect on the dates of origination
of the related Mortgage Loans.
The Originator commenced operations in May 1997. Accordingly, the
Originator (whether as an originator or acquirer of mortgage loans) does not
have representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of the Mortgage Loans.
GEOGRAPHIC CONCENTRATION
Mortgage Loans representing approximately 34.78%, 10.62%, 7.57% and 4.89%
of the Pool Principal Balance as of the Cut-off Date are secured by Mortgaged
Properties located in California, Florida, Illinois and Michigan, respectively.
If these residential real estate markets should experience an overall decline in
property values after the dates of origination of the Mortgage Loans, the rates
of delinquencies, foreclosures, bankruptcies and losses on the Mortgage Loans
may increase substantially. Changes in the values of Mortgaged Properties may
have an effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans. No assurance can be given that the values of the
Mortgaged Properties have remained or will remain at the levels in effect on the
dates of origination of the related Mortgage Loans.
HURRICANE DAMAGE RISKS
An area of the southeastern United States, including Florida, Louisiana,
Mississippi and Alabama, suffered substantial damage as a result of Hurricane
Georges prior to the Closing Date. Approximately 11.36% of the Mortgaged Loans
are secured by Mortgaged Properties located in the States of Florida, Louisiana,
Mississippi and Alabama and may be located in areas which have sustained damage.
Nevertheless, the Seller will represent and warrant as of the Closing Date each
Mortgaged Property is undamaged by flood, hurricane, tornado or other casualty
so as to materially affect the value of such Mortgaged Property, and the Seller
will be obligated to repurchase or substitute for any Mortgage Loan found to be
in breach of such representation after the initial issuance of the Certificates.
Any damage to a Mortgaged Property occurring after the Closing Date as a result
of Hurricane Georges or any other hurricane, tornado or casualty will not cause
a breach of such representation and warranties. Any such repurchase would have
the effect of increasing the rate of principal payment on the Offered
Certificates. See "Yield, Prepayments and Maturity Considerations" herein.
PREPAYMENT INTEREST SHORTFALL
When a principal prepayment in full is made on a Mortgage Loan, the
Mortgagor is charged interest only up to the date of such prepayment, instead of
for a full month which may result in a Prepayment Interest Shortfall. The Master
Servicer is obligated to pay, without any right of reimbursement, those
shortfalls in interest collections payable on the Offered Certificates that are
attributable to Prepayment Interest Shortfalls less the Servicing Fee, but only
to the extent of one-half of the Servicing Fee for the related Due Period.
ADDITIONAL RISKS ASSOCIATED WITH THE MORTGAGE LOANS
Approximately 26.86% of the Mortgage Loans (by Pool Principal Balance as of
the Cut-off Date) had a Loan-to-Value Ratio at origination in excess of 80%.
With respect to such Mortgage Loans, primary mortgage insurance is not required.
Mortgage Loans with higher Loan-to-Value Ratios may present a greater risk of
loss. See "The Mortgage Pool--Mortgage Loan Statistics" herein.
LIMITED OBLIGATIONS
The Offered Certificates will not represent an interest in or obligation of
the Depositor, the Master Servicer, the Trustee or any of their respective
affiliates. The only obligations of the foregoing entities with respect to the
Certificates or any Mortgage Loan will be the obligations of the Seller pursuant
to certain limited representations and warranties made with respect to the
Mortgage Loans and of the Master Servicer with respect to its servicing
obligations under the Pooling and Servicing Agreement (including the limited
obligation to make certain Advances). Neither the Certificates nor the
underlying Mortgage Loans will be guaranteed or insured by any governmental
agency or instrumentality, or by the Depositor, the Seller, the Master Servicer,
the Trustee or any of their respective affiliates. Proceeds of the assets
included in the Trust Fund (including the Mortgage Loans) will be the sole
source of payments on the Offered Certificates, and there will be no recourse to
the Depositor, the Seller, the Master Servicer, the Trustee or any other entity
in the event that such proceeds are insufficient or otherwise unavailable to
make all payments provided for under the Offered Certificates.
LEGAL CONSIDERATIONS
The transfer of the Mortgage Loans from the Seller to the Depositor will be
treated by the Seller and the Depositor as a sale of the Mortgage Loans. The
Seller will warrant that such transfer is a sale of its interest in the Mortgage
Loans. In the event of an insolvency of the Seller, the receiver or bankruptcy
trustee of the Seller may attempt to recharacterize the sale of the Mortgage
Loans as a borrowing by the Seller secured by a pledge of the Mortgage Loans in
connection with a borrowing by the Seller rather than a true sale. Such an
attempt, even if unsuccessful, could result in delays in payments on the
Certificates and possible reductions in the amount of such payments could occur.
The Depositor will warrant in the Pooling and Servicing Agreement that the
transfer of the Mortgage Loans to the Trust Fund is a valid transfer of all of
the Depositor's right, title and interest in the Mortgage Loans to the Trust
Fund.
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE MORTGAGE LOANS
Applicable federal and state laws regulate interest rates and other charges
with respect to mortgage loans and require certain disclosures. In addition,
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and debt collection
practices may apply to the origination, servicing and collection of the Mortgage
Loans. Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability to collect all or part of the principal of or interest on
the Mortgage Loans, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject the owner of the Mortgage Loans to damages
and administrative enforcement. See "Risk Factors--Certain Other Legal
Considerations Regarding the Loans" in the Prospectus.
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 the Mortgaged Properties.
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 other 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.
RISK OF LOAN RATES REDUCING THE PASS-THROUGH RATES OF THE OFFERED CERTIFICATES
The calculation of the Pass-Through Rates of the Offered Certificates is
based upon (i) the value of One-Month LIBOR, which may be different from the
value of the Index applicable to the Adjustable Rate Mortgage Loans (either as a
result of the use of a different index, a different rate determination date or a
different rate adjustment date) and (ii) the weighted average of the Loan Rates
(net of certain amounts described herein) of the Mortgage Loans, which are
either fixed, in the case of the Fixed Rate Mortgage Loans, or subject to
periodic adjustment caps, maximum rate caps and minimum rate floors, in the case
of the Adjustable Rate Mortgage Loans. In general, the Adjustable Rate Mortgage
Loans adjust based upon the Index whereas the Pass-Through Rates on the Offered
Certificates adjust monthly based upon One-Month LIBOR, as described herein
under "Description of Certificates--Calculation of One-Month LIBOR," subject to
the Available Funds Cap. Consequently, the interest which becomes due on the
Adjustable Rate Mortgage Loans (net of the Servicing Fee and the Trustee Fee)
during any Due Period may not equal the amount of interest that would accrue on
Adjustable Rate Mortgage Loans at One-Month LIBOR plus the Pass-Through Rate
Margin during the related Interest Period. In particular, Pass-Through Rates
adjust monthly, while the Loan Rates of the Adjustable Rate Mortgage Loans
adjust less frequently (and the Loan Rates of the Fixed Rate Mortgage Loans do
not adjust) with the result that the Available Funds Cap may limit increases in
the Pass-Through Rates for extended periods in a rising interest rate
environment. The Loan Rate on 86.02% of the Adjustable Rate Mortgage Loans (by
aggregate principal balance of the Adjustable Rate Mortgage Loans as of the
Cut-off Date), have an initial fixed rate period of one year, two years, three
years or five years following the date of origination. In addition, the Loan
Rates on certain of the Mortgage Loans may respond to different economic and
market factors than the Pass-Through Rates and there is not necessarily a
correlation between them. Thus, it is possible, for example, that the Loan Rates
on certain of the Mortgage Loans may fall during the periods of which One-Month
LIBOR is stable or rising or that, even if both the Loan Rates on the Mortgage
Loans and One-Month LIBOR fall during the same period, the Loan Rates on certain
of the Mortgage Loans may fall more rapidly than One-Month LIBOR. Furthermore,
if the Available Funds Cap is used to determine the Pass-Through Rates of one or
more Classes of Offered Certificates for a Distribution Date, the value of such
Class of Certificates may be temporarily reduced.
If, with respect to any Distribution Date, the amount of interest that
would accrue during the related Accrual Period on a Class of Offered
Certificates based on the applicable level of One-Month LIBOR plus the
Pass-Through Rate Margin is greater than the weighted average (calculated as
described herein) of the Loan Rates on the Mortgage Loans as of the first day of
the related Due Period, less the Servicing Fee Rate and the Trustee Fee Rate,
then the Pass-Through Rate on such Class of Offered Certificates will be based
on the Available Funds Cap, and Basis Risk Shortfall Amount will, except as
provided below, occur. However, no assurance can be given that there will be
sufficient General Excess Available Amount generated from the Mortgage Loans to
pay the Basis Risk Shortfall Amount on any given Distribution Date.
YIELD CONSIDERATIONS WITH RESPECT TO THE ADJUSTABLE RATE MORTGAGE LOANS
The yield to maturity on the Offered Certificates may be affected by the
resetting of the Loan Rates on the Adjustable Rate Mortgage Loans on the related
Adjustment Dates. In addition, because the Loan Rate for each Adjustable Rate
Mortgage Loan is based on the Index plus the related Gross Margin, such rate
could be higher than prevailing market interest rates, and this may result in an
increase in the rate of prepayments on the Adjustable Rate Mortgage Loans after
such adjustment. Finally, because the Loan Rates on the Adjustable Rate Mortgage
Loans are based on the Index while the Pass-Through Rate on the Offered
Certificates is based in part on One-Month LIBOR, and a substantial number of
the Mortgage Loans are Delayed First Adjustment Mortgage Loans, any resulting
Basis Risk Shortfall Amount, to the extent not covered by amounts in the Excess
Reserve Fund Account, as described herein, will adversely affect the yield to
maturity on the Offered Certificates.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
As is the case with most companies using computers in their operations, the
Master Servicer is faced with the task of completing its compliance goals in
connection with the year 2000 issue. The year 2000 issue is the result of prior
computer programs being written using two digits, rather than four digits, to
define the applicable year. Any of the Master Servicer's computer programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. Any such occurrence could result in major computer
system failure or miscalculations. The Master Servicer is presently engaged in
various procedures to ensure that their computer systems and software will be
year 2000 complaint.
However, in the event that the Master Servicer, or any of its suppliers,
customers, brokers or agents do not successfully and timely achieve year 2000
compliance, the performance of obligations of the Master Servicer under the
Pooling and Servicing Agreement could be materially adversely affected.
THE MORTGAGE POOL
GENERAL
All Mortgage Loan statistics set forth herein are based on principal
balances, interest rates, terms to maturity, mortgage loan counts and similar
statistics as of the Cut-off Date, unless indicated to the contrary herein. All
weighted averages specified herein are weighted based on the Cut-off Date
Principal Balances of the Mortgage Loans. References to percentages of the
Mortgage Loans mean percentages based on the Pool Principal Balance as of the
Cut-off Date, unless otherwise specified.
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the principal payments received
on or before such date. Prior to the issuance of the Certificates, Mortgage
Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such mortgage loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor believes
that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time the
Certificates are issued, although the range of Mortgage Rates and maturities and
certain other characteristics of the Mortgage Loans may vary.
MORTGAGE LOAN STATISTICS
The Mortgage Pool will consist of approximately 2,205 conventional,
fixed-rate and adjustable rate Mortgage Loans. Approximately 0.44% of the
Mortgage Loans are secured by Mortgages in a second lien position, all of which
are Fixed Rate Mortgage Loans. The Mortgage Loans have original terms to
maturity ranging from 10 years to 30 years. The Mortgage Pool consists of
fixed-rate Mortgage Loans (the "Fixed Rate Mortgage Loans"), which will consist
of approximately 773 Mortgage Loans having an aggregate principal balance as of
September 1, 1998 (the "Cut-off Date") of approximately $70,414,758.90 and
adjustable-rate Mortgage Loans (the "Adjustable Rate Mortgage Loans"), which
will consist of approximately 1,432 Mortgage Loans having an aggregate principal
balance as of the Cut-off Date of approximately $191,234,079.71, in each case
after application of payments of principal due on or before the Cut-off Date
whether or not received, and in each case subject to a permitted variance of
plus or minus 5%. Each Adjustable Rate Mortgage Loan provides for semi-annual
adjustment to the mortgage rate thereon based on six-month London interbank
offered rates for United States dollar deposits (the "Index") and for
corresponding adjustments to the monthly payment amount due thereon, in each
case subject to the limitations described under "--Adjustable Rate Mortgage
Loans" herein; provided that in the case of 0.34% of the Adjustable Rate
Mortgage Loans, the first adjustment for such Mortgage Loan will occur after an
initial period of one year, in the case of 84.60% of the Adjustable Rate
Mortgage Loans, two years, in the case of 0.28% of the Adjustable Rate Mortgage
Loans, three years, and in the case of 0.80% of the Adjustable Rate Mortgage
Loans, five years, each by aggregate principal balance of the Adjustable Rate
Mortgage Loans as of the Cut-off Date (each such Mortgage Loan described in this
proviso, a "Delayed First Adjustment Mortgage Loan").
The Mortgage Loans are primarily secured by first mortgages or deeds of
trust or other similar security instruments (each, a "Mortgage") creating first
liens on one-to four-family residential properties consisting of detached or
semi-detached one- to four-family dwelling units and individual condominium
units (the "Mortgage Properties"). Approximately 26.86% of the Mortgage Loans
had a Loan-to-Value Ratio at origination in excess of 80%. Three Mortgage Loans
have a Loan-to-Value Ratio at origination exceeding 90.00%. There can be no
assurance that the Loan-to-Value Ratio of any Mortgage Loan determined at any
time after origination is less than or equal to its original Loan-to-Value
Ratio. The Mortgage Loans have scheduled monthly payments due on the first day
of the month (with respect to each Mortgage Loan, a "Due Date"), except for
approximately - 4.05% of the Mortgage Loans which have Due Dates on other dates
during the month. Each Mortgage Loan will contain a customary "due-on-sale"
clause.
Approximately 80.07% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment charge on certain partial prepayments and all prepayments in full
made within six months, one year, two years, three years, four years or five
years from the date of origination of such Mortgage Loan. The amount of the
prepayment charge is as provided in the related Mortgage Note but is generally
equal to six months' interest on any amounts prepaid in excess of 20% of the
then outstanding principal balance of the related Mortgage Loan in any 12 month
period.
Ninety-eight (98) Fixed Rate Mortgage Loans comprising approximately 3.28%
of the Pool Principal Balance as of the Cut-off Date are balloon payment
mortgage loans (each, a "Balloon Loan"). Each Balloon Loan generally amortizes
over 360 months, but the final payment (the "Balloon Payment") on each Balloon
Loan is due and payable on the 180th month. The amount of the Balloon Payment on
each Balloon Loan is substantially in excess of the amount of the scheduled
monthly payment on the Mortgage Loan for the period prior to the Due Date of
such Balloon Payment.
Each Mortgage Loan had a Loan Rate of not less than 6.375% per annum and
not more than 18.050% per annum and as of the Cut-off Date the weighted average
Loan Rate was approximately 10.388% per annum.
The weighted average remaining term to maturity of the Mortgage Loans will
be approximately 346 months as of the Cut-off Date. None of the Mortgage Loans
will have a first Due Date prior to January 1, 1997 or after October 1, 1998 or
will have a remaining term to maturity of less than 107 months or greater than
30 years as of the Cut-off Date. The month of the latest maturity date of any
Mortgage Loan is September 1, 2028.
The average principal balance of the Mortgage Loans at origination was
approximately $118,883.27. The average principal balance of the Mortgage Loans
as of the Cut-off Date was approximately $118,661.60.
No Mortgage Loan had a principal balance as of the Cut-off Date of greater
than approximately $1,924,255.39 or less than approximately $9,961.53. The
Mortgage Loans are expected to have the following characteristics as of the
Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE(1)
NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE PRINCIPAL
MORTGAGE OUTSTANDING AS OF BALANCE OUTSTANDING AS OF
PRINCIPAL BALANCE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------------------------- -------------- --------------------- ---------------------------
9,961.53 - 50,000.00................. 467 $ 16,577,912.04 6.34%
50,000.01 - 100,000.00................. 826 60,400,849.54 23.08
100,000.01 - 150,000.00................. 459 56,257,276.04 21.50
150,000.01 - 200,000.00................. 181 31,540,590.26 12.05
200,000.01 - 250,000.00................. 86 19,259,472.65 7.36
250,000.01 - 300,000.00................. 57 15,603,585.84 5.96
300,000.01 - 350,000.00................. 32 10,361,512.80 3.96
350,000.01 - 400,000.00................. 25 9,473,569.59 3.62
400,000.01 - 450,000.00................. 24 10,200,037.00 3.90
450,000.01 - 500,000.00................. 25 11,924,718.11 4.56
500,000.01 - 550,000.00................. 2 1,084,756.43 0.41
550,000.01 - 600,000.00................. 2 1,173,579.59 0.45
600,000.01 - 650,000.00................. 3 1,935,715.48 0.74
650,000.01 - 700,000.00................. 3 2,037,394.68 0.78
700,000.01 - 750,000.00................. 3 2,221,914.91 0.85
800,000.01 - 850,000.00................. 1 845,000.00 0.32
900,000.01 - 950,000.00................. 1 901,051.33 0.34
950,000.01 - 1,000,000.00............... 3 2,952,018.60 1.13
1,050,000.01 - 1,100,000.00............... 1 1,075,990.85 0.41
1,100,000.01 - 1,150,000.00............... 1 1,123,212.35 0.43
1,150,000.01 - 1,200,000.00............... 1 1,199,425.13 0.46
1,550,000.01 - 1,600,000.00............... 1 1,575,000.00 0.60
1,900,000.01 - 1,924,255.39............... 1 1,924,255.39 0.74
-------------- --------------------- ---------------------------
Total............................... 2,205 $ 261,648,838.61 100.00 %
============== ===================== ===========================
- --------------
(1) The average principal balance of the Mortgage Loans as of the Cut-off Date was $ 118,661.60.
ORIGINAL TERM TO MATURITY OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
120.......................... 2 $ 41,317.60 0.02 %
180.......................... 194 14,195,499.09 5.43
181.......................... 1 44,407.38 0.02
240.......................... 28 1,435,646.53 0.55
360.......................... 1,980 245,931,968.01 93.99
------------------- ------------------------ -----------------------
Total................... 2,205 $ 261,648,838.61 100.00 %
=================== ======================== =======================
- --------------
(1)The weighted average original term of the mortgage loans was 350 months.
PROPERTY TYPES OF THE MORTGAGE LOANS
% OF AGGREGATE
NUMBER PRINCIPAL BALANCE PRINCIPAL BALANCE
OF MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF THE
PROPERTY TYPE LOANS THE CUT-OFF DATE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
Single Family................ 1,859 $ 227,082,715.79 86.79 %
2-Family..................... 157 14,441,904.71 5.52
3-Family..................... 35 3,611,975.74 1.38
4-Family..................... 35 5,793,729.01 2.21
Condominium.................. 91 8,399,204.52 3.21
Other........................ 28 2,319,308.84 0.88
------------------- ------------------------ -----------------------
Total................... 2,205 $ 261,648,838.61 100.00 %
=================== ======================== =======================
OCCUPANCY STATUS OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF THE
OCCUPANCY STATUS OF MORTGAGE LOANS THE CUT-OFF DATE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
Non-Owner Occupied........... 286 $ 23,681,305.57 9.05 %
Other........................ 2 214,722.20 0.08
Owner-Occupied............... 1,917 237,752,810.84 90.87
------------------- ------------------------ -----------------------
Total................... 2,205 $ 261,648,838.61 100.00 %
=================== ======================== =======================
- --------------
(1) The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
PURPOSE OF THE MORTGAGE LOANS
% OF AGGREGATE
NUMBER PRINCIPAL BALANCE PRINCIPAL BALANCE
OF MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF THE
PURPOSE LOANS THE CUT-OFF DATE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
Cash Out Refinance........... 1,164 $ 134,257,522.51 51.31%
Purchase..................... 635 81,258,351.51 31.06
Rate/Term Refinance.......... 406 46,132,964.59 17.63
------------------- ------------------------ -----------------------
Total................... 2,205 $ 261,648,838.61 100.00%
=================== ======================== =======================
LOAN RATES OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF THE
LOAN RATE (%)(1) OF MORTGAGE LOANS THE CUT-OFF DATE CUT-OFF DATE
- ------------------------------- ------------------- ------------------------ -----------------------
6.375 - 7.000............. 13 $ 1,267,999.06 0.48 %
7.001 - 8.000............. 85 10,541,697.02 4.03
8.001 - 9.000............. 239 30,823,448.72 11.78
9.001 - 10.000............ 511 76,041,446.59 29.06
10.001 - 11.000............. 599 76,035,588.84 29.06
11.001 - 12.000............. 383 38,186,973.35 14.59
12.001 - 13.000............. 181 14,417,192.07 5.51
13.001 - 14.000............. 105 7,946,019.78 3.04
14.001 - 15.000............ 63 4,858,653.24 1.86
15.001 - 16.000............. 20 1,361,065.73 0.52
16.001 - 17.000............. 4 132,725.28 0.05
17.001 - 18.000............. 1 20,785.62 0.01
18.001 - 18.050............. 1 15,243.31 0.01
------------------- ------------------------ -----------------------
Total....................... 2,205 $ 261,648,838.61 100.00 %
=================== ======================== =======================
- --------------
(1)As of the Cut-off Date, the Loan Rates of the Mortgage Loans ranged from 6.375% to 18.050% per annum, with
a weighted average of approximately 10.388% per annum.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OUTSTANDING AS OF
ORIGINAL LOAN - TO - VALUE RATIO (%) OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
9.01 - 10.00................. 1 $ 23,176.13 0.01 %
10.01 - 15.00................. 7 191,507.33 0.07
15.01 - 20.00................. 17 405,958.05 0.16
20.01 - 25.00................. 6 171,136.98 0.07
25.01 - 30.00................. 8 599,039.02 0.23
30.01 - 35.00................. 14 965,995.44 0.37
35.01 - 40.00................. 13 1,232,345.28 0.47
40.01 - 45.00................. 29 2,590,626.21 0.99
45.01 - 50.00................. 36 2,944,879.50 1.13
50.01 - 55.00................. 28 4,467,502.31 1.71
55.01 - 60.00................. 76 6,806,746.57 2.60
60.01 - 65.00................. 191 19,709,557.94 7.53
65.01 - 70.00................. 335 38,367,806.50 14.66
70.01 - 75.00................. 421 48,602,615.93 18.58
75.01 - 80.00................. 531 64,286,814.48 24.57
80.01 - 85.00................. 289 40,332,586.93 15.41
85.01 - 90.00................. 200 29,474,560.24 11.26
90.01 - 94.03................. 3 475,983.77 0.18
------------------ ---------------------- --------------------
Total........................ 2,205 $ 261,648,838.61 100.00 %
================== ====================== ====================
- --------------
(1)As of the Cut-off Date, the weighted average Loan-to-Value Ratio at origination of the Mortgage Loans was
approximately 75.50%.
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
Alabama................................. 6 $ 623,202.85 0.24%
Arizona................................. 6 1,841,318.88 0.70
Arkansas................................ 15 1,469,638.12 0.56
California.............................. 525 90,996,375.88 34.78
Colorado................................ 12 1,650,283.80 0.63
Connecticut............................. 20 2,810,765.39 1.07
Delaware................................ 2 124,077.51 0.05
District of Columbia.................... 7 459,892.52 0.18
Florida................................. 284 27,778,412.30 10.62
Georgia................................. 29 3,591,180.60 1.37
Idaho................................... 18 1,380,719.58 0.53
Illinois................................ 206 19,794,999.17 7.57
Indiana................................. 57 3,844,450.65 1.47
Iowa.................................... 8 495,873.68 0.19
Kansas.................................. 12 1,451,823.84 0.55
Kentucky................................ 7 402,220.17 0.15
Louisiana............................... 18 1,036,625.74 0.40
Maine................................... 4 681,586.15 0.26
Maryland................................ 21 2,441,047.36 0.93
Massachusetts(1)........................ 57 10,398,990.41 3.97
Michigan................................ 144 12,805,194.87 4.89
Minnesota............................... 10 1,050,117.48 0.40
Mississippi............................. 4 281,730.53 0.11
Missouri................................ 66 4,756,478.49 1.82
Montana................................. 1 27,938.99 0.01
Nebraska................................ 38 2,517,058.75 0.96
New Hampshire........................... 3 239,012.14 0.09
New Jersey.............................. 30 5,545,584.54 2.12
New Mexico.............................. 2 154,117.55 0.06
New York................................ 63 9,218,805.55 3.52
North Carolina.......................... 42 3,392,584.68 1.30
North Dakota............................ 1 40,408.05 0.02
Ohio.................................... 89 6,081,381.34 2.32
Oklahoma................................ 3 243,215.51 0.09
Oregon.................................. 36 4,535,584.62 1.73
Pennsylvania............................ 58 3,333,336.33 1.27
Rhode Island............................ 20 2,709,354.42 1.04
South Carolina.......................... 15 988,576.36 0.38
Tennessee............................... 31 3,014,660.94 1.15
Texas................................... 9 2,145,338.12 0.82
Utah.................................... 57 7,873,549.39 3.01
Vermont................................. 1 55,973.81 0.02
Virginia................................ 50 3,742,388.72 1.43
Washington.............................. 101 12,105,593.66 4.63
West Virginia........................... 1 14,613.27 0.01
Wisconsin............................... 15 1,407,802.11 0.54
Wyoming................................. 1 94,953.79 0.04
------------------ ---------------------- --------------------
Total................................... 2,205 $261,648,838.61 100.00%
================== ====================== ====================
- --------------
(1)The greatest ZIP Code geographic concentration of Mortgage Loans, by aggregate principal balance as of the
Cut-off Date, was approximately $2,319,882.44 in the 02554 zip code in Massachusetts.
DOCUMENTATION LEVEL OF THE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
Full Documentation....................... 1,549 $161,232,880.91 61.62 %
Stated Documentation..................... 555 82,740,997.56 31.62
Lite Documentation....................... 101 17,674,960.14 6.76
------------------ ---------------------- --------------------
Total............................... 2,205 $261,648,838.61 100.00 %
================== ====================== ====================
RISK CATEGORIES OF THE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- --------------------
A........................................ 63 $ 8,993,538.17 3.44%
A-....................................... 920 128,097,088.93 48.96
B........................................ 688 76,705,850.05 29.32
C........................................ 201 18,138,695.65 6.93
D........................................ 195 16,682,336.18 6.38
D-....................................... 138 13,031,329.63 4.98
------------------ ---------------------- --------------------
================== ====================== ====================
Total................................ 2,205 $ 261,648,838.61 100.00%
================== ====================== ====================
- ---------------------
(1) See "Underwriting Standards" herein.
PREPAYMENT CHARGES(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
YEARS OF MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------- ------------------ ---------------------- ---------------------
No prepayment charge..................... 496 $ 52,145,916.11 19.93%
0.50 years............................... 9 870,525.64 0.33
1.00..................................... 134 18,058,908.00 6.90
2.00..................................... 736 96,999,730.32 37.07
3.00..................................... 458 48,833,107.88 18.66
4.00..................................... 39 3,693,701.08 1.41
5.00..................................... 333 41,046,949.58 15.69
------------------ ---------------------- --------------------
Total............................... 2,205 $ 261,648,838.61 100.00%
================== ====================== ====================
- --------------
(1) Prepayment charges are assessed on any Mortgage Loans prepaid in full or in part within the specified
number of years.
LOAN RATES OF THE FIXED RATE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE
OF FIXED RATE MORTGAGE
NUMBER PRINCIPAL BALANCE LOANS
OF MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------- ----------------- --------------------------- -------------------------
6.375 - 7.000....................... 12 $1,191,094.49 1.69%
7.001 - 8.000....................... 56 6,453,412.11 9.16
8.001 - 9.000....................... 113 12,312,401.37 17.49
9.001 - 10.000...................... 184 19,903,801.25 28.27
10.001 - 11.000....................... 171 16,455,928.88 23.37
11.001 - 12.000....................... 121 8,303,038.61 11.79
12.001 - 13.000....................... 52 2,746,792.72 3.90
13.001 - 14.000....................... 23. 1,011,852.93 1.44
14.001 - 15.000....................... 19 883,833.16 1.26
15.001 - 16.000....................... 16 983,849.17 1.40
16.001 - 17.000....................... 4 132,725.28 0.19
17.001 - 18.000....................... 1 20,785.62 0.03
18.001 - 18.050....................... 1 15,243.31 0.02
----------- --------------------------- -------------------------
Total............................. 773 $70,414,758.90 100.00%
=========== =========================== =========================
- --------------
(1)The weighted average Loan Rate of the Fixed Rate Mortgage Loan as of the Cut-off Date was 10.019% per nnum.
ADJUSTABLE RATE MORTGAGE LOANS
Each Adjustable Rate Mortgage Loan provides for semi-annual adjustment to
the Loan Rate thereon and for corresponding adjustments to the monthly payment
amount due thereon, in each case on each adjustment date applicable thereto
(each such date, an "Adjustment Date"); provided that the first adjustment for
such Mortgage Loan will occur after an initial period of one year, in the case
of 0.34% of the Adjustable Rate Mortgage Loans, two years in the case of 84.60%
of the Adjustable Rate Mortgage Loans, three years in the case of 0.28% of the
Adjustable Rate Mortgage Loans, and five years in the case of 0.80% of the
Adjustable Rate Mortgage Loans, each by aggregate principal balance of the
Adjustable Rate Mortgage Loans as of the Cut-off Date. On each Adjustment Date
for each Adjustable Rate Mortgage Loan, the Loan Rate thereon will be adjusted
to equal the sum, rounded to the nearest multiple of 0.125%, of the Index (as
described below) and a fixed percentage amount (the "Gross Margin"); provided,
however, that the Loan Rate on each such Mortgage Loan generally will not
increase or decrease by more than 2.00% per annum on any related Adjustment Date
(the "Periodic Rate Cap"), except that each such Mortgage Loan may increase or
decrease by a higher percentage per annum on the initial Adjustment Date. Each
Loan Rate on each such Mortgage Loan will not exceed a specified maximum Loan
Rate over the life of such Mortgage Loan (the "Maximum Loan Rate") or be less
than a specified minimum Loan Rate over the life of such Mortgage Loan (the
"Minimum Loan Rate"). The Delayed First Adjustment Mortgage Loans have a
weighted average Periodic Rate Cap of approximately 1.00% per annum. Effective
with the first monthly payment due on each Adjustable Rate Mortgage Loan after
each related Adjustment Date, the monthly payment amount will be adjusted to an
amount that will amortize fully the outstanding principal balance of the related
Mortgage Loan over its remaining term, and pay interest at the Loan Rate as so
adjusted. Due to the application of the Periodic Rate Caps and the Maximum Loan
Rates, the Loan Rate on each such Mortgage Loan, as adjusted on any related
Adjustment Date, may be less than the sum of the Index and the related Gross
Margin, rounded as described herein. See "--The Index" herein. None of the
Adjustable Rate Mortgage Loans permits the related mortgagor to convert the
adjustable Loan Rate thereon to a fixed Loan Rate.
The Adjustable Rate Mortgage Loans had Loan Rates as of the Cut-off Date of
not less than 6.875% per annum and not more than 15.500% per annum and the
weighted average Loan Rate was approximately 10.524% per annum. As of the
Cut-off Date, the Adjustable Rate Mortgage Loans had Gross Margins ranging from
4.25% to 11.10%, Minimum Loan Rates ranging from 0.00% per annum to 15.38% per
annum and Maximum Loan Rates ranging from 13.38% per annum to 22.25% per annum.
As of the Cut-off Date, the weighted average Gross Margin was approximately
5.73%, the weighted average Minimum Loan Rate was approximately 10.43% per annum
(exclusive of the Mortgage Loans that do not have a Minimum Loan Rate) and the
weighted average Maximum Loan Rate was approximately 16.97% per annum. The
latest first Adjustment Date following the Cut-off Date on any Adjustable Rate
Mortgage Loan occurs in August 2003 and the weighted average next Adjustment
Date for all of the Adjustable Rate Mortgage Loans following the Cut-off Date is
April, 2000.
The Adjustable Rate Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding) and the percentages set forth in the tables are
percentages of the Adjustable Rate Mortgage Loans as of the Cut-off Date.
LOAN RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE OF
ADJUSTABLE RATE
PRINCIPAL BALANCE MORTGAGE LOANS
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF THE
LOAN RATE (%) MORTGAGE LOANS THE CUT-OFF DATE CUT-OFF DATE
- ------------------------------ -------------------- ----------------------- ------------------------
6.875-7.000................. 1 $76,904.57 0.04%
7.001-8.000................. 29 4,088,284.91 2.14
8.001-9.000................. 126 18,511,047.35 9.68
9.001-10.000................ 327 56,137,645.34 29.36
10.001-11.000................. 428 59,579,659.96 31.16
11.001-12.000................. 262 29,883,934.74 15.63
12.001-13.000................. 129 11,670,399.35 6.10
13.001-14.000................. 82 6,934,166.85 3.63
14.001-15.000................. 44 3,974,820.08 2.08
15.001-15.500................. 4 377,216.56 0.20
-------------------- ----------------------- ------------------------
Total................... 1,432 $191,234,079.71 100.00%
==================== ======================= ========================
- --------------
(1)The weighted average Loan Rate of the Adjustable Rate Mortgage Loan as of the Cut-off Date was 10.524%
per annum.
MAXIMUM LOAN RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE
OF ADJUSTABLE RATE
PRINCIPAL BALANCE MORTGAGE LOANS
NUMBER OF OUTSTANDING AS OF THE OUTSTANDING AS OF
MAXIMUM LOAN RATE (%) MORTGAGE LOANS CUT-OFF DATE THE CUT-OFF DATE
----------------------------------- ----------------- ----------------------- ---------------------
13.375 - 14.000.............. 14 $ 2,015,855.69 1.05 %
14.001 - 15.000.............. 58 8,717,562.15 4.56
15.001 - 16.000.............. 220 34,621,070.49 18.10
16.001 - 17.000.............. 411 61,625,280.95 32.23
17.001 - 18.000.............. 386 53,572,762.09 28.01
18.001 - 19.000.............. 176 15,959,418.52 8.35
19.001 - 20.000.............. 95 8,671,701.95 4.53
20.001 - 21.000.............. 63 5,280,989.44 2.76
21.001 - 22.000.............. 8 640,085.99 0.33
22.001 - 22.250.............. 1 129,352.44 0.07
------------------ -------------------- ----------------
Total..................... 1,432 $ 191,234,079.71 100.00 %
================== ==================== ================
- --------------
(1)The weighted average Maximum Loan Rate of the Adjustable Rate Mortgage Loans as of the Cut-off Date was
approximately 16.97% per annum.
MINIMUM LOAN RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE OF
ADJUSTABLE RATE
PRINCIPAL BALANCE MORTGAGE LOANS
NUMBER OF OUTSTANDING AS OF THE OUTSTANDING AS OF
MINIMUM LOAN RATE (%) MORTGAGE LOANS CUT-OFF DATE THE CUT-OFF DATE
------------------------------- ----------------- ----------------------- ----------------------
0.000%............. 16 $ 3,965,292.58 2.07 %
4.001 - 5.000.............. 4 424,787.48 0.22
5.001 - 6.000.............. 4 637,481.63 0.33
6.001 - 7.000.............. 6 489,835.67 0.26
7.001 - 8.000.............. 29 4,201,531.54 2.20
8.001 - 9.000.............. 130 19,016,410.34 9.94
9.001 - 10.000.............. 325 56,269,440.34 29.42
10.001 - 11.000.............. 433 57,345,380.95 29.99
11.001 - 12.000.............. 247 28,374,402.34 14.84
12.001 - 13.000.............. 119 10,083,366.32 5.27
13.001 - 14.000.............. 76 6,736,794.69 3.52
14.001 - 15.000.............. 40 3,404,879.59 1.78
15.001 - 15.375.............. 3 284,476.24 0.15
----------------- ----------------------- ----------------------
Total.................... 1,432 $ 191,234,079.71 100.00 %
================= ======================= ======================
- --------------
(1)The weighted average Minimum Loan Rate of the Mortgage Loans (exclusive of the Mortgage Loans that do not
have a Minimum Loan Rate) as of the Cut-off Date was approximately 10.43% per annum.
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE OF
ADJUSTABLE RATE
NUMBER PRINCIPAL BALANCE MORTGAGE OUTSTANDING
OF MORTGAGE OUTSTANDING AS OF THE AS OF
GROSS MARGINS ( %) LOANS CUT-OFF DATE THE CUT-OFF DATE
---------------------------- ----------------- ----------------------- ------------------------
4.250 - 4.250.............. 3 $ 284,643.67 0.15 %
4.251 - 4.500.............. 92 14,665,827.29 7.67
4.501 - 4.750.............. 20 2,975,069.64 1.56
4.751 - 5.000.............. 173 27,102,461.94 14.17
5.001 - 5.250.............. 99 13,233,254.89 6.92
5.251 - 5.500.............. 156 27,201,391.02 14.22
5.501 - 5.750.............. 224 32,233,772.44 16.86
5.751 - 6.000.............. 186 21,623,618.88 11.31
6.001 - 6.250.............. 152 17,036,667.24 8.91
6.251 - 6.500.............. 140 16,215,538.82 8.48
6.501 - 6.750.............. 48 5,724,433.60 2.99
6.751 - 7.000.............. 76 7,321,742.96 3.83
7.001 - 7.250.............. 12 908,669.11 0.48
7.251 - 7.500.............. 10 1,194,474.42 0.62
7.501 - 7.750.............. 7 543,212.89 0.28
7.751 - 8.000.............. 15 1,043,432.08 0.55
8.001 - 8.250.............. 5 677,525.23 0.35
8.251 - 8.500.............. 1 86,101.21 0.05
8.501 - 8.750.............. 2 141,624.09 0.07
8.751 - 9.000.............. 3 325,505.30 0.17
9.001 - 9.250.............. 1 29,911.42 0.02
9.251 - 9.500.............. 2 150,933.56 0.08
9.501 - 9.750.............. 2 140,657.24 0.07
9.751 - 10.000.............. 1 41,254.11 0.02
10.251 - 10.500.............. 1 235,026.25 0.12
11.001 - 11.100.............. 1 97,330.41 0.05
----------------- ----------------------- --------------------
Total..................... 1,432 $ 191,234,079.71 100.00 %
================= ======================= ====================
- --------------
(1)The weighted average Gross Margin of the Adjustable Rate Mortgage Loans as of the Cut-off Date was
approximately 5.73%.
NEXT ADJUSTMENT DATE FOR THE ADJUSTABLE RATE MORTGAGE LOANS
NEXT ADJUSTMENT DATE NUMBER OF PRINCIPAL BALANCE % OF AGGREGATE
MORTGAGE LOANS OUTSTANDING AS OF THE PRINCIPAL BALANCE
CUT-OFF DATE OF ADJUSTABLE RATE
MORTGAGE LOANS AS
OF THE CUT-OFF DATE
---------------------------- ----------------- ----------------------- --------------------
09/01/98..................... 9 $1,022,327.26 0.53 %
09/03/98..................... 1 130,742.70 0.07
09/08/98..................... 1 58,127.98 0.03
09/16/98..................... 1 99,747.34 0.05
09/23/98..................... 1 29,481.08 0.02
09/24/98..................... 1 93,933.64 0.05
10/01/98..................... 18 1,783,611.38 0.93
10/06/98..................... 1 70,831.67 0.04
11/01/98..................... 23 3,737,900.21 1.95
11/28/98..................... 1 130,685.52 0.07
11/29/98..................... 2 45,336.97 0.02
12/01/98..................... 38 5,808,729.94 3.04
12/06/98..................... 1 115,317.99 0.06
12/10/98..................... 1 105,820.04 0.06
12/11/98..................... 1 14,758.76 0.01
12/30/98..................... 1 125,482.76 0.07
01/01/99..................... 36 5,937,932.03 3.11
01/14/99..................... 1 85,161.42 0.04
01/23/99..................... 1 90,652.95 0.05
01/28/99..................... 4 274,199.60 0.14
02/01/99..................... 31 5,734,126.85 3.00
02/02/99..................... 1 146,314.24 0.08
02/04/99..................... 1 98,288.40 0.05
02/05/99..................... 1 39,899.77 0.02
02/11/99..................... 1 86,015.27 0.04
02/15/99..................... 1 33,627.32 0.02
02/16/99..................... 1 43,965.02 0.02
02/27/99..................... 1 43,755.51 0.02
03/01/99..................... 5 1,027,407.71 0.54
03/15/99..................... 1 47,916.92 0.03
04/01/99..................... 2 434,250.63 0.23
05/01/99..................... 1 110,986.79 0.06
05/07/99..................... 1 142,912.91 0.07
NEXT ADJUSTMENT DATE FOR THE ADJUSTABLE RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE
PRINCIPAL BALANCE OF ADJUSTABLE RATE
NUMBER OF OUTSTANDING AS OF THE MORTGAGE LOANS AS
NEXT ADJUSTMENT DATE MORTGAGE LOANS CUT-OFF DATE OF THE CUT-OFF DATE
---------------------------- ----------------- ----------------------- --------------------
06/01/99..................... 1 74,397.18 0.04
06/04/99..................... 1 41,254.11 0.02
06/16/99..................... 1 59,596.27 0.03
06/23/99..................... 1 94,029.64 0.05
07/01/99..................... 1 97,330.41 0.05
08/01/99..................... 4 289,117.11 0.15
08/06/99..................... 1 214,383.92 0.11
09/01/99..................... 4 774,630.16 0.41
10/01/99..................... 5 894,363.99 0.47
11/01/99..................... 4 1,154,328.66 0.60
12/01/99..................... 8 2,109,560.75 1.10
12/20/99..................... 1 49,857.71 0.03
01/01/00..................... 9 958,860.16 0.50
02/01/00..................... 30 1,904,035.64 1.00
03/01/00..................... 57 6,413,919.52 3.35
03/26/00..................... 1 448,304.93 0.23
04/01/00..................... 129 15,694,844.84 8.21
05/01/00..................... 170 21,472,692.48 11.23
06/01/00..................... 245 30,215,474.60 15.80
07/01/00..................... 252 33,824,761.98 17.69
08/01/00..................... 232 32,208,276.28 16.84
09/01/00..................... 75 12,429,520.00 6.50
03/01/01..................... 1 27,302.07 0.01
04/01/01..................... 2 273,392.29 0.14
06/01/01..................... 2 239,185.59 0.13
01/01/03..................... 1 199,335.92 0.10
05/01/03..................... 2 1,153,976.21 0.60
08/01/03..................... 1 167,098.71 0.09
----------------- ----------------------- -----------------
Total........................ 1,432 $ 191,234,079.71 100.00 %
================= ======================= ================
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM OF THE ADJUSTABLE RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
PRINCIPAL BALANCE ADJUSTABLE RATE
INITIAL FIXED TERM/ NUMBER OF OUTSTANDING AS OF THE MORTGAGE LOANS AS OF
SUBSEQUENT ADJUSTABLE RATE TERM MORTGAGE LOANS CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------------------- ----------------- ----------------------- ----------------------
One Year/Twenty-Nine Years................. 5 $ 648,116.35 0.34 %
Two Years/Twenty-Eight Years............... 1,234 161,793,211.24 84.60
Three Years/Twenty-Seven Years............. 5 539,879.95 0.28
Five Years/Twenty-Five Years............... 4 1,520,410.84 0.80
Six Months/Various......................... 184 26,732,461.33 13.98
----------------- ----------------------- ----------------------
Total................................... 1,432 $ 191,234,079.71 100.00 %
================= ======================= ======================
PERIODIC RATE CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
PRINCIPAL BALANCE ADJUSTABLE RATE
NUMBER OF OUTSTANDING AS OF THE MORTGAGE LOANS AS OF
PERIODIC RATE CAP (%) MORTGAGE LOANS CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------- ----------------- ----------------------- ----------------------
1.00 ................................. 1,427 $189,782,796.37 99.24 %
1.50.................................. 4 1,415,615.69 0.74
2.00.................................. 1 35,667.65 0.02
----------------- ----------------------- --------------------
Total.............................. 1,432 $191,234,079.71 100.00 %
================= ======================= ====================
INITIAL PERIODIC RATE CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE
PRINCIPAL BALANCE OF ADJUSTABLE RATE
NUMBER OF OUTSTANDING AS OF THE MORTGAGE LOANS AS
INITIAL PERIODIC RATE CAP (%) MORTGAGE LOANS CUT-OFF DATE OF THE CUT-OFF DATE
------------------------------------- ----------------- ----------------------- ---------------------
1.00................................ 195 $ 28,067,988.04 14.68 %
1.50................................ 1 1,075,990.85 0.56
2.00................................ 1,154 151,031,765.13 78.98
3.00................................ 82 11,058,335.69 5.78
----------------- ----------------------- -----------------
Total............................ 1,432 $ 191,234,079.71 100.00 %
================= ======================= =================
THE INDEX
As of any Adjustment Date, the Index applicable to the determination of the
Loan Rate on each Adjustable Rate Mortgage Loan will be the average of the
interbank offered rates for six-month United States dollar deposits in the
London market as published in The Wall Street Journal and as most recently
available either (i) as of the first business day 45 days prior to such
Adjustment Date, (ii) as of the first business day of the month preceding the
month of such Adjustment Date or (iii) the last business day of the second month
preceding the month in which such Adjustment Date occurs, as specified in the
related Mortgage Note.
In the event that the Index becomes unavailable or otherwise unpublished,
the Master Servicer will select a comparable alternative index over which it has
no direct control and which is readily verifiable.
UNDERWRITING STANDARDS
The Mortgage Loans will be acquired by the Depositor from the Seller on the
Closing Date pursuant to a Mortgage Loan Purchase Agreement by and between
Financial Asset Securities Corp. (the "Purchaser") and LMAC, Inc. (the
"Seller"), dated as of September 1, 1998. All of the Mortgage Loans were
originated or acquired by Ocwen Financial Services, Inc. (the "Originator"), a
subsidiary of Ocwen Financial Corporation, in the ordinary course of its
business. A portion of the Mortgage Loans, representing approximately 4.59% of
the Mortgage Pool and 9.81% of the Fixed Rate Mortgage Loans and 2.67% of the
Adjustable Rate Mortgage Loans (in each case by aggregate principal balance as
of the Cut-off Date) were acquired by the Originator from Cityscape Corp. (such
Mortgage Loans, the "CITYSCAPE LOANS"). The Seller, a wholly-owned finance
subsidiary of Ocwen Financial Services, Inc., will acquire the Mortgage Loans
from Ocwen Financial Services, Inc. in a transaction contemporaneous with the
transfer of the Mortgage Loans from the Seller to the Depositor.
Originator's Underwriting Standards. The Originator's underwriting
standards are primarily intended to assess the value of the mortgaged property
and to evaluate the adequacy of such property as collateral for the mortgage
loan. All of the Mortgage Loans originated by the Originator are also
underwritten with a view toward the resale thereof in the secondary mortgage
market. While the Originator's primary consideration in underwriting a mortgage
loan is the value of the mortgaged property, the Originator also considers,
among other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio ("Debt Ratio"), as well as the type and use of the
mortgaged property. Second lien financing of the mortgaged properties may be
provided by lenders at any time (including at origination). The Originator,
however, will not itself provide second lien financing on a mortgaged property.
The Mortgage Loans generally bear higher rates of interest than mortgage
loans that are originated in accordance with Fannie Mae and Freddie Mac
standards which is likely to result in rates of delinquencies and foreclosures
that are higher, and that may be substantially higher, than those experienced by
portfolios of mortgage loans underwritten in a more traditional manner. A
majority of the Mortgage Loans provide for the payment by the mortgagor of a
prepayment charge in limited circumstances on certain full or partial
prepayments made within six months, one year, two years, three years, four years
or five years from the date of origination of the related Mortgage Loan as
described under "The Mortgage Pool--Mortgage Loan Statistics" above. Such
charges may be waived or may be prohibited by State law. The amount of the
prepayment charge is as provided in the related Mortgage Note but is generally
equal to six months' interest on any amounts prepaid in excess of 20% of the
then outstanding principal balance of the related Mortgage Loan in any 12 month
period.
As a result of the Originator's underwriting criteria, changes in the
values of Mortgaged Properties may have a greater effect on the Originator's
delinquency, foreclosure and loss experience than on those of lenders whose
mortgage loans are originated in a more traditional manner. No assurance can be
given that the values of the Mortgaged Properties have remained or will remain
at the levels in effect on the dates of origination of the related Mortgage
Loans. Approximately 34.78%, 10.62%, 7.57% and 4.89%, respectively, of the
Mortgage Loans, each by aggregate principal balance of the Mortgage Loans as of
the Cut-off Date, are secured by Mortgaged Properties located in the States of
California, Florida, Illinois and Michigan. If the California, Florida, Illinois
or Michigan residential real estate markets should experience an overall decline
in property values after the dates of origination of the Mortgage Loans, the
rates of delinquencies, foreclosures and losses on the Mortgage Loans may
increase over historical levels of comparable type loans, and may increase
substantially.
All originations by the Originator of one- to four-family residential
mortgage loans are based on loan application packages submitted through approved
correspondents and brokers. Such loan application packages, which generally
contain relevant credit, property and underwriting information on the loan
request, are compiled by the applicable correspondent or broker and submitted to
the Originator for approval and purchase. The correspondents and brokers receive
all or a portion of the loan origination fee charged to the borrower at the time
the loan is made. As part of their quality control procedures, the Originator
maintains a file with respect to each correspondent and broker including a copy
of such correspondent's or broker's license and reports of any complaints
received with respect to such correspondent or their brokers.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history,
employment history and personal information. The Originator requires a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions, or judgments. Properties that are to
secure single-family mortgage loans are appraised or reviewed by qualified
independent appraisers who are approved by the Originator's internal appraisal
department. Such appraisers inspect the interior and/or exterior and appraise
the subject property and report the property condition. Following each
inspection, the appraiser prepares a report which includes a market value
analysis based on recent sales of comparable homes in the area and, when deemed
appropriate, replacement cost analysis based on the current cost of constructing
a similar home. All appraisals are required to conform to the Uniform Standards
of Professional Appraisal Practice adopted by the Appraisal Standards Board of
the Appraisal Foundation and must be on forms acceptable to Fannie Mae and
Freddie Mac. Every independent appraisal is reviewed by either the Originator or
by another independent appraiser approved by the Originator before the mortgage
loan is made and to the extent that such review appraisal determines a market
value more than five percent less than the market value determined by the
initial appraisal, such review appraisal is used in place of the initial
appraisal.
Except for the Cityscape Loans, the Mortgage Loans were underwritten by the
Originator's regular lending divisions pursuant to the Originator's "Full
Documentation," "Lite Documentation," and "Stated Income Documentation"
residential loan programs. Under each of the programs, the Originator's regular
lending divisions review the loan applicant's source of income, calculate the
amount of income from sources indicated on the loan application or similar
documentation, review the credit history of the applicant, calculate the Debt
Ratio to determine the applicant's ability to repay the loan, review the type
and use of the property being financed and review the property for compliance
with the Originator's standards. In determining the ability of the applicant to
repay the loan, the Originator uses the interest rate of the loan being applied
for (the "Qualifying Rate"). The Originator's underwriting standards are applied
in a standardized procedure which complies with applicable federal and state
laws and regulations and requires their underwriters and/or the in-house
appraiser to be satisfied that the value of the property being financed, as
indicated by an appraisal and a review appraisal, currently supports the
outstanding loan balance.
In general, the maximum loan amount for mortgage loans originated under the
regular lending program is $750,000; however, mortgage loans on a case by case
basis may be originated for a higher loan amount. None of the Mortgage Loans has
a principal balance at origination higher than $1,925,000. The Originator
underwrites one to four-family loans with Loan-to-Value Ratios at origination of
generally up to 90%, depending on, among other things, the purpose of the
mortgage loan, a mortgagor's credit history, repayment ability and Debt Ratio,
as well as the type and use of the property. Under each class of underwriting
criteria, the maximum combined loan-to-value ratio at origination, including any
then existing second deeds of trust subordinate to the Originator's first deed
of trust, is 100%. The Originator, however, will not itself provide second lien
financing on a mortgaged property. Generally, none of the mortgage loans
originated or acquired by the Originator will be covered by a primary mortgage
insurance policy.
The Originator verifies the income of each borrower and the source of funds
under their various programs as follows: under the Full Documentation program,
borrowers are generally required to submit verification of stable income for a
two year period. Under the Lite Documentation program, borrowers are generally
required to submit verification of stable employment for the past six months.
Under the Stated Income program, the borrowers may be qualified based upon the
monthly income stated on the mortgage application, without verification. The
income stated must be reasonable and customary for the borrower's line of work
and a copy of the business license is required or other generally acceptable
evidence of business conduct. Under all of the programs, the correspondent, or
an Originator if originated by the Originator, generally performs a telephone
verification of the borrower's employment. For self-employed borrowers the
business location and telephone number must be confirmed through an independent
source, such as directory assistance or a published telephone directory.
The Originator generally uses the following categories and characteristics
as guidelines to grade the mortgage loans:
"A" RISK. Under the "A" risk category, account ratings cannot be
greater than 30-days past due. A maximum of 0x30-day late payment in the
last 12 months, and 1x30 day late payment in the last 24 months is
acceptable (or 0x30 for mortgage loans originated under the Lite
Documentation and Stated Income Documentation programs). No 60-day late
payments within the last 24 months is acceptable on an existing mortgage
loan. For purposes of determining whether a prospective mortgagor has been
30-days late, the Originator uses a "rolling 30-day period," i.e., the
Originator generally will consider a continuous sequence of 30-day late
payments as a single 30-day late payment. All judgments, garnishments and
liens of record must be paid in full at funding. No bankruptcies may have
occurred during the preceding 24 months and no notice of default may have
occurred in the preceding 36 months. All bankruptcies must have been
discharged or dismissed. Two years re-established excellent credit since
discharge or dismissal is required. A maximum Loan-to-Value Ratio of 90%
(or 85% for mortgage loans originated under the Lite Documentation and
Stated Income Documentation programs) is permitted for a mortgage loan on a
single family owner occupied property. A maximum of 85% Loan-to-Value Ratio
is permitted for a mortgage loan on an owner occupied condominium or
two-to-four family residential property originated under the Full
Documentation program. All nonowner occupied loans have a maximum
Loan-to-Value Ratio of 80% (or 75% and 70% for mortgage loans originated
under the Lite Documentation or Stated Income Documentation programs,
respectively). The required Debt Ratio is 45% or less.
"A-" RISK. Under the "A-" risk category, account ratings cannot be
greater than 30-days past due. A maximum of 2x30-day late payments in the
last 12 months is acceptable on a mortgage loan. No 60-day late payments
within the last 24 months is acceptable on an existing mortgage loan. For
purposes of determining whether a prospective mortgagor has been 30-days
late, the Originator uses a "rolling 30-day period," i.e., the Originator
generally will consider a continuous sequence of 30-day late payments as a
single 30-day late payment. An existing mortgage loan is not required to be
current at the time the application is submitted. All judgments,
garnishments and liens of record must be paid in full at funding. When the
Loan-to-Value Ratio is equal to 80% or less, judgments and collections that
do not appear in the public records need not be paid on rate/term
refinances (no cash to borrowers) and purchases only. No bankruptcies may
have occurred in the preceding 12 months. All bankruptcies must have been
discharged or dismissed. No notice of default may have occurred in the
preceding 24 months. One year of reestablished credit since discharge or
dismissal is required. A maximum Loan-to-Value Ratio of 90% (or 85% for
mortgage loans originated under the Lite Documentation or Stated Income
Documentation programs) is permitted for a mortgage loan on a single family
owner occupied property. A maximum of 85% Loan-to-Value Ratio is permitted
for a mortgage loan on an owner occupied condominium or two-to-four family
residential property under the Full Documentation program only. Non-owner
occupied loans have a maximum Loan-to-Value Ratio of 80% under the Full
Documentation program or 75% under the Lite Documentation program (or 70%
for mortgage loans originated under the Stated Income program).
The maximum Debt Ratio is 50%.
"B" RISK. Under the "B" risk category, account ratings cannot be
greater than 60-days past due. A maximum of 4x30 or 2x30 and 1x60 day late
payments in the last 12 months is acceptable on a mortgage loan. For
purposes of determining whether a prospective mortgagor has been 30-days
late, the Originator uses a "rolling 30-day period," i.e., the Originator
generally will consider a continuous sequence of 30-day late payments as a
single 30-day late payment. An existing mortgage loan is not required to be
current at the time the application is submitted. All judgments,
garnishments and liens of record must be paid in full at funding. When the
Loan-to-Value Ratio is equal to 80% or less, judgments and collections that
do not appear in the public records need not be paid on rate/term
refinances (no cash to borrowers) and purchases only. No bankruptcies may
have occurred in the preceding 12 months. All bankruptcies must have been
discharged or dismissed. One year's re-established credit since discharge
of dismissal is required. No notice of default may have occurred in the
preceding 24 months. A maximum Loan-to-Value Ratio of 85% (or 80% for
mortgage loans originated under the Lite Documentation program or 80% under
the Stated Income Documentation program) is permitted for an owner occupied
mortgage loan regardless of the property type. Non-owner occupied loans
have a maximum Loan-to-Value Ratio of 75% under the Full Documentation, 70%
under the Lite Documentation and 65% under the Stated Income Documents
programs. The maximum Debt Ratio is 55% for Loan-to-Value Ratios equal to
or less than 70% and 50% for Loan-to-Value Ratios greater than 70%.
"C" RISK. Under the "C" risk category, account ratings cannot be
greater than 90-days past due. The majority of the credit must not be
currently delinquent. A maximum of 6x30 or 3x30 and 1x60 or 2x30 and 1x90
day late payments in the last 12 months is acceptable. For purposes of
determination whether a prospective mortgagor has been 30-days late, the
Originator uses a "rolling 30-day period," i.e., the Originator generally
will consider a continuous sequence of 30-day late payments as a single
30-day late payment. An existing mortgage loan is not required to be
current at the time the application is submitted. When the Loan-to-Value
Ratio is equal to 80% or less, judgments and collections that do not appear
in the public records need not be paid on rate/term refinances (no cash to
borrowers) and purchases only. A mortgagor may be in Chapter 11 or Chapter
13 bankruptcy proceedings immediately prior to the mortgage loan by the
Originator or have been in bankruptcy proceedings within the preceding one
year if the mortgagor has remained current on existing mortgage loan
payments for the preceding twelve months, has emerged from such bankruptcy
proceedings prior to or contemporaneously with the making of such mortgage
loan by the Originator and the Loan-to-Value Ratio of the mortgage loan
extended by the Originator does not exceed 70%. No notice of default may
have occurred in the preceding 12 months. A maximum Loan-to-Value Ratio of
75% is permitted for an owner occupied mortgage loan regardless of the
property type. Non-owner occupied loans have a maximum Loan-to-Value Ratio
of 70% under the Full Documentation, 65% under the Lite Documentation and
60% under the Stated Income Documentation programs. The maximum Debt Ratio
is 60%.
"D" RISK. Under the "D" risk category, account ratings cannot be
greater than 180-days past due in the last 12 months. A maximum 120 days
past due (or over 120 days with a Loan-to-Value ratio of 70% or less) in
the last 12 months is acceptable. No notice of sale can be filed on any
notice of default. For purposes of determining whether a prospective
mortgagor has been 30-days late, the Originator uses a "rolling 30-day
period," i.e., the Originator generally will consider a continuous sequence
of 30-day late payments as a single 30-day late payment. An existing
mortgage loan is not required to be current at the time the application is
submitted. Judgments and collections that do not appear in the public
records need not be paid on rate/term refinances (no cash to borrowers) and
purchases only. The mortgagor cannot be currently in bankruptcy on a
purchase but a recent discharge or dismissal is allowed. On refinances the
mortgagor can be currently in a Chapter 11 or 13 bankruptcy. The proceeds
can be used to obtain the bankruptcy discharge. A maximum Loan-to-Value
Ratio of 75% is permitted for an owner occupied mortgage loan regardless of
the property type. Non-owner occupied loans have a maximum Loan-to-Value
Ratio of 60% under the Full Documentation, 55% under the Lite Documentation
and 50% under the Stated Income Documentation programs. The maximum Debt
Ratio is 60%.
"D-" RISK. Under the "D-" risk category, account ratings are not taken
into consideration. Notice of sale can be filed on any notice of default.
For purposes of determining whether a prospective mortgagor has been
30-days late, the Originator uses a "rolling 30-day period," i.e., the
Originator generally will consider a continuous sequence of 30-day late
payments as a single 30-day late payment. An existing mortgage loan is not
required to be current at the time the application is submitted. Judgments
and collections that do not appear in the public records need not be paid
on rate/term refinances (no cash to borrowers) and purchases only. The
mortgagor can be currently in bankruptcy and proceeds can be used to obtain
the bankruptcy discharge. A maximum Loan-to-Value Ratio of 70% is permitted
for an owner occupied mortgage loan regardless of the property type.
Non-owner occupied loans have a maximum Loan-to-Value Ratio of 60% under
the Full Documentation, 55% under the Lite Documentation and 50% under the
Stated Income Documentation programs. The maximum Debt Ratio is 60%.
Exceptions. As described above the Originator uses the foregoing
categories and characteristics as guidelines only. On a case by case basis
only, the Originator may determine that the prospective mortgagor warrants
a risk upgrade or an exception from certain requirements of a particular
risk category. A one level credit upgrade in "B" and "C" risk grade loans
only may be allowed if the application reflects certain compensating
factors, among others: low Loan-to-Value Ratio, stable employment,
ownership of current residence of 5 or more years and condition of the
property. An exception may also be granted if the applicant has tendered a
minimum down payment of 20% or more, the new loan reduces the applicant's
housing expense by more than 25% and if the mortgage credit history is
rated 0x30 or 1x30 in the last 12 months. In addition, certain of the
Mortgage Loans were graded by the Originator by means of a proprietary
automated risk grading system that may upgrade or downgrade the risk
grading accorded a loan on the basis of certain compensating or
countervailing factors.
Cityscape and Cityscape Underwriting Standards. Cityscape Corp.'s
("Cityscape") underwriting guidelines, similar to the Originator's underwriting
guidelines, focused primarily on the prior mortgage delinquency history and
general credit history of the borrower, debt ratios and loan-to-value ratios.
However, the relative weighting of such factors by Cityscape may have varied
from the weightings accorded such factors by the Originator. Based upon an
examination of the loan files relating to the Cityscape Loans and written
underwriting guidelines provided by Cityscape to the Originator in connection
with the acquisition by the Originator of the Cityscape Loans, the Originator
believes that the Cityscape underwriting guidelines were not materially less
strict than the underwriting guidelines observed by the Originator in
originating its own mortgage loans. However, the Originator did not reunderwrite
the Cityscape Loans in connection with such acquisition and makes no
representation or warranty regarding the compliance by Cityscape with the
written Cityscape underwriting guidelines supplied to the Originator or the
actual underwriting guidelines observed by Cityscape.
The Originator will make representations and warranties with respect to all
of the Mortgage Loans as of the Closing Date. The Originator will be obligated
to repurchase Mortgage Loans in respect of which a material breach of the
representations and warranties has occurred (other than those breaches which
have been cured).
THE MASTER SERVICER
Pursuant to the terms of the Pooling and Servicing Agreement, Ocwen
Financial Services, Inc. will act as master servicer. In connection with its
duties under the Pooling and Servicing Agreement, Ocwen Financial Services, Inc.
will appoint Ocwen Federal Bank FSB as subservicer. See "Ocwen Federal Bank FSB"
below.
OCWEN FEDERAL BANK FSB
The information set forth in the following paragraphs has been provided by
Ocwen Federal Bank FSB. None of the Depositor, the Trustee, the Underwriter or
any of their respective affiliates have made or will make any representation as
to the accuracy or completeness of such information.
Ocwen Federal Bank FSB ("Ocwen"), a federally-chartered savings bank, with
its home office in Fort Lee, New Jersey and its servicing operations and
corporate offices in West Palm Beach, Florida, will serve as the Special
Servicer and the Subservicer for the Mortgage Loans (in such capacities, the
"Special Servicer" and the "Subservicer," respectively). Ocwen is a wholly-owned
subsidiary of Ocwen Financial Corporation, a public financial services holding
company. As of June 30, 1998, Ocwen had approximately $2.6 billion in assets,
approximately $2.4 billion in liabilities and approximately $257 million in
equity. As of June 30, 1998, Ocwen's tangible and leveraged capital ratio was
approximately 9.64% and its risk-based capital ratio was approximately 16.11%.
For the four quarters ended June 30, 1998, Ocwen's income from continuing
operations was approximately $65.1 million.
In its capacity as subservicer, Ocwen will perform the day-to-day servicing
duties on behalf of the Master Servicer. Compensation to the subservicer will be
paid by the Master Servicer from the Servicing Fee.
Pursuant to the terms of the Pooling and Servicing Agreement, when a
Mortgage Loan becomes 90 days or more delinquent, the responsibility for
servicing such Mortgage Loan will be transferred to the Special Servicer. The
Special Servicer shall maintain responsibility for the servicing of such
Mortgage Loan until it is liquidated. As compensation for its services under the
Pooling and Servicing Agreement, the Special Servicer will be entitled to
receive the Servicing Fee in connection with the Mortgage Loans serviced by it
(each, a "Specially Serviced Mortgage Loan"). In addition, the Special Servicer
is entitled to a fee in connection with the liquidation of Specially Serviced
Mortgage Loans (the "Special Servicer Incentive Fee") which will be paid prior
to liquidation proceeds being distributed to Certificateholders and to
additional compensation (the "Special Servicer Fee") with respect to each
Specially Serviced Mortgage Loan.
The Special Servicer Fee will equal the sum of (a) $166 per Specially
Serviced Mortgage Loan payable immediately upon such Mortgage Loan becoming a
Specially Serviced Mortgage Loans, and (b) upon such Specially Serviced Mortgage
Loan becoming 150 days or more delinquent, $166 per month for the next twelve
months regardless of whether such Specially Serviced Mortgage Loan is cured.
Pursuant to the terms of the Pooling and Servicing Agreement, the Special
Servicer Fee will be paid after distributions are made to the Offered
Certificateholders.
The major business of the Special Servicer has been the resolution of
nonperforming single-family, multi-family and commercial mortgage loan
portfolios acquired from the Resolution Trust Corporation, from private
investors, and most recently, from the United States Department of Housing and
Urban Development ("HUD") through HUD's auction of defaulted FHA Loans.
The following table sets forth, for Ocwen's subprime loans (the "BCD
Mortgage Loans") servicing portfolio serviced by the Special Servicer as of
December 31, 1996, as of December 31, 1997 and as of June 30, 1998, certain
information relating to the delinquency experience (including loans in
foreclosure included in the Special Servicer's servicing portfolio (which
portfolio does not include mortgage loans that are subserviced by others)) at
the end of the indicated periods. The indicated periods of delinquency are based
on the number of days past due on a contractual basis. No mortgage loan is
considered delinquent for these purposes until it is one month past due on a
contractual basis. The information contained in the monthly remittance reports
which will be sent to investors will be compiled using the same methodology as
that used to compile the information contained in the table below.
The following tables set forth, for the BCD Mortgage Loan servicing
portfolio derived from the Special Servicer as of December 31, 1996, as of
December 31, 1997 and as of June 30, 1998, certain information relating to the
foreclosure, REO and loan loss experience of BCD Mortgage Loans included in the
Special Servicer's servicing portfolio (which portfolio does not include
mortgage loans that are subserviced by others) at the end of the indicated
periods.
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------------------------------------------------
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 JUNE 30, 1998
-------------------------------------- --------------------------------------- --------------------------------------
PERCENT PERCENT PERCENT
BY PERCENT BY BY PERCENT BY BY PERCENT BY
BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- --------- -------- -------- --------- ---------- -------- -------- -------- ---------- -------- --------
Total
Portfolio... 2,834 $305,085 100.00% 100.00% 21,827 $2,318,261 100.00% 100.00% 49,838 $4,279,751 100.00% 100.00%
Period
of
Delinquency:
30-59 Days... 07 10,554 3.78% 3.46% 437 41,429 2.00% 1.79% 1,043 89,423 2.09% 2.09%
60-89 Days... 38 4,321 1.34% 1.42% 171 17,803 0.78% 0.77% 609 58,255 1.22% 1.36%
90 Days or
more........ 138 17,969 4.87% 5.89% 302 36,878 1.38% 1.59% 1,324 128,226 2.66% 3.00%
Total Delinquent
Loans........ 283 32,844 9.99% 10.77% 910 96,110 4.17% 4.15% 2,976 275,904 5.97% 6.45%
Loans in
Foreclosure(1) 136 17,805 4.80% 5.84% 281 34,663 1.29% 1.50% 1,091 113,505 2.19% 2.65%
- ----------
(1) Loans in foreclosure are also included under the heading "Total Delinquent Loans."
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 JUNE 30, 1998
--------------------------------------------------------------------
BY NO. BY BY NO. BY BY NO. BY
OF DOLLAR OF DOLLAR OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
--------------------------------------------------------------------
Total Portfolio.......... 2,834 $305,085 21,827 $2,318,261 49,838 $4,279,751
Foreclosed Loans(1)...... 34 3,329 66 7,387 115 13,092
Foreclosed Ratio(2)...... 1.20% 1.09% 0.30% 0.32% 0.23% 0.31%
- ----------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by the Special Servicer.
(2) The Foreclosure Ratio is equal to the aggregate principal balance or number
of Foreclosed Loans divided by the aggregate principal balance, or number,
as applicable, or mortgage loans in the total portfolio at the end of the
indicated period.
LOAN GAIN/(LOSS) EXPERIENCE
(DOLLARS IN THOUSANDS)
----------------------------------------------------------------------
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 JUNE 30, 1998
----------------------- ----------------------- --------------------
Total Portfolio (1)................ $305,085 $2,318,261 $4,279,751
Net Gains/(Losses) (2)............. 24 (1,209) (2,103)
Net Gains/(Losses) as a 0.01% (0.05)% (0.05)%
Percentage of Total Portfolio...
(1) "Total Portfolio" on the date stated above is the principal balance of the
mortgage loans outstanding on the last day of the period.
(2) "Net Gains/(Losses)" are actual gains or losses incurred on liquidated
properties and shortfall payoffs for each respective period. Gains or
losses on liquidated properties are calculated as net sales proceeds less
book value (exclusive of loan purchase premium or discount). Shortfall
payoffs are calculated as the difference between principal payoff amount
and unpaid principal at the time of payoff.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the Special Servicer's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for the Special
Servicer's mortgage servicing portfolio only for the periods presented, whereas
the aggregate delinquency experience on the Mortgage Loans comprising the
Mortgage Pool will depend on the results obtained over the life of the Mortgage
Pool. The Special Servicer commenced receiving applications for mortgage loans
under its BCD Mortgage Loan program in December 1994. Accordingly, the Special
Servicer (whether as an originator or acquirer of mortgage loans or as a
servicer of such mortgage loans) does not have significant historical
delinquency, bankruptcy, foreclosure or default experience that may be referred
to for purposes of estimating the future delinquency and loss experience of
Mortgage Loans. There can be no assurance that the Mortgage Loans comprising the
Mortgage Pool will perform consistent with the delinquency or foreclosure
experience described herein. It should be noted that if the residential real
estate market should experience an overall decline in property values, the
actual rates of delinquencies and foreclosures could be higher than those
previously experienced by the Special Servicer. In addition, adverse economic
conditions may affect the timely payment by Mortgagors of scheduled payments of
principal and interest on the Mortgage Loans and, accordingly, the actual rates
of delinquencies and foreclosures with respect to the Mortgage Pool.
CERTAIN RIGHTS RELATED TO FORECLOSURE AND THE SPECIAL SERVICER
Certain rights in connection with foreclosure of defaulted Mortgage Loans
will be granted to the holder of the Class OC Certificates (the "Directing
Holder"), which is initially expected to be an affiliate of the Special
Servicer. Such rights will include the right to recommend foreclosure or
alternatives to foreclosure, and, if such recommendation is not accepted by the
Special Servicer, to purchase such Mortgage Loans from the Trust Fund. Any such
purchase may affect the yields to maturity of the Offered Certificates.
The Directing Holder will also have the right to terminate the rights and
obligations of the Special Servicer under a special servicing agreement at any
time, without cause, and to appoint a successor special servicer, provided that
(i) such successor is reasonably acceptable to the Master Servicer and (ii) a
letter is provided to the Trustee from each Rating Agency to the effect that
such termination and appointment will not result in the qualification, reduction
or withdrawal of the ratings then applicable to the Certificates.
The rights of the Directing Holder may be transferred to any future holder
of the Class OC Certificates if, prior to such transfer, (i) the Special
Servicer consents thereto and (ii) a letter is provided to the Trustee from each
Rating Agency to the effect that the transfer of such rights to the proposed
transferee will not result in the qualification, reduction or withdrawal of the
ratings then applicable to the Certificates.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. The Trust Fund created under the Pooling and Servicing Agreement will
consist of (i) all of the Depositor's right, title and interest in the Mortgage
Loans, the related Mortgage Notes, Mortgages and other related documents, (ii)
all payments on or collections in respect of the Mortgage Loans due after the
Cut-off Date, together with any proceeds thereof, (iii) any Mortgaged Properties
acquired on behalf of Certificateholders by foreclosure or by deed in lieu of
foreclosure, and any revenues received thereon, (iv) the rights of the Trustee
under all insurance policies required to be maintained pursuant to the Pooling
and Servicing Agreement and (v) the rights of the Depositor under the Mortgage
Loan Purchase Agreement between the Depositor and the Seller. The Offered
Certificates will be transferable and exchangeable at the corporate trust
offices of the Trustee.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date the Depositor will transfer to the Trust Fund all of
its right, title and interest in and to each Mortgage Loan, the related Mortgage
Notes, Mortgages and other related documents (collectively, the "Related
Documents"), including all scheduled payments with respect to each such Mortgage
Loan due after the applicable Cut-off Date. The Trustee, concurrently with such
transfer, will deliver the Certificates to the Depositor. Each Mortgage Loan
transferred to the Trust Fund will be identified on a schedule (the "Mortgage
Loan Schedule") delivered to the Trustee pursuant to the Pooling and Servicing
Agreement. Such schedule will include information such as the Principal Balance
of each Mortgage Loan as of the Cut-off Date, its Loan Rate as well as other
information.
The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Seller will deliver or cause to be delivered to
the Trustee (or a custodian, as the Trustee's agent for such purpose) the
Mortgage Loans endorsed to the Trustee on behalf of the Certificateholders and
the Related Documents. In lieu of delivery of original mortgages, if such
original is not available, the Seller may deliver or cause to be delivered true
and correct copies thereof, together with a lost note affidavit executed by the
Seller.
Within 90 days of the Closing Date, the Trustee will review the Mortgage
Loans and the Related Documents pursuant to the Pooling and Servicing Agreement
and if any Mortgage Loan or Related Document is found to be defective in any
material respect and such defect is not cured within 60 days following
notification thereof to the Seller by the Trustee, the Seller will be obligated
to either (i) substitute for such Mortgage Loan an Eligible Substitute Mortgage
Loan; however, such substitution is permitted only within two years of the
Closing Date and may not be made unless an opinion of counsel is provided to the
effect that such substitution will not disqualify the Trust Fund as a REMIC or
result in a prohibited transaction tax under the Code or (ii) purchase such
Mortgage Loan at a price (the "Purchase Price") equal to the outstanding
Principal Balance of such Mortgage Loan as of the date of purchase, plus all
accrued and unpaid interest thereon, computed at the Loan Rate (net of the
Servicing Fee Rate) through the end of the calendar month in which the purchase
is effected, plus the amount of any unreimbursed Advances and Servicing Advances
made by the Master Servicer or the Special Servicer. The Purchase Price will be
deposited in the Collection Account on or prior to the next succeeding
Determination Date after such obligation arises. The obligation of the Seller to
repurchase or substitute for a Defective Mortgage Loan is the sole remedy
regarding any defects in the Mortgage Loans and Related Documents available to
the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Defective Mortgage Loan; (ii) have a Loan Rate,
with respect to a Fixed Rate Mortgage Loan, not less than the Loan Rate of the
Defective Mortgage Loan and not more than 1% in excess of the Loan Rate of such
Defective Mortgage Loan or, with respect to an Adjustable Rate Mortgage Loan,
have a Maximum Loan Rate and Minimum Loan Rate not less than the respective rate
for the Defective Mortgage Loan and have a Gross Margin equal to or greater than
the Defective Mortgage Loan; (iii) have the same Due Date as the Defective
Mortgage Loan; (iv) have a remaining term to maturity not more than one year
earlier and not later than the remaining term to maturity of the Defective
Mortgage Loan; (v) comply with each representation and warranty as to the
Mortgage Loans set forth in the Pooling and Servicing Agreement (deemed to be
made as of the date of substitution); and (vi) satisfy certain other conditions
specified in the Pooling and Servicing Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant, on the
Closing Date, that, among other things: (i) at the time of transfer to the
Depositor, the Seller has transferred or assigned all of its right, title and
interest in each Mortgage Loan and the Related Documents, free of any lien; and
(ii) each Mortgage Loan complied, at the time of origination, in all material
respects with applicable state and federal laws. Upon discovery of a breach of
any such representation and warranty which materially and adversely affects the
interests of the Certificateholders in the related Mortgage Loan and Related
Documents, the Seller will have a period of 60 days after discovery or notice of
the breach to effect a cure. If the breach cannot be cured within the 60-day
period, the Seller will be obligated to (i) substitute for such Defective
Mortgage Loan an Eligible Substitute Mortgage Loan or (ii) purchase such
Defective Mortgage Loan from the Trust Fund. The same procedure and limitations
that are set forth above for the substitution or purchase of Defective Mortgage
Loans as a result of deficient documentation relating thereto will apply to the
substitution or purchase of a Defective Mortgage Loan as a result of a breach of
a representation or warranty in the Pooling and Servicing Agreement that
materially and adversely affects the interests of the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Pooling and Servicing Agreement, the Master Servicer and
Special Servicer will service and administer the Mortgage Loans as more fully
set forth herein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND
DISTRIBUTION ACCOUNT
The Master Servicer shall establish and maintain or cause to be maintained
a separate trust account (the "Collection Account") for the benefit of the
holders of the Certificates. The Collection Account will be an Eligible Account
(as defined herein). Upon receipt by the Master Servicer of amounts in respect
of the Mortgage Loans (excluding amounts representing the Servicing Fee,
reimbursement for Advances and Servicing Advances and insurance proceeds to be
applied to the restoration or repair of a Mortgaged Property or similar items),
the Master Servicer will deposit such amounts in the Collection Account. Amounts
so deposited may be invested in Eligible Investments (as described in the
Pooling and Servicing Agreement) maturing no later than one Business Day prior
to the date on which the amount on deposit therein is required to be deposited
in the Distribution Account or on such Distribution Date if approved by the
Rating Agencies. The Trustee will establish an account (the "Distribution
Account") into which will be deposited amounts withdrawn from the Collection
Account for distribution to Certificateholders on a Distribution Date. The
Distribution Account will be an Eligible Account. Amounts on deposit therein may
be invested in Eligible Investments maturing on or before the Business Day prior
to the related Distribution Date unless such Eligible Investments are invested
in investments managed or advised by the Trustee or an affiliate thereof, in
which case such Eligible Investments may mature on the related Distribution
Date.
An "Eligible Account" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution or
trust company the short-term unsecured debt obligations of which (or, in the
case of a depository institution or trust company that is the principal
subsidiary of a holding company, the short-term unsecured debt obligations of
such holding company) are rated P-1 by Moody's and A-1 by Standard & Poor's (or
comparable ratings if Moody's and Standard & Poor's are not the Rating Agencies)
at the time any amounts are held on deposit therein, (ii) an account or accounts
the deposits in which are fully insured by the Federal Deposit Insurance
Corporation (to the limits established by such corporation), the uninsured
deposits in which account are otherwise secured such that, as evidenced by an
opinion of counsel delivered to the Trustee and to each Rating Agency, the
Certificateholders will have a claim with respect to the funds in such account
or a perfected first priority security interest against such collateral (which
shall be limited to Eligible Investments) securing such funds that is superior
to claims of any other depositors or creditors of the depository institution
with which such account is maintained, (iii) a trust account or accounts
maintained with the trust department of a federal or state chartered depository
institution, national banking association or trust company acting in its
fiduciary capacity or (iv) otherwise acceptable to each Rating Agency without
reduction or withdrawal of their then current ratings of the Certificates as
evidenced by a letter from each Rating Agency to the Trustee. Eligible
Investments are specified in the Pooling and Servicing Agreement and are limited
to investments which meet the criteria of the Rating Agencies from time to time
as being consistent with their then current ratings of the Certificates.
ADVANCES
Subject to the following limitations, the Master Servicer will be obligated
to advance or cause to be advanced on or before each Distribution Date its own
funds, or funds in the Collection Account that are not included in the Available
Funds for such Distribution Date, in an amount equal to the aggregate of all
payments of principal and interest, net of the Servicing Fee Rate, that were due
during the related Due Period on the Mortgage Loans, other than Balloon
Payments, and that were delinquent on the related Determination Date, plus
certain amounts representing assumed payments not covered by any current net
income on the Mortgaged Properties acquired by foreclosure or deed in lieu of
foreclosure, and, with respect to Balloon Loans, with respect to which the
Balloon Payment is not made when due, an assumed monthly payment that would have
been due on the related Due Date based on the original principal amortization
schedule for such Balloon Loan (any such advance, an "Advance").
Advances are required to be made only to the extent they are deemed by the
Master Servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making such Advances is to
maintain a regular cash flow to the Certificateholders, rather than to guarantee
or insure against losses. The Master Servicer will not be required to make any
Advances with respect to reductions in the amount of the monthly payments on the
Mortgage Loans due to bankruptcy proceedings or the application of the Relief
Act.
All Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed Advance was made. In addition, any Advances
previously made in respect of any Mortgage Loan that are deemed by the Master
Servicer to be nonrecoverable from related late collections, insurance proceeds
or liquidation proceeds may be reimbursed to the Master Servicer out of any
funds in the Collection Account prior to the distributions on the Certificates.
In the event the Master Servicer fails in its obligation to make any such
advance, the Trustee, in its capacity as successor Master Servicer, will be
obligated to make any such advance, to the extent required in the Pooling and
Servicing Agreement.
In the course of performing its servicing obligations, the Master Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (i) the preservation, restoration and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage. Each such expenditure will
constitute a "Servicing Advance."
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds and such
other amounts as may be collected by the Master Servicer from the related
Mortgagor or otherwise relating to the Mortgage Loan in respect of which such
unreimbursed amounts are owed, unless such amounts are deemed to be
nonrecoverable by the Master Servicer, in which event reimbursement will be made
to the Master Servicer from general funds in the Collection Account.
THE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association organized and existing under the laws of the United States, will be
named Trustee pursuant to the Pooling and Servicing Agreement. The Trustee will
initially serve as custodian of the Mortgage Loans.
The principal compensation (the "Trustee Fee") to be paid to the Trustee in
respect of its obligations under the Pooling and Servicing Agreement will be
equal to accrued interest at the "Trustee Fee Rate" of 0.00875% per annum on the
Principal Balance of each Mortgage Loan. The Pooling and Servicing Agreement
will provide that the Trustee and any director, officer, employee or agent of
the Trustee will be indemnified by the Trust Fund and will be held harmless
against any loss, liability or expense (not including expenses, disbursements
and advances incurred or made by the Trustee, including the compensation and the
expenses and disbursements of its agents and counsel, in the ordinary course of
the Trustee's performance in accordance with the provisions of the Pooling and
Servicing Agreement) incurred by the Trustee arising out of or in connection
with the acceptance or administration of its obligations and duties under the
Pooling and Servicing Agreement, other than any loss, liability or expense (i)
that constitutes a specific liability of Trustee under the Pooling and Servicing
Agreement or (ii) incurred by reason of willful misfeasance, bad faith or
negligence in the performance of the Trustee's duties under the Pooling and
Servicing Agreement or as a result of a breach, or by reason of reckless
disregard, of the Trustee's obligations and duties under the Pooling and
Servicing Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation (the "Servicing Fee") to be paid to the Master
Servicer in respect of its servicing activities for the Certificates will be
equal to accrued interest at the "Servicing Fee Rate" of 0.50% per annum on the
Principal Balance of each Mortgage Loan. As additional servicing compensation,
the Master Servicer is entitled to retain all service-related fees (other than
prepayment penalties), including assumption fees, modification fees, extension
fees and late payment charges, to the extent collected from mortgagors, together
with any interest or other income earned on funds held in the Collection Account
and any escrow accounts. The Master Servicer is obligated to offset any
Prepayment Interest Shortfall on any Distribution Date (payments made by the
Master Servicer in satisfaction of such obligation, "Compensating Interest") by
an amount not in excess of one-half of its Servicing Fee for such Distribution
Date. The Master Servicer is obligated to pay certain insurance premiums and
certain ongoing expenses associated with the Mortgage Pool and incurred by the
Master Servicer in connection with its responsibilities under the Pooling and
Servicing Agreement and is entitled to reimbursement therefor as provided in the
Pooling and Servicing Agreement.
With respect to any Determination Date and each Mortgage Loan as to which a
principal prepayment in full or in part was applied during the related Due
Period, the "Prepayment Interest Shortfall" is an amount equal to the interest
at the applicable Loan Rate (net of the Servicing Fee) on the amount of such
principal prepayment for the number of days commencing on the date on which the
principal prepayment is applied and ending on the last day of the related Due
Period.
VOTING RIGHTS
With respect to any date of determination, the percentage of all the Voting
Rights allocated among holders of the Offered Certificates shall be the
fraction, expressed as a percentage, the numerator of which is the aggregate
Certificate Principal Balance of all the Certificates of such Class then
outstanding and the denominator of which is the aggregate Principal Balance of
the Mortgage Loans then outstanding. The Voting Rights allocated to each Class
of Offered Certificates shall be allocated among all holders of each such Class
in proportion to the outstanding Certificate Principal Balance of such
Certificates.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Seller, the
Depositor, the Master Servicer and the Trustee, without the consent of the
holders of the Certificates, for any of the purposes set forth under "The
Agreements--Amendment" in the Prospectus. In addition, the Pooling and Servicing
Agreement may be amended by the Seller, the Depositor, the Master Servicer, the
Special Servicer and the Trustee and the holders of a majority in interest of
any Class of Offered Certificates affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Pooling and Servicing Agreement or of modifying in any manner the rights of
the holders of Offered Certificates; provided, however, that no such amendment
may (i) reduce in any manner the amount of, or delay the timing of,
distributions required to be made on any Offered Certificate without the consent
of the holder of such Certificate; (ii) adversely affect in any material respect
the interests of the holders of any Class of the Offered Certificates in a
manner other than as described in clause (i) above, without the consent of the
holders of Offered Certificates of such Class evidencing percentage interests
aggregating at least 66%; or (iii) reduce the aforesaid percentage of aggregate
outstanding principal amounts of Offered Certificates, the holders of which are
required to consent to any such amendment, without the consent of the holders of
all such Certificates.
TERMINATION
The Majority Residual Interestholder (or if such holder does not exercise
such option, the Master Servicer) will have the right to repurchase all
remaining Mortgage Loans and REO Properties and thereby effect the early
retirement of the Certificates, on any Distribution Date following the Due
Period during which the aggregate principal balance of the Mortgage Loans is
less than or equal to 10% of the Maximum Collateral Amount. In the event that
the option is exercised, the repurchase will be made at a price generally equal
to par plus accrued interest for each Mortgage Loan at the related Loan Rate to
but not including the first day of the month in which such repurchase price is
distributed plus the amount of any unreimbursed Advances and Servicing Advances
made by the Master Servicer or Special Servicer. Proceeds from such repurchase
will be included in Available Funds and will be distributed to the holders of
the Certificates in accordance with the Pooling and Servicing Agreement. Any
such repurchase of the Mortgage Loans and REO Properties will result in the
early retirement of the Certificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 90 days or more,
the Master Servicer or the Special Servicer may, at its option, purchase such
Mortgage Loan from the Trust Fund at the Purchase Price for such Mortgage Loan.
EVENTS OF DEFAULT
Events of Default will consist, among other things, of: (i) (a) any failure
by the Master Servicer to make an Advance and (b) any other failure by the
Master Servicer to deposit in the Collection Account or Distribution Account the
required amounts or remit to the Trustee any payment which continues unremedied
for one Business Day following written notice to the Master Servicer; (ii) any
failure of the Master Servicer to make any Advance or to cover any Prepayment
Interest Shortfalls, as described herein, which failure continues unremedied for
one Business Day; (iii) any failure by the Master Servicer to observe or perform
in any material respect any other of its covenants or agreements in the Pooling
and Servicing Agreement, which continues unremedied for 30 days after the first
date on which (x) the Master Servicer has knowledge of such failure or (y)
written notice of such failure is given to the Master Servicer; (iv) insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, and certain actions by or on behalf of the Master Servicer
indicating its insolvency or inability to pay its obligations or (v) cumulative
Realized Losses as of any Distribution Date exceed the amount specified in the
Pooling and Servicing Agreement.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under the Pooling and Servicing Agreement
remains unremedied, the Trustee at the direction of the holders of Offered
Certificates evidencing not less than 51% of the Voting Rights may terminate all
of the rights and obligations of the Master Servicer in its capacity as servicer
with respect to the Mortgage Loans, as provided in the Pooling and Servicing
Agreement, whereupon the Trustee will succeed to all of the responsibilities and
duties of the Master Servicer under the Pooling and Servicing Agreement,
including the obligation to make Advances. No assurance can be given that
termination of the rights and obligations of the Master Servicer under the
Pooling and Servicing Agreement would not adversely affect the servicing of the
related Mortgage Loans, including the delinquency experience of such Mortgage
Loans.
No holder of an Offered Certificate, solely by virtue of such holder's
status as a holder of an Offered Certificate, will have any right under the
Pooling and Servicing Agreement to institute any proceeding with respect
thereto, unless such holder previously has given to the Trustee written notice
of default and unless the holders of Offered Certificates having not less than
51% of the Voting Rights evidenced by the Offered Certificates so agree and have
offered reasonable indemnity to the Trustee.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Offered Certificates will be issued pursuant to a Pooling and Servicing
Agreement, dated as of September 1, 1998 (the "Pooling and Servicing
Agreement"), among the Depositor, the Seller, the Master Servicer and the
Trustee. Set forth below are summaries of the specific terms and provisions
pursuant to which the Offered Certificates will be issued. The following
summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, the provisions of the Pooling and Servicing
Agreement. When particular provisions or terms used in the Pooling and Servicing
Agreement are referred to, the actual provisions (including definitions of
terms) are incorporated by reference.
Ocwen Mortgage Loan Trust 1998-OFS3 will issue the Class A Certificates
(the "Senior Certificates"), (ii) the Class M-1 Certificates and the Class M-2
Certificates (the "Mezzanine Certificates"), (iii) the Class B Certificates (the
"Subordinate Certificates"), (iv) The Class OC Certificates and (v) the Class R
Certificates (the "Residual Certificates"). The Senior Certificates, the
Mezzanine Certificates and the Subordinate Certificates (collectively, the
"Offered Certificates"), the Class OC Certificates and the Residual Certificates
are collectively referred to herein as the "Certificates." Only the Offered
Certificates are offered hereby.
The Class A, Class M-1, Class M-2 and Class B Certificates will have the
respective Original Certificate Principal Balances specified on the cover
hereof. The aggregate of the Original Certificate Principal Balances of the
Offered Certificates is $261,648,739.
The Class R Certificates will have an Original Certificate Principal
Balance of $100 and will accrue interest thereon at the Pass-through Rate
applicable to the Class A Certificates.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $100,000 and integral multiples of $1,000 in excess thereof (except that one
certificate of each Class may be issued in a denomination which is not an
integral multiple thereof). The assumed final maturity dates for the Classes of
Offered Certificates are the applicable Distribution Dates set forth in the
table below:
CLASS ASSUMED FINAL MATURITY DATES
- --------------------------------------- -----------------------------------
Class A.......................... October 25, 2029
Class M-1........................ October 25, 2029
Class M-2........................ October 25, 2029
Class B.......................... October 25, 2029
Distributions on the Offered Certificates will be made by the Trustee on
the 25th day of each month, or if such day is not a Business Day, on the first
Business Day thereafter, commencing on October 26, 1998 (each, a "Distribution
Date"), to the persons in whose names such Certificates are registered at the
close of business on the Business Day immediately preceding the related
Distribution Date (each, a "Record Date").
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Offered
Certificates ("Certificate Owners") will hold their Offered Certificates through
DTC in the United States, or Cedel or Euroclear (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate principal balance of the Offered
Certificates 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 will act as depositary for Cedel and The
Chase Manhattan Bank will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Certificates in minimum denominations of $50,000. Except as described below, no
person acquiring a Book-Entry Certificate (each, a "beneficial owner") will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and until Definitive Certificates are issued,
it is anticipated that the only "Certificateholder" of the Offered Certificates
will be Cede & Co., as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Agreement. Certificate Owners are
only permitted to exercise their rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate 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 beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Cedel or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Offered Certificates from the Trustee through DTC and DTC
participants. While the Offered Certificates 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 Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Offered Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Offered Certificates, the Rules provide a mechanism by which Certificate Owners
will receive distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the Offered Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificateholders who are not Participants may
transfer ownership of Offered Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Offered Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Offered Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Offered Certificates
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 Certificateholders.
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
below) or Euroclear Participant (as defined below) 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. For information with respect to tax documentation procedures
relating to the Certificates, see "Certain Material Federal Income Tax
Considerations--Tax Treatment of Foreign Investors" and "--Backup Withholding"
in the Prospectus and "Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" in Annex
I hereto.
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.
DTC which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the Rules, as
in effect from time to time.
Cedel Bank, societe anonyme, 67 Bd Grande-Duchesse Charlotte, L-1331
Luxembourg, was incorporated in 1970 as a limited company under Luxembourg law.
Cedel is owned by banks, securities dealers and financial institutions, and
currently has about 100 shareholders, including U.S. financial institutions or
their subsidiaries. No single entity may own more than five percent of Cedel's
stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institute Monetaire Luxembourgeois, "IML", the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its customers ("Cedel Participants") and
facilitates the clearance and settlement of securities transactions by
electronic book-entry transfers between their accounts. Cedel provides various
services, including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
also deals with domestic securities markets in several countries through
established depository and custodial relationships. Cedel has established an
electronic bridge with Morgan Guaranty Trust as the Euroclear Operator in
Brussels to facilitate settlement of trades between systems. Cedel currently
accepts over 70,000 securities issues on its books.
Cedel's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Cedel's United States customers are limited to securities
brokers and dealers and banks. Currently, Cedel has approximately 3,000
customers located in over 60 countries, including all major European countries,
Canada, and the United States. Indirect access to Cedel is available to other
institutions which clear through or maintain a custodial relationship with an
account holder of Cedel.
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 29 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
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, 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.
The Euroclear Operator 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 the Euroclear Operator
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.
Distributions on the Book-Entry Certificates will be made on each
Remittance Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
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
Considerations--Tax Treatment of Foreign Investors" and "--Miscellaneous Tax
Aspects--Backup Withholding" in the Prospectus. Because DTC can only act on
behalf of Financial Intermediaries, the ability of a beneficial owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates 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 Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Certificateholder 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 Offered Certificates which
conflict with actions taken with respect to other Offered Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Company advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Company or the
Trustee is unable to locate a qualified successor, (b) the Company, at its sole
option, with the consent of the Trustee, elects to terminate a book-entry system
through DTC or (c) after the occurrence of an Event of Default, beneficial
owners having Percentage Interests aggregating not less than 51% of the
Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of beneficial owners.
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 Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Offered Certificates 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.
Neither the Company, the Servicer nor 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 Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
PRIORITY OF DISTRIBUTIONS AMONG CERTIFICATES
As more fully described herein, distributions on the Certificates will be
made on each Distribution Date from Available Funds and will be made to the
Classes of Certificates (subject to the prior payment of interest and principal
distributions to the Class R Certificates on the first Distribution Date as
described herein) in the following order of priority: (i) to interest on each
Class of Offered Certificates in the priority and subject to the limitations
described under "--Allocation of Available Funds" herein; (ii) to current
principal of the Classes of Certificates then entitled to receive distributions
of principal, in the order and subject to the priorities set forth herein under
"--Allocation of Available Funds"; (iii) to principal of the Classes of
Certificates then entitled to receive distributions of principal in order to
maintain the Overcollateralization Target Amount; (iv) to unpaid interest and
the Loss Reimbursement Entitlement in the order and subject to the priorities
described herein under "--Allocation of Available Funds", (v) to the Class OC
Certificates for deposit into the Excess Reserve Fund Account first to cover any
Basis Risk Shortfall Amount and then to cover any Required Reserve Amount, and
then to be released to the Class OC Certificates, in each case subject to
certain limitations set forth herein under "--Allocation of Available Funds" and
(vi) any remaining amounts to the holders of the Class R Certificates.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each Class of Offered Certificates will be made
on each Distribution Date from Available Funds. "Available Funds" for any
Distribution Date is equal to the sum, net of amounts reimbursable therefrom to
the Master Servicer and the Special Servicer, of (i) the aggregate amount of
monthly payments on the related Mortgage Loans due on the related Due Date and
received by the Trustee on or prior to the related Determination Date, after
deduction of the Servicing Fee and the Trustee Fee, (ii) certain unscheduled
payments in respect of the Mortgage Loans, including prepayments, insurance
proceeds, Net Liquidation Proceeds and proceeds from repurchases of and
substitutions for such Mortgage Loans occurring during the related Prepayment
Period, excluding prepayment penalties and (iii) all Advances with respect to
the related Mortgage Loans received by the Trustee for such Distribution Date.
The "Prepayment Period" with respect to any Distribution Date is the period
commencing on the Determination Date in the month preceding the month in which
such Distribution Date occurs (or, in the case of the first Distribution Date,
the day following the Cut-off Date) and ending on the Determination Date
relating to such Distribution Date.
On each Distribution Date, the Trustee will withdraw from the Distribution
Account all Available Funds then on deposit therein and will distribute the same
in the following order of priority (provided, however, on the first Distribution
Date, the Trustee will first distribute interest and principal due on the Class
R Certificates):
(i) to the holders of each Class of Offered Certificates in the following
order or priority:
(a) concurrently, to the Senior Certificates, the Interest
Distributable Amount for such Class for such Distribution Date; and
(b) sequentially, to the Class M-1, Class M-2 and Class B Certificates,
in that order, the related Monthly Interest Distributable Amount for such
Distribution Date;
(ii) from the Principal Distribution Amount (giving effect first to the
component of the Principal Distribution Amount equal to the Basic Principal
Distribution Amount and then to the component of the Principal Distribution
Amount equal to the Extra Principal Distribution Amount pursuant to clause
(iii)(a) below):
(a) on each Distribution Date (1) before the Stepdown Date or (2)
with respect to which a Trigger Event is in effect, sequentially
to the holders of the Class A, Class M-1, Class M-2 and Class B
Certificates, in that order, the respective Class Principal
Distribution Amount; or
(b) on each Distribution Date (1) on or after the Stepdown Date and
(2) as long as a Trigger Event is not in effect, to the holders
of the Class or Classes of Offered Certificates then entitled to
distribution of principal, in an amount equal to in the
aggregate the Principal Distribution Amount in the following
amounts and order of priority:
(1) the lesser of (x) the Principal Distribution Amount and
(y) the Class A Principal Distribution Amount to the Class A
Certificateholders, until the Certificate Principal Balance
thereof is reduced to zero;
(2) the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the amount distributed to the
Class A Certificateholders in clause (ii)(b)(1) above and (y)
the Class M-1 Principal Distribution Amount, to the Class M-1
Certificateholders, until the Certificate Principal Balance
thereof is reduced to zero;
(3) the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amounts distributed
to the Class A Certificateholders in clause (ii)(b)(1) above and
to the Class M-1 Certificateholders in clause (ii)(B)(2) above
and (y) the Class M-2 Principal Distribution Amount, to the
Class M-2 Certificateholders, until the Certificate Principal
Balance thereof is reduced to zero;
(4) the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amounts distributed
to the Class A Certificateholders in clause (ii)(b)(1), the
amount distributed to the Class M-1 Certificateholders in clause
(ii)(b)(2) and the amount distributed to the Class M-2
Certificateholders in clause (ii)(b)(3) above and (y) the Class
B Principal Distribution Amount, to the Class B
Certificateholders, until the Certificate Principal Balance
thereof is reduced to zero;
(iii) any amounts remaining after the distributions in clauses (i) through
(ii) above shall be distributed in the following order of priority:
(a) to fund the Extra Principal Distribution Amount for such
Distribution Date to be paid as a component of the Principal Distribution
Amount in the same order of priority described in clause (ii) above;
(b) to the Class M-1 Certificateholders, the related Unpaid Interest
Shortfall Amount for such Distribution Date and then the related Loss
Reimbursement Entitlement, if any, for such Distribution Date;
(c) to the Class M-2 Certificateholders, the related Unpaid Interest
Shortfall Amount for such Distribution Date and then the related Loss
Reimbursement Entitlement, if any, for such Distribution Date;
(d) to the Class B Certificateholders, the related Unpaid Interest
Shortfall Amount for such Distribution Date and then the related Loss
Reimbursement Entitlement, if any, for such Distribution Date;
(e) to the Special Servicer, the amount of any accrued and unpaid
Special Servicing Fee, if any;
(f) to the holders of the Class OC Certificates for deposit into the
Excess Reserve Fund Account first to cover any Basis Risk Shortfall Amount
and then to cover any Required Reserve Amount, and then to be released to
the holders of the Class OC Certificates, such amounts, if any, as
described in the Pooling and Servicing Agreement;
(g) to the Master Servicer, the Extra Master Servicing Fee, as defined
in the Pooling and Servicing Agreement; and
(iv) to the holders of the Class R Certificates, the remaining amount.
On each Distribution Date, all amounts representing prepayment penalties
received during the related Due Period will be distributed to the holders of the
Class OC Certificates.
DEFINITIONS
The "Accrual Period" for the Offered Certificates for a given Distribution
Date will be the actual number of days (based on a 360-day year) included in the
period commencing on the immediately preceding Distribution Date and ending on
the day immediately preceding such Distribution Date; provided, however, that
the initial Accrual Period for the Offered Certificates will be the actual
number of days included in the period commencing on the Closing Date and ending
on and including October 25, 1998.
The "Allocable Loss Amount" with respect to each Distribution Date means
the excess, if any, of (a) the aggregate of the Certificate Principal Balances
of all Classes of Offered Certificates (after giving effect to all distributions
on such Distribution Date) over (b) the Pool Principal Balance as of the end of
the preceding Due Period.
The "Basic Principal Distribution Amount" means with respect to any
Distribution Date the excess of (i) the Principal Remittance Amount for such
Distribution Date over (ii) the Overcollateralization Release Amount, if any,
for such Distribution Date.
The "Call Option Date" is the first Distribution Date on which the Pool
Principal Balance is less than or equal to 10% of the Maximum Collateral Amount.
The "Certificate Principal Balance" of any Class of Offered Certificates,
as of any Distribution Date, will be equal to the Certificate Principal Balance
thereof on the Closing Date (the "Original Certificate Principal Balance")
reduced by the sum of (i) all amounts actually distributed in respect of
principal of such Class on all prior Distribution Dates and (ii) with respect to
any Mezzanine Certificates and the Class B Certificates, all related Allocable
Loss Amounts applied in reduction of principal of such Certificates on all prior
Distribution Dates.
"Class A Principal Distribution Amount" means as of any Distribution Date
(a) prior to the Stepdown Date or with respect to which a Trigger Event is in
effect, the lesser of (i) 100% of the Principal Distribution Amount and (ii) the
aggregate Certificate Principal Balance of the Class A Certificates and (b) on
or after the Stepdown Date and as long as a Trigger Event is not in effect, the
positive difference, if any, of the excess of (x) the aggregate Certificate
Principal Balance of the Class A Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) approximately
66.80% and (ii) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period and (B) the aggregate Principal Balance of
the Mortgage Loans as of the last day of the related Due Period minus
approximately $1,308,244.
"Class M-1 Principal Distribution Amount" means as of any Distribution Date
(a) with respect to which a Trigger Event is in effect, the lesser of (i) 100%
of the Principal Distribution Amount and (ii) the aggregate Certificate
Principal Balance of the Class M-1 Certificates and (b) on or after the Stepdown
Date and as long as a Trigger Event is not in effect, the positive difference,
if any, of the excess of (x) the sum of (i) the aggregate Certificate Principal
Balance of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date) and (ii)
the Certificate Principal Balance of the Class M-1 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately 79.30% and (ii) the aggregate Principal Balance of the Mortgage
Loans as of the last day of the related Due Period and (B) the aggregate
Principal Balance of the Mortgage Loans as of the last day of the related Due
Period minus approximately $1,308,244.
"Class M-2 Principal Distribution Amount" means as of any Distribution Date
(a) with respect to which a Trigger Event is in effect, the lesser of (i) 100%
of the Principal Distribution Amount and (ii) the aggregate Certificate
Principal Balance of the Class M-2 Certificates and (b) on or after the Stepdown
Date and as long as a Trigger Event is not in effect, the positive difference,
if any, of the excess of (x) the sum of (i) the aggregate Certificate Principal
Balance of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date) and (iii) the Certificate Principal Balance of the Class M-2
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) approximately 87.30% and (ii) the aggregate Principal
Balance of the Mortgage Loans as of the last day of the related Due Period and
(B) the aggregate Principal Balance of the Mortgage Loans as of the last day of
the related Due Period minus approximately $1,308,244.
"Class B Principal Distribution Amount" means as of any Distribution Date
(a) with respect to which a Trigger Event is in effect, the lesser of (i) 100%
of the Principal Distribution Amount and (ii) the aggregate Certificate
Principal Balance of the Class B Certificates and (b) on or after the Stepdown
Date and as long as a Trigger Event is not in effect, the positive difference,
if any, of the excess of (x) the sum of (i) the aggregate Certificate Principal
Balance of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date), and (iv) the Certificate
Principal Balance of the Class B Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) approximately
93.80% and (ii) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period and (B) the aggregate Principal Balance of
the Mortgage Loans as of the last day of the related Due Period minus
approximately $1,308,244.
The "Delinquency Percentage," with respect to any Distribution Date and the
related Due Period, is the fraction, expressed as a percentage, the numerator of
which is the aggregate of the Principal Balances of all Mortgage Loans that are
60 or more days Delinquent, in foreclosure or relating to REO Properties as of
the close of business on the last day of the related Due Period and the
denominator of which is the Pool Principal Balance as of the close of business
on the last day of such Due Period.
A Mortgage Loan is "Delinquent" if any monthly payment due thereon is not
made by the close of business on the day such monthly payment is scheduled to be
due. A Mortgage Loan is "30 days Delinquent" if such monthly payment has not
been received by the close of business on the corresponding day of the month
immediately succeeding the month in which such monthly payment was due or, if
there was no such corresponding day (e.g., as when a 30-day month follows a
31-day month in which a payment was due on the 31st day of such month), then on
the last day of such immediately succeeding month; and similarly for "60 days
Delinquent", etc.
A "Due Period" with respect to the any Distribution Date is the period
commencing on the second day of the month preceding the month in which such
Distribution Date occurs and ending on the first day of the month in which such
Distribution Date occurs.
The "Extra Principal Distribution Amount" for any Distribution Date, is the
lesser of (x) the General Excess Available Amount for such Distribution Date and
(y) Overcollateralization Deficiency Amount for such Distribution Date.
The "General Excess Available Amount" means with respect to each
Distribution Date is the amount, if any, by which the Available Funds for such
Distribution Date exceeds the aggregate amount distributed on such Distribution
Date pursuant to clauses (i) and (ii) under "--Allocation of Available Funds"
above (other than the Extra Principal Distribution Amount).
The "Interest Distributable Amount" for any Distribution Date and each
Class of Offered Certificates equals the sum of (i) the Monthly Interest
Distributable Amount for such Class for such Distribution Date and (ii) the
Unpaid Interest Shortfall Amount for such Class for such Distribution Date.
"Loss Reimbursement Entitlement" means, with respect to any Distribution
Date and the Class M-1 Certificates, Class M-2 Certificates or Class B
Certificates, the amount of Allocable Loss Amounts applied to the reduction of
the Certificate Principal Balance of such Class and not reimbursed pursuant to
"--Allocation of Available Funds" above as of such Distribution Date.
The "Maximum Collateral Amount" means the Pool Principal Balance as of the
Cut-off Date.
The "Monthly Interest Distributable Amount" for any Distribution Date and
each Class of Offered Certificates equals the amount of interest accrued during
the related Accrual Period at the related Pass-Through Rate on the Certificate
Principal Balance of such Class immediately prior to such Distribution Date (or,
in the case of the first Distribution Date, on the Closing Date).
An "Overcollateralization Deficiency Amount" with respect to any
Distribution Date equals the amount, if any, by which the Overcollateralization
Target Amount exceeds the related Overcollateralized Amount on such Distribution
Date (after giving effect to distributions in respect of the Basic Principal
Distribution Amount but without giving effect to any Allocable Loss Amounts on
such Distribution Date.
"Overcollateralization Release Amount" means, with respect to any
Distribution Date on or after the Stepdown Date on which an
Overcollateralization Stepdown Trigger Event is not in effect, the lesser of (x)
the Principal Remittance Amount for such Distribution Date and (y) the excess,
if any, of (i) the Overcollateralized Amount for such Distribution Date,
assuming that 100% of the Principal Remittance Amount is applied to as a
principal payment on the Offered Certificates on such Distribution Date over
(ii) the Overcollateralization Target Amount for such Distribution Date.
The "Overcollateralization Target Amount" means with respect to (a) any
Distribution Date occurring prior to the Stepdown Date, an amount equal to 3.10%
of the Maximum Collateral Amount; and (b) with respect to any Distribution Date
on or after the Stepdown Date and (A) as long as a Trigger Event is not in
effect, an amount equal to the greater of (x) 6.20% of the Pool Principal
Balance as of the end of the related Due Period and (y) approximately $1,308,244
or (B) for so long as a Trigger Event is in effect, the Overcollateralization
Target Amount for the preceding Distribution Date.
The "Overcollateralized Amount" for any Distribution Date is the amount, if
any, by which (i) the Pool Principal Balance on the last day of the immediately
preceding Due Period exceeds (ii) the aggregate Certificate Principal Balance of
the Offered Certificates as of such Distribution Date after giving effect to
distributions to be made on such Certificates on such Distribution Date.
The "Principal Distribution Amount" for any Distribution Date will equal
the sum of (i) the Basic Principal Distribution Amount and (ii) the Extra
Principal Distribution Amount for such Distribution Date.
A "Principal Prepayment" with respect to any Distribution Date is any
mortgagor payment or other recovery of principal on a Mortgage Loan that is
received in advance of its scheduled Due Date and is not accompanied by an
amount representing scheduled interest due on any date or dates in any month or
months subsequent to the month of prepayment.
The "Principal Remittance Amount" means with respect to any Distribution
Date, the sum of (i) each scheduled payment of principal collected on the
Mortgage Loans by the Master Servicer in the related Due Period, (ii) the
principal portion of all partial and full principal prepayments of such Mortgage
Loans applied by the Master Servicer during such Due Period, (iii) the principal
portion of all Net Liquidation Proceeds and Insurance Proceeds received during
such Due Period, (iv) that portion of the Purchase Price, representing principal
of any repurchased Mortgage Loan, required to be deposited to the Collection
Account during such Due Period, (v) the principal portion of any Substitution
Adjustments required to be deposited in the Collection Account during such Due
Period, and (vi) on the Distribution Date on which the Trust Fund is to be
terminated in accordance with the Pooling and Servicing Agreement, that portion
of the Termination Price, in respect of principal.
A "Realized Loss" with respect to any defaulted Mortgage Loan that is
finally liquidated (a "Liquidated Mortgage Loan") is (i) the amount of loss
realized equal to the portion of the Principal Balance remaining unpaid after
application of all liquidation proceeds net of amounts reimbursable to the
Master Servicer or Special Servicer for related Advances, Servicing Advances,
Servicing Fees and the Special Servicer Incentive Fee (such amount, the "Net
Liquidation Proceeds") in respect of such Mortgage Loan and (ii) with respect to
certain Mortgage Loans the principal balances or the scheduled payments of
principal and interest of which have been reduced in connection with bankruptcy
proceedings, (a) in the case of a reduction of the principal balance of a
Mortgage Loan, the amount of such principal reduction, and (b) in the case of a
reduction in the scheduled payments of principal and interest of a Mortgage
Loan, the net present value (using as the discount rate the higher of the Loan
Rate on such Mortgage Loan or the rate of interest, if any, specified by the
court in such order) of the scheduled payments as so modified or restructured.
The "Rolling Delinquency Percentage" means, with respect to any
Distribution Date, the average of the Delinquency Percentages with respect to
the last day of each of the three immediately preceding Due Periods.
The "Senior Credit Enhancement Percentage," with respect to any
Distribution Date, is the percentage obtained by dividing (i) the sum of (a) the
aggregate of the Certificate Principal Balances of the Mezzanine Certificates
and the Class B Certificates and (b) the Overcollateralized Amount, in each case
after giving effect to the distributions of principal on such Distribution Date,
by (ii) the Pool Principal Balance as of the end of the related Due Period.
The "Senior Specified Enhancement Percentage" on any date of determination
thereof means 33.20%.
The "Stepdown Date" means the earlier of (A) the Distribution Date on which
the Certificate Principal Balance of the Senior Certificates equals zero and (B)
the later to occur of (x) the Distribution Date in October 2001 and (y) the
first Distribution Date on which the Senior Credit Enhancement Percentage
(calculated for this purpose only using the Pool Principal Balance as of the end
of the related Due Period but prior to any application of Principal Distribution
Amount to the Certificates) is greater than or equal to the Senior Specified
Enhancement Percentage.
A "Trigger Event" has occurred on any Distribution Date, if the Rolling
Delinquency Percentage exceeds 42% of the Senior Credit Enhancement Percentage
for such Distribution Date.
An "Overcollateralization Stepdown Trigger Event" means the occurrence on
any Distribution Date of both of the following: (i) the Cumulative Loss Trigger
has occurred and (ii) the Trigger Event has occurred.
The "Cumulative Loss Trigger" has occurred on a Distribution Date if
cumulative Realized Losses as of such Distribution Date exceed the percentages
of the Maximum Collateral Amount set forth below with respect to such
Distribution Date.
PERCENTAGE OF
THE MAXIMUM
DISTRIBUTION DATE COLLATERAL AMOUNT
- ----------------- -----------------
October 1998 to September 2001.................................. 1.50%
October 2001 to September 2002.................................. 2.25%
October 2002 to September 2003.................................. 2.75%
October 2003 to September 2004.................................. 3.20%
October 2004 to September 2005.................................. 3.50%
October 2005 and thereafter..................................... 3.75%
The "Unpaid Interest Shortfall Amount" means (i) for each Class of Offered
Certificates and the first Distribution Date, zero, and (ii) with respect to
each Class and any Distribution Date after the first Distribution Date, the
amount, if any, by which (a) the sum of (1) the Monthly Interest Distributable
Amount for such Class for the immediately preceding Distribution Date and (2)
the outstanding Unpaid Interest Shortfall Amount, if any, for such Class for
such preceding Distribution Date exceeds (b) the aggregate amount distributed on
such Class in respect of interest pursuant to clause (a) of this definition on
such preceding Distribution Date, plus interest on the amount of interest due
but not paid on the Certificates of such Class on such preceding Distribution
Date, to the extent permitted by law, at the Pass-Through Rate for such Class
for the related Accrual Period.
PASS-THROUGH RATES
The Pass-Through Rate for each Class of Offered Certificates for a
particular Distribution Date is a per annum rate equal to the lesser of (a) the
sum of (i) One-Month LIBOR on the related LIBOR Determination Date (as defined
herein) and (ii) the related Pass-Through Margin and (b) the Available Funds
Cap. The Pass-Through Margins for the Class A, Class M-1, Class M-2 and Class B
Certificates will be equal to 0.31% (31 basis points), 0.50% (50 basis points),
0.75% (75 basis points), and 1.85% (185 basis points), respectively, until the
first Distribution Date following the Call Option Date, and 0.62% (62 basis
points), 0.75% (75 basis points), 1.125% (112.5 basis points) and 2.775% (277.5
basis points), respectively, on and after such Distribution Date. As to any
Distribution Date, the "Available Funds Cap" is a rate per annum equal to the
weighted average of the Loan Rates on the Mortgage Loans outstanding as of the
first day of the related Due Period, net of the sum of (i) the Servicing Fee
Rate and (ii) the Trustee Fee Rate. The sum of the Servicing Fee Rate and the
Trustee Fee Rate will be approximately 0.50875%. The "Call Option Date" is the
first Distribution Date on which the Pool Principal Balance (as defined herein)
is less than or equal to 10% of the Maximum Collateral Amount (as defined
herein). The Pass-Through Rates for the Class A, Class M-1, Class M-2 and Class
B Certificates for the Distribution Date in October 1998 will be 5.69672%,
5.88672%, 6.13672% and 7.23672%, respectively, per annum. See "Calculation of
One-Month LIBOR" herein.
If on any Distribution Date, the Pass-Through Rate for any Class of Offered
Certificates is based upon the Available Funds Cap, the excess of (i) the amount
of interest such Class of Certificates would have been entitled to receive on
such Distribution Date had such Pass-Through Rate not been subject to the
Available Funds Cap, up to the Maximum Cap, over (ii) the amount of interest
such Class of Offered Certificates received on such Distribution Date based on
the Available Funds Cap, together with the unpaid portion of any such excess
from prior Distribution Dates (and interest accrued thereon at the then
applicable Pass-Through Rate on such Class of Offered Certificates, without
giving effect to the Available Funds Cap) is the "Basis Risk Shortfall Amount"
for such Class of Offered Certificates. Any Basis Risk Shortfall Amount on any
Class of Offered Certificates will be paid on future Distribution Dates from and
to the extent of funds available therefor in the Excess Reserve Fund Account (as
described herein). The ratings on the Offered Certificates do not address the
likelihood of the payment of any Basis Risk Shortfall Amount.
The "Maximum Cap" for any Distribution Date is a per annum rate equal to
the weighted average of the Loan Rate on the Fixed Rate Mortgage Loans and the
Maximum Loan Rate on the Adjustable Rate Mortgage Loans, in each case
outstanding as of the first day of the related Due Period, net of the sum of (i)
the Servicing Fee Rate and (ii) the Trustee Fee Rate.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period following the initial Accrual Period (each
such date, a "LIBOR Determination Date"), the Trustee (except for the first
Accrual Period) will determine the London interbank offered rate for one-month
United States dollar deposits ("One-Month LIBOR") for such Accrual Period for
the Offered Certificates 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 LIBOR 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 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 LIBOR Determination Date in question, (iii) which
have been designated as such by the Trustee and (iv) not controlling, controlled
by or under common control with, the Depositor, the Master Servicer or any
successor Master Servicer. The One-Month LIBOR value for the initial Accrual
Period will be 5.38672% per annum.
On each LIBOR Determination Date, One-Month LIBOR for the related Accrual
Period for the Offered Certificates will be established by the Trustee as
follows:
(a) If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, One-Month LIBOR for the related Accrual
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 LIBOR Determination Date fewer than two Reference Banks
provide such offered quotations, One-Month LIBOR for the related Accrual
Period will be the higher of (x) One-Month LIBOR as determined on the
previous LIBOR Determination Date and (y) the Reserve Interest Rate. The
"Reserve Interest Rate" will be the rate per annum that the 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
Trustee are quoting on the relevant LIBOR Determination Date to the
principal London offices of leading banks in the London interbank market or
(ii) in the event that the Trustee can determine no such arithmetic mean,
the lowest one-month United States dollar lending rate which New York City
banks selected by the Trustee are quoting on such LIBOR Determination Date
to leading European banks.
The establishment of One-Month LIBOR on each LIBOR Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable to
the Offered Certificates for the related Accrual Period will (in the absence of
manifest error) be final and binding.
APPLICATION OF ALLOCABLE LOSS AMOUNTS
Following any reduction of the Overcollateralized Amount to zero, any
Allocable Loss Amounts will be applied, sequentially, in reduction of the
Certificate Principal Balances of the Class B Certificates, the Class M-2
Certificates and the Class M-1 Certificates, in that order, until their
respective Certificate Principal Balances have been reduced to zero. The
Certificate Principal Balance of the Senior Certificates will not be reduced by
any application of Allocable Loss Amounts. The reduction of the Certificate
Principal Balance of any applicable Class of Offered Certificates by the
application of Allocable Loss Amounts entitles such Class to reimbursement in an
amount equal to the Loss Reimbursement Entitlement. Each such Class of Offered
Certificates will be entitled to receive its Loss Reimbursement Entitlement, or
any portion thereof, in accordance with the payment priorities specified herein.
Payment in respect of Loss Reimbursement Entitlements will not reduce the
Certificate Principal Balance of the related Class or Classes.
EXCESS RESERVE FUND ACCOUNT
The Pooling and Servicing Agreement establishes an account (the "Excess
Reserve Fund Account"), which is held in trust, as part of the Trust Fund, by
the Trustee on behalf of the Offered Certificateholders. The Excess Reserve Fund
Account will not be an asset of any REMIC. Certificateholders of each Class of
Offered Certificates in the order of their priority of payment will be entitled
to receive payments from the Excess Reserve Fund Account to the extent of
amounts on deposit therein pursuant to the Pooling and Servicing Agreement in an
amount equal to any Basis Risk Shortfall Amount for such Class of Certificates.
On the Closing Date, $1,000 will be deposited into the Excess Reserve Fund
Account. Thereafter, if the Available Funds Cap exceeds One-Month LIBOR by less
than 0.25%, the amount to be held in the Excess Reserve Fund Account (the
"Required Reserve Amount") on any Distribution Date thereafter shall equal the
greater of (i) 0.50% of the outstanding Class Certificate Balance of the Offered
Certificates as of such Distribution Date and (ii) $5,000 and shall be funded
from amounts otherwise to be paid to the Class OC Certificates. Any distribution
by the Trustee from amounts in the Excess Reserve Fund Account shall be made on
the applicable Distribution Date.
Amounts on deposit in the Excess Reserve Fund Account in excess of $5,000
will be released therefrom and distributed to the holders of the Class OC
Certificates on any Distribution Date on which the Available Funds Cap exceeds
One-Month LIBOR by 0.25% or more.
REPORTS TO CERTIFICATEHOLDERS OF THE CERTIFICATES
On each Distribution Date, the Trustee will forward to each holder of a
Certificate and the Rating Agency a statement generally setting forth:
(i) the amount of the distributions, separately identified, with
respect to each Class of the Offered Certificates;
(ii) the amount of such distributions set forth in clause (i)
allocable to principal, separately identifying the aggregate amount of
any Principal Prepayments or other unscheduled recoveries of principal
included therein;
(iii) the amount of such distributions set forth in clause (i)
allocable to interest and the calculation thereof;
(iv) the amount of any Unpaid Interest Shortfall Amount with
respect to each Class of Offered Certificates, separately identified;
(v) the Overcollateralization Target Amount and
Overcollateralized Amount as of such Distribution Date;
(vi) the Certificate Principal Balance of each Class of Offered
Certificates after giving effect to the distribution of principal on
such Distribution Date;
(vii) the Pool Principal Balance at the end of the related Due
Period;
(viii) the amount of the Servicing Fee paid to or retained by
the Master Servicer and the amount of compensation paid to the Special
Servicer;
(ix) the amount of the Trustee Fee paid to the Trustee;
(x) the amount of Advances for the related Due Period;
(xi) the number and aggregate Principal Balance of Mortgage
Loans that were (A) delinquent (exclusive of Mortgage Loans in
foreclosure) (1) 30 to 59 days, (2) 60 to 89 days and (3) 90 or more
days, (B) in foreclosure and delinquent (1) 30 to 59 days, (2) 60 to 89
days and (3) 90 or more days and (C) in bankruptcy as of the close of
business on the last day of the calendar month preceding such
Distribution Date;
(xii) with respect to any Mortgage Loan that became an REO
Property during the preceding calendar month, the loan number, the
Principal Balance of such Mortgage Loan as of the close of business on
the last day of the related Due Period and the date of acquisition
thereof;
(xiii) the total number and principal balance of any REO
Properties as of the close of business on the last day of the preceding
Due Period;
(xiv) the aggregate amount of Realized Losses incurred during
the preceding calendar month;
(xv) the cumulative amount of Realized Losses;
(xvi) any Overcollateralization Deficiency Amount after giving
effect to the distribution of principal on such Distribution Date;
(xvii) the Allocable Loss Amounts, if any, allocated to each
Class of the Mezzanine and Subordinate Certificates and the Loss
Reimbursement Entitlement owing to each Class of Mezzanine and
Subordinate Certificates outstanding after giving effect to
distributions thereof on such Distribution Date;
(xviii) whether a Trigger Event or Overcollateralization
Stepdown Trigger Event has occurred and is continuing;
(xix) the amount of the Extra Principal Distribution Amount;
(xx) the Pass-Through Rate for each Class of Offered
Certificates for such Distribution Date; and
(xxi) the amount on deposit in the Excess Reserve Fund Account
on such Distribution Date and the Basis Risk Shortfall Amount owing to
each Class of Offered Certificates after giving effect to distributions
thereof on such Distribution Date.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their tax
returns. Such statements will not have been examined and reported upon by an
independent public accountant.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of the Offered Certificates, and particularly the
Subordinate Certificates, will be sensitive to defaults on the Mortgage Loans.
If a purchaser of an Offered Certificate calculates its anticipated yield based
on an assumed rate of default and amount of losses that is lower than the
default rate and amount of losses actually incurred, its actual yield to
maturity will be lower than that so calculated. Certificateholders of the
Offered Certificates may not receive reimbursement for Realized Losses in the
month following the occurrence of such losses. In general, the earlier a loss
occurs, the greater is the effect on an investor's yield to maturity. There can
be no assurance as to the delinquency, foreclosure or loss experience with
respect to the Mortgage Loans. Because the Mortgage Loans were underwritten in
accordance with standards less stringent than those generally acceptable to FNMA
and FHLMC with regard to a borrower's credit standing and repayment ability, the
risk of delinquencies with respect to, and losses on, the Mortgage Loans will be
greater than that of mortgage loans underwritten in accordance with FNMA and
FHLMC standards.
The rate of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yields to maturity
of the Offered Certificates will be related to the rate and timing of payments
of principal on the Mortgage Loans. The rate of principal payments on the
Mortgage Loans will in turn be affected by the amortization schedules of the
Mortgage Loans and by the rate of principal prepayments (including for this
purpose prepayments resulting from refinancing, liquidations of the Mortgage
Loans due to defaults, casualties or condemnations and repurchases by the Seller
or Master Servicer). Because certain of the Mortgage Loans contain prepayment
penalties, the rate of principal payments may be less than the rate of principal
payments for mortgage loans which did not have prepayment penalties. The
Mortgage Loans are subject to the "due-on-sale" provisions included therein. See
"The Mortgage Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans (including
any optional purchase) will result in distributions on the Offered Certificates
of principal amounts which would otherwise be distributed over the remaining
terms of the Mortgage Loans. Since the rate of payment of principal on the
Mortgage Loans will depend on future events and a variety of other factors, no
assurance can be given as to such rate or the rate of principal prepayments. The
extent to which the yield to maturity of a Class of Offered Certificates may
vary from the anticipated yield will depend upon the degree to which such
Offered Certificate is purchased at a discount or premium, and the degree to
which the timing of payments thereon is sensitive to prepayments, liquidations
and purchases of the Mortgage Loans. Further, an investor should consider the
risk that, in the case of any Offered Certificate purchased at a discount, a
slower than anticipated rate of principal payments (including prepayments) on
the Mortgage Loans could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any Offered Certificate
purchased at a premium, a faster than anticipated rate of principal payments on
the Mortgage Loans could result in an actual yield to such investor that is
lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. In general, if prevailing interest
rates were to fall significantly below the Loan Rates on the Fixed Rate Mortgage
Loans, such Mortgage Loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the Loan Rates on such
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally be
expected to decrease. As is the case with fixed rate Mortgage Loans, the
Adjustable Rate Mortgage Loans may be subject to a greater rate of principal
prepayments in a low interest rate environment. For example, if prevailing
interest rates were to fall, Mortgagors with Adjustable Rate Mortgage Loans may
be inclined to refinance their Adjustable Rate Mortgage Loans with a fixed rate
loan to "lock in" a lower interest rate. The existence of the applicable
Periodic Rate Cap and Maximum Rate also may affect the likelihood of prepayments
resulting from refinancings. No assurances can be given as to the rate of
prepayments on the Mortgage Loans in stable or changing interest rate
environments. In addition, the delinquency and loss experience of the Adjustable
Rate Mortgage Loans may differ from that on the fixed rate Mortgage Loans
because the amount of the monthly payments on the Adjustable Rate Mortgage Loans
are subject to adjustment on each Adjustment Date. In addition, a substantial
majority of the Adjustable Rate Mortgage Loans will not have their initial
Adjustment Date for one to five years after the origination thereof. The
prepayment experience of the Delayed First Adjustment Mortgage Loans may differ
from that of the other Adjustable Rate Mortgage Loans. The Delayed First
Adjustment Mortgage Loans may be subject to greater rates of prepayments as they
approach their initial Adjustment Dates even if market interest rates are only
slightly higher or lower than the Loan Rates on the Delayed First Adjustment
Mortgage Loans as borrowers seek to avoid changes in their monthly payments.
OVERCOLLATERALIZATION PROVISIONS
The operation of the overcollateralization provisions of the Pooling and
Servicing Agreement will affect the weighted average lives of the Offered
Certificates and consequently the yields to maturity of such Certificates.
Unless and until the Overcollateralized Amount equals the Overcollateralization
Target Amount, the General Excess Available Spread will be applied as
distributions of principal of the Class or Classes of Certificates then entitled
to distributions of principal, thereby reducing the weighted average lives
thereof. The actual Overcollateralized Amount may change from Distribution Date
to Distribution Date producing uneven distributions of the General Excess
Available Spread. There can be no assurance as to when or whether the
Overcollateralized Amount will equal the Overcollateralization Target Amount.
The General Excess Available Spread generally is a function of the excess
of interest collected or advanced on the Mortgage Loans over the interest
required to pay interest on the Offered Certificates, the Trustee Fee and the
Servicing Fee. Mortgage Loans with higher Loan Rates will contribute more
interest to the General Excess Available Spread. Mortgage Loans with higher Loan
Rates may prepay faster than Mortgage Loans with relatively lower Loan Rates in
response to a given change in market interest rates. Any such disproportionate
prepayments of Mortgage Loans with higher Loan Rates may adversely affect the
amount of the General Excess Available Spread available to make accelerated
payments of principal of the Offered Certificates.
As a result of the interaction of the foregoing factors, the effect of the
overcollateralization provisions on the weighted average lives of the Offered
Certificates may vary significantly over time and from Class to Class.
ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to certain Classes of the Offered Certificates with the
Commission in a report on Form 8-K and may file certain additional yield tables
and other computational materials with respect to one or more Classes of Offered
Certificates with the Commission in a report on Form 8-K. Such tables and
materials were prepared by the Underwriter at the request of certain prospective
investors, based on assumptions provided by, and satisfying the special
requirements of, such prospective investors. Such tables and assumptions may be
based on assumptions that differ from the Structuring Assumptions. Accordingly,
such tables and other materials may not be relevant to or appropriate for
investors other than those specifically requesting them.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of Principal Prepayments on the Mortgage
Loans may significantly affect an investor's actual yield to maturity, even if
the average rate of Principal Prepayments is consistent with such investor's
expectation. In general, the earlier a Principal Prepayment on the Mortgage
Loans occurs, the greater the effect of such Principal Prepayment on an
investor's yield to maturity. The effect on an investor's yield of Principal
Prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of Principal Prepayments.
The projected weighted average life of any Class of Offered Certificates is
the average amount of time that will elapse from September 29, 1998 (the
"Closing Date") until each dollar of principal is scheduled to be repaid to the
investors in such Class of Offered Certificates. Because it is expected that
there will be prepayments and defaults on the Mortgage Loans, the actual
weighted average lives of the Classes of Offered Certificates are expected to
vary substantially from the weighted average remaining terms to stated maturity
of the Mortgage Loans as set forth herein under "The Mortgage Loans--Mortgage
Loan Statistics."
The "Assumed Final Maturity Date" for each Class of Offered Certificates is
as set forth herein under "Description of the Certificates--General". The
Assumed Final Maturity Date for each Class of Offered Certificates is the 13th
Distribution Date following the Due Period in which the Principal Balances of
all the Mortgage Loans have been reduced to zero, assuming that the Mortgage
Loans pay in accordance with their terms. The weighted average life of each
Class of Offered Certificates is likely to be shorter than would be the case if
payments actually made on the Mortgage Loans conformed to the foregoing
assumptions, and the final Distribution Date with respect to the Offered
Certificates could occur significantly earlier than the related Assumed Final
Maturity Date because (i) prepayments are likely to occur, (ii) excess cashflow,
if any, will be applied as principal of the Offered Certificates as described
herein, (iii) the Overcollateralization Target Amount is as defined herein and
(iv) the Majority Residual Interestholder or the Master Servicer may cause a
termination of the Trust Fund as provided herein.
The model used in this Prospectus Supplement (the "Prepayment Assumption")
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. 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 mortgage loans, including the Mortgage Loans. With
respect to the Fixed Rate Mortgage Loans, a 100% Prepayment Assumption assumes
constant prepayment rates of 4% per annum of the then outstanding principal
balance of the Fixed Rate Mortgage Loans in the first month of the life of the
mortgage loans and an approximate 1.455% per annum in each month thereafter
until the twelfth month. Beginning in the twelfth month and in each month
thereafter during the life of such Fixed Rate Mortgage Loans, 100% Prepayment
Assumption assumes a constant prepayment rate of 20% per annum each month. As
used in the table below, 0% Prepayment Assumption assumes prepayment rates equal
to 0% of the 100% Prepayment Assumption i.e., no prepayments. Correspondingly,
125% Prepayment Assumption assumes prepayment rates equal to 125% of the 100%
Prepayment Assumption, and so forth.
With respect to the Adjustable Rate Mortgage Loans, a 100% Prepayment
Assumption assumes constant prepayment rates of 5% per annum of the then
outstanding principal balance of the Adjustable Rate Mortgage Loans in the first
month of the life of the mortgage loans and an approximate 1.765% per annum in
each month thereafter until the eighteenth month. Beginning in the eighteenth
month and in each month thereafter during the life of such Adjustable Rate
Mortgage Loans, 100% Prepayment Assumption assumes a constant prepayment rate of
35% per annum each month. As used in the table below, 0% Prepayment Assumption
assumes prepayment rates equal to 0% of the Prepayment Assumption, i.e., no
prepayments. Correspondingly, 125% Prepayment Assumption assumes prepayment
rates equal to 125% of the 100% Prepayment Assumption, and so forth.
Each of the Prepayment Scenarios in the table on page S-62 assumes the
respective percentages of the applicable Prepayment Assumption described
thereunder.
The tables on pages S-63 through S-66 were prepared on the basis of the
assumptions in the following paragraph and the tables set forth below. There are
certain differences between the loan characteristics included in such
assumptions and the characteristics of the actual Mortgage Loans. Any such
discrepancy may have an effect upon the percentages of Original Certificate
Principal Balances outstanding and weighted average lives of the Offered
Certificates set forth in the tables on pages S-63 through S-66. In addition,
since the actual Mortgage Loans in the Trust Fund will have characteristics that
differ from those assumed in preparing the tables set forth below, the
distributions of principal of the Offered Certificates may be made earlier or
later than indicated in the tables.
The percentages and weighted average lives in the tables on pages S-63
through S-66 were determined assuming that (the "Structuring Assumptions"): (i)
the Mortgage Loans consist of thirteen sub-pools of loans with the
characteristics set forth in the table below, (ii) the Closing Date for the
Offered Certificates occurs on September 29, 1998 and the Offered Certificates
were sold to investors by the Underwriter on the Closing Date, (iii)
distributions on the Certificates are made on the 25th day of each month
regardless of the day on which the Distribution Date actually occurs, commencing
in October 1998, in accordance with the allocation of Available Funds set forth
above under "Description of the Certificates--Allocation of Available Funds";
(iv) the Accrual Period for each Distribution Date will consist of the actual
number of days from and including the preceding Distribution Date (or the
Closing Date in the case of the October 1998 Distribution Date) to and including
the day immediately preceding such Distribution Date, (v) the prepayment rates
are the percentages of the Prepayment Assumption set forth in the "Prepayment
Scenarios" table below, (vi) prepayments include thirty days' interest thereon,
(vii) the Seller is not required to substitute or repurchase any or all of the
Mortgage Loans pursuant to the Pooling and Servicing Agreement and no optional
termination is exercised, except with respect to the entries identified by the
row heading "Weighted Average Life (years) to Optional Termination" in the
tables below, (viii) the Overcollateralization Target Amount is set initially as
specified herein and thereafter decreases as described in the definition
thereof, (ix) scheduled payments for all Mortgage Loans are received on the
first day of each month commencing in October 1998, the principal portion of
such payments is computed prior to giving effect to prepayments received in such
month and there are no losses or delinquencies with respect to such Mortgage
Loans, (x) all Mortgage Loans prepay at the same rate and all such payments are
treated as prepayments in full of individual Mortgage Loans, with no shortfalls
in collection of interest, (xi) such prepayments are received on the last day of
each month commencing in the month of the Closing Date, (xii) One-Month LIBOR is
at all times 5.38672%, (xiii) the Pass-Through Rates for the Class A, Class M-1,
Class M-2 and Class B Certificates are as set forth herein, (xiv) the Loan Rate
for each Adjustable Mortgage Loan is adjusted on its next Adjustment Date (and
on subsequent Adjustment Dates, if necessary) to equal the sum of (a) the
assumed level of the Index and (b) the respective Gross Margin (such sum being
subject to the applicable Periodic Rate Caps, Minimum Loan Rates and Maximum
Loan Rates), (xv) with respect to the Adjustable Mortgage Loans, the Index is
equal to 5.25%. Nothing contained in the foregoing assumptions should be
construed as a representation that the Mortgage Loans will not experience
delinquencies or losses and (xvi) the Class R Certificates are issued with an
Original Certificate Principal Balance of $100 and accrues interest at a rate
equal to the Pass-Through Rate for the Class A Certificates.
PREPAYMENT SCENARIOS
Prepayment Scenario Scenario I Scenario II Scenario III Scenario IV Scenario V
------------------- ---------- ----------- ------------ ----------- ----------
Fixed Rate Mortgage Loans 0% 65% 125% 150% 200%
Adjustable Rate Mortgage Loans 0% 50% 100% 125% 175%
ASSUMED MORTGAGE LOAN CHARACTERISTICS
MONTHS TO INITIAL
NEXT PERIODIC ORIGINAL REMAINING
PRINCIPAL CURRENT LOAN ADJUSTMENT GROSS LIFETIME RATE CAP PERIODIC MONTHS TO MONTHS TO
DESCRIPTION BALANCE ($) RATE (%) DATE MARGIN (%) CAP (%) (%) CAP (%) MATURITY MATURITY
- ----------- ----------- -------- ---- ---------- ------- --- ------- -------- --------
FIXED 15 YR 5,662,655.26 9.5697 N/A N/A N/A N/A N/A 180 176
FIXED 30 YR 56,177,942.21 9.9961 N/A N/A N/A N/A N/A 357 355
FIXED BALLOON 8,574,161.43 10.4631 N/A N/A N/A N/A N/A 180 175(1)
6 MO ARM 2,623,475.79 10.8906 1 6.3192 16.9452 1.0000 1.0000 360 355
6 MO ARM 3,859,256.97 10.2158 2 5.8451 16.3209 1.0000 1.0000 360 355
6 MO ARM 6,043,035.63 10.4458 3 5.9144 16.5752 1.0162 1.0000 360 356
6 MO ARM 6,275,706.38 10.8910 4 6.0710 16.9195 1.0357 1.0000 360 356
6 MO ARM 6,225,992.38 10.1411 5 5.7819 16.2577 1.0000 1.0000 360 357
6 MO ARM 1,704,994.18 10.2943 6 5.7739 16.4523 1.0000 1.0000 360 356
1 YR FIX/6 MO 648,116.35 9.8854 7 5.5032 16.3854 1.1100 1.0000 360 356
2 YR FIX/6 MO 161,793,211.24 10.5366 21 5.6969 17.0359 2.0502 1.0046 360 358
3 YR FIX/6 MO 539,879.95 9.4236 32 5.5017 15.9236 2.0000 1.0000 360 357
5 YR FIX/6 MO 1,520,410.84 10.6657 56 6.1348 17.1657 2.8689 1.0000 360 357
(1) The remaining amortizing term is 355 months.
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Offered Certificates, and set
forth the percentages of the Original Certificate Principal Balance of each such
Class that would be outstanding after each of the dates shown, at various
Prepayment Scenarios.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCES OUTSTANDING*
CLASS A
PREPAYMENT SCENARIO
---------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ----------------------------------- ---------- ----------- ------------ ----------- ----------
Initial Percentage................ 100% 100% 100% 100% 100%
September, 1999................... 96% 85% 74% 69% 58%
September, 2000................... 95% 68% 44% 34% 16%
September, 2001................... 94% 53% 23% 13% 0%
September, 2002................... 93% 41% 19% 13% 0%
September, 2003................... 92% 33% 13% 8% 0%
September, 2004................... 91% 28% 9% 5% 0%
September, 2005................... 90% 23% 6% 3% 0%
September, 2006................... 89% 19% 4% 2% 0%
September, 2007................... 87% 16% 3% 1% 0%
September, 2008................... 86% 13% 2% 1% 0%
September, 2009................... 84% 11% 1% 0% 0%
September, 2010................... 82% 9% 1% 0% 0%
September, 2011................... 80% 7% 0% 0% 0%
September, 2012................... 77% 6% 0% 0% 0%
September, 2013................... 71% 5% 0% 0% 0%
September, 2014................... 69% 4% 0% 0% 0%
September, 2015................... 66% 3% 0% 0% 0%
September, 2016................... 62% 2% 0% 0% 0%
September, 2017................... 59% 2% 0% 0% 0%
September, 2018................... 55% 2% 0% 0% 0%
September, 2019................... 50% 1% 0% 0% 0%
September, 2020................... 45% 1% 0% 0% 0%
September, 2021................... 40% 1% 0% 0% 0%
September, 2022................... 35% 0% 0% 0% 0%
September, 2023................... 30% 0% 0% 0% 0%
September, 2024................... 25% 0% 0% 0% 0%
September, 2025................... 19% 0% 0% 0% 0%
September, 2026................... 13% 0% 0% 0% 0%
September, 2027................... 6% 0% 0% 0% 0%
September, 2028................... 0% 0% 0% 0% 0%
Weighted Average Life (years)
to Maturity(1).................. 19.34 4.83 2.54 2.00 1.24
Weighted Average Life (years)
to Optional Termination(1)...... 19.30 4.51 2.35 1.85 1.24
- -------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by (i) multiplying the
assumed net reduction, if any, in the principal amount on each Distribution Date on such Class of
Certificates by the number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by the aggregate amount of
the assumed net reductions in principal amount on such Class of Certificates.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCES OUTSTANDING*
CLASS M-1
PREPAYMENT SCENARIO
---------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ----------------------------------- ---------- ----------- ------------ ----------- ----------
Initial Percentage................ 100% 100% 100% 100% 100%
September, 1999................... 100% 100% 100% 100% 100%
September , 2000.................. 100% 100% 100% 100% 100%
September , 2001.................. 100% 100% 100% 100% 87%
September , 2002.................. 100% 100% 50% 37% 85%
September, 2003................... 100% 86% 34% 20% 43%
September, 2004................... 100% 72% 23% 13% 21%
September, 2005................... 100% 59% 16% 8% 7%
September, 2006................... 100% 49% 11% 5% 1%
September, 2007................... 100% 41% 7% 0% 0%
September, 2008................... 100% 34% 5% 0% 0%
September, 2009................... 100% 28% 1% 0% 0%
September, 2010................... 100% 23% 0% 0% 0%
September, 2011................... 100% 19% 0% 0% 0%
September, 2012................... 100% 15% 0% 0% 0%
September, 2013................... 100% 12% 0% 0% 0%
September, 2014................... 100% 10% 0% 0% 0%
September, 2015................... 100% 8% 0% 0% 0%
September, 2016................... 100% 6% 0% 0% 0%
September, 2017................... 100% 5% 0% 0% 0%
September, 2018................... 100% 3% 0% 0% 0%
September, 2019................... 100% 1% 0% 0% 0%
September, 2020................... 100% 0% 0% 0% 0%
September, 2021................... 100% 0% 0% 0% 0%
September, 2022................... 91% 0% 0% 0% 0%
September, 2023................... 79% 0% 0% 0% 0%
September, 2024................... 65% 0% 0% 0% 0%
September, 2025................... 50% 0% 0% 0% 0%
September, 2026................... 34% 0% 0% 0% 0%
September, 2027................... 15% 0% 0% 0% 0%
September, 2028................... 0% 0% 0% 0% 0%
Weighted Average Life (years)
to Maturity(1).................. 26.87 9.24 4.96 4.48 4.98
Weighted Average Life (years)
to Optional Termination(1)...... 26.78 8.49 4.53 4.13 3.40
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by (i) multiplying the
assumed net reduction, if any, in the principal amount on each Distribution Date on such Class of
Certificates by the number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by the aggregate amount of
the assumed net reductions in principal amount on such Class of Certificates.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCES OUTSTANDING*
CLASS M-2
PREPAYMENT SCENARIO
---------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ----------------------------------- ---------- ----------- ------------ ----------- ----------
Initial Percentage................ 100% 100% 100% 100% 100%
September, 1999................... 100% 100% 100% 100% 100%
September, 2000................... 100% 100% 100% 100% 100%
September , 2001.................. 100% 100% 100% 100% 100%
September, 2002................... 100% 100% 50% 33% 13%
September, 2003................... 100% 86% 34% 20% 5%
September, 2004................... 100% 72% 23% 13% 0%
September, 2005................... 100% 59% 16% 8% 0%
September, 2006................... 100% 49% 11% 0% 0%
September, 2007................... 100% 41% 7% 0% 0%
September, 2008................... 100% 34% 1% 0% 0%
September, 2009................... 100% 28% 0% 0% 0%
September, 2010................... 100% 23% 0% 0% 0%
September, 2011................... 100% 19% 0% 0% 0%
September, 2012................... 100% 15% 0% 0% 0%
September, 2013................... 100% 12% 0% 0% 0%
September, 2014................... 100% 10% 0% 0% 0%
September, 2015................... 100% 8% 0% 0% 0%
September, 2016................... 100% 4% 0% 0% 0%
September, 2017................... 100% 1% 0% 0% 0%
September, 2018................... 100% 0% 0% 0% 0%
September, 2019................... 100% 0% 0% 0% 0%
September, 2020................... 100% 0% 0% 0% 0%
September, 2021................... 100% 0% 0% 0% 0%
September, 2022................... 91% 0% 0% 0% 0%
September, 2023................... 79% 0% 0% 0% 0%
September, 2024................... 65% 0% 0% 0% 0%
September, 2025................... 50% 0% 0% 0% 0%
September, 2026................... 34% 0% 0% 0% 0%
September, 2027................... 15% 0% 0% 0% 0%
September, 2028................... 0% 0% 0% 0% 0%
Weighted Average Life (years)
to Maturity(1).................. 26.86 9.14 4.84 4.21 3.82
Weighted Average Life (years)
to Optional Termination(1)...... 26.78 8.49 4.47 3.92 3.48
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by (i) multiplying the
assumed net reduction, if any, in the principal amount on each Distribution Date on such Class of
Certificates by the number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by the aggregate amount of
the assumed net reductions in principal amount on such Class of Certificates.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCES OUTSTANDING*
CLASS B
PREPAYMENT SCENARIO
---------------------------------------------------------------------
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ----------------------------------- ---------- ----------- ------------ ----------- ----------
Initial Percentage................ 100% 100% 100% 100% 100%
September, 1999................... 100% 100% 100% 100% 100%
September , 2000.................. 100% 100% 100% 100% 100%
September, 2001................... 100% 100% 100% 100% 100%
September, 2002................... 100% 100% 50% 33% 11%
September, 2003................... 100% 86% 34% 20% 0%
September, 2004................... 100% 72% 23% 9% 0%
September, 2005................... 100% 59% 15% 0% 0%
September, 2006................... 100% 49% 6% 0% 0%
September, 2007................... 100% 41% 0% 0% 0%
September, 2008................... 100% 34% 0% 0% 0%
September, 2009................... 100% 28% 0% 0% 0%
September, 2010................... 100% 23% 0% 0% 0%
September, 2011................... 100% 19% 0% 0% 0%
September, 2012................... 100% 15% 0% 0% 0%
September, 2013................... 100% 8% 0% 0% 0%
September, 2014................... 100% 4% 0% 0% 0%
September, 2015................... 100% 0% 0% 0% 0%
September, 2016................... 100% 0% 0% 0% 0%
September, 2017................... 100% 0% 0% 0% 0%
September, 2018................... 100% 0% 0% 0% 0%
September, 2019................... 100% 0% 0% 0% 0%
September, 2020................... 100% 0% 0% 0% 0%
September, 2021................... 100% 0% 0% 0% 0%
September, 2022................... 91% 0% 0% 0% 0%
September, 2023................... 79% 0% 0% 0% 0%
September, 2024................... 65% 0% 0% 0% 0%
September, 2025................... 50% 0% 0% 0% 0%
September, 2026................... 34% 0% 0% 0% 0%
September, 2027................... 15% 0% 0% 0% 0%
September, 2028................... 0% 0% 0% 0% 0%
Weighted Average Life (years)
to Maturity(1).................. 26.84 8.91 4.68 4.01 3.39
Weighted Average Life (years)
to Optional Termination(1)...... 26.78 8.49 4.44 3.82 3.27
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by (i) multiplying the
assumed net reduction, if any, in the principal amount on each Distribution Date on such Class of
Certificates by the number of years from the date of issuance of the Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by the aggregate amount of
the assumed net reductions in principal amount on such Class of Certificates.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans transferred to the
Trust Fund.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Pooling and Servicing Agreement provides that the Trust Fund, exclusive
of the assets held in the Excess Reserve Fund Account, will comprise several
Subsidiary REMICs and a Master REMIC organized in a tiered REMIC structure. Each
Subsidiary REMIC will issue uncertificated regular interests and those interests
will be held entirely by the REMIC immediately above it in the tiered structure.
Each of the Subsidiary REMICs and the Master REMIC will designate a single class
of interests as the residual interest in that REMIC. The Class R Certificates
will represent ownership of the residual interests in each of the REMICs.
Elections will be made to treat each Subsidiary REMIC and the Master REMIC as a
REMIC for federal income tax purposes.
Each Class of Offered Certificates and the Class OC Certificates will
represent beneficial ownership of regular interests issued by the Master REMIC.
In addition, each of the Offered Certificates will represent a beneficial
interest in the right to receive payments from the Excess Reserve Fund Account.
Upon the issuance of the Offered Certificates, Brown & Wood LLP ("Tax
Counsel"), will deliver its opinion concluding, assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, each
Subsidiary REMIC and the Master REMIC will qualify as a REMIC within the meaning
of Section 860D of the Internal Revenue Code of 1986, as amended (the "Code").
In addition, Tax Counsel will deliver an opinion concluding that the Excess
Reserve Fund Account is an "outside reserve fund" that is beneficially owned by
the Certificateholders of the Class OC Certificates. Moreover, Tax Counsel will
deliver an opinion concluding that the rights of the Certificateholders of the
Offered Certificates to receive payments from the Excess Reserve Fund Account
represent, for federal income tax purposes, interests in an interest rate cap
contract.
TAXATION OF REGULAR INTERESTS
A Certificateholder of a Class of Offered Certificates will be treated for
federal income tax purposes as owning an interest in regular interests in the
Master REMIC. The Offered Certificates will also represent beneficial ownership
of an interest in a limited recourse interest rate cap contract (the "Cap
Contract"). A Certificateholder of an Offered Certificate must allocate its
purchase price for the Offered Certificate between its two components - the
REMIC regular interest component and the Cap Contract component (the value of
which should be nominal). For information reporting purposes, the Trustee will
assume that, with respect to any Offered Certificate, the Cap Contract component
will have only nominal value relative to the value of the regular interest
component. The IRS could, however, argue that the Cap Contract component has a
greater than de minimis value, and if that argument were to be sustained, the
regular interest component could be viewed as having been issued with original
issue discount ("OID") (which could cause the total amount of discount to exceed
a statutorily defined de minimis amount). See "Certain Material Federal Income
Tax Considerations" in the Prospectus.
Upon the sale, exchange, or other disposition of an Offered Certificate,
the Certificateholder must allocate the amount realized between the two
components of the Offered Certificate based on the relative fair market values
of those components at the time of sale. Assuming that an Offered Certificate is
held as a "capital asset" within the meaning of section 1221 of the Code, gain
or loss on the disposition of an interest in the Cap Contract component should
be capital gain or loss, and, gain or loss on the disposition of the regular
interest component should, subject to the limitation described below, be capital
gain or loss. Gain attributable to the regular interest component of an Offered
Certificate will be treated as ordinary income, however, to the extent such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the Certificateholder's gross income with respect to the regular
interest component had income thereon accrued at a rate equal to 110% of the
applicable federal rate as defined in section 1274(d) of the Code determined as
of the date of purchase of the Offered Certificate over (ii) the amount actually
included in such Certificateholder's income.
Interest on a regular interest must be included in income by a
Certificateholder under the accrual method of accounting, regardless of the
Certificateholder's regular method of accounting. In addition, a Regular
interest could be considered to have been issued with OID. See "Certain Material
Federal Income Tax Considerations" in the Prospectus. The prepayment assumption
that will be used to in determining the accrual of any OID, market discount, or
bond premium, if any, will equal the rate described above under "Yield,
Prepayment and Maturity Considerations--Weighted Average Lives" for Scenario
III. No representation is made that the Mortgage Loans will prepay at such a
rate or at any other rate. OID must be included in income as it accrues on a
constant yield method, regardless of whether the Certificateholder receives
currently the cash attributable to such OID.
STATUS OF THE OFFERED CERTIFICATES
The regular interest component of the Offered Certificates will be treated
as assets described in Section 7701(a)(19)(C) of the Code, and as "real estate
assets" under Section 856(c)(5)(B) of the Code, generally, in the same
proportion that the assets of the Trust Fund, exclusive of the Excess Reserve
Fund Account, would be so treated. In addition, to the extent a regular interest
represents real estate assets under section 856(c)(5)(B) of the Code, the
interest derived from that component would be interest on obligations secured by
interests in real property for purposes of section 856(c)(3) of the Code. The
Cap Contract component of an Offered Certificate will not, however, qualify as
an asset described in Section 7701(a)(19)(C) of the Code or as a real estate
asset under Section 856(c)(5)(B) of the Code.
THE EXCESS RESERVE FUND ACCOUNT
As indicated above, a portion of the purchase price paid by a
Certificateholder to acquire an Offered Certificate will be attributable to the
Cap Contract component of the Offered Certificate. The portion of the overall
purchase price attributable to the Cap Component must be amortized over the life
of the Offered Certificate, taking into account the declining balance of the
related regular interest component. Treasury regulations concerning notional
principal contracts provide alternative methods for amortizing the purchase
price of an interest rate cap contract. Under one method - the level yield
constant interest method - the price paid for an interest rate cap is amortized
over the life of the cap as though it were the principal amount of a loan
bearing interest at a reasonable rate. Certificateholders are urged to consult
their tax advisors concerning the methods that can be employed to amortize the
portion of the purchase price paid for the Cap Contract component of an Offered
Certificate.
Any payments made to a Certificateholder from the Excess Reserve Fund
Account will be treated as periodic payments on an interest rate cap contract.
To the extent the sum of such periodic payments for any year exceed that year's
amortized cost of the Cap Contract component, such excess is ordinary income. If
for any year the amount of that year's amortized cost exceeds the sum of the
periodic payments, such excess is allowable as an ordinary deduction.
NON-U.S. PERSONS
Interest paid to or accrued by a Certificateholder who is a non-U.S. Person
will be considered "portfolio interest", and will not be subject to U.S. 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 non-U.S.
Person and the non-U.S. Person (i) is not actually or constructively a "10
percent shareholder" of the Trust Fund or a "controlled foreign corporation"
with respect to which the Trust Fund is a "related person" within the meaning of
the Code and (ii) provides the Trust Fund or other person who is otherwise
required to withhold U.S. tax with respect to the Offered Certificates with an
appropriate statement (on Form W-8 or a similar form), signed under penalties of
perjury, certifying that the beneficial owner of the Offered Certificate is a
non-U.S. Person and providing the non-U.S. Person's name and address. If an
Offered Certificate 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 non-U.S. Person that owns the Certificate.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of an Offered Certificate by a non-U.S. 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 non-U.S. Person and (ii) in the case of an
individual, the individual is not present in the United States for 183 days or
more in the taxable year.
For purposes of the foregoing discussion, the term "non-U.S. Person" means
any person other than (i) a citizen or resident of the United States; (ii) a
corporation (or entity treated as a corporation for tax purposes) created or
organized in the United States or under the laws of the United States or of any
state thereof, including, for this purpose, the District of Columbia; (iii) a
partnership (or entity treated as a partnership for tax purposes) organized in
the United States or under the laws of the United States or of any state
thereof, including, for this purpose, the District of Columbia (unless provided
otherwise by future Treasury regulations); (iv) an estate whose income is
includible in gross income for United States income tax purposes regardless of
its source; or (v) a trust, if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more U.S. Persons have authority to control all substantial decisions of the
trust. Notwithstanding the last clause of the preceding sentence, to the extent
provided in Treasury regulations, certain trusts in existence on August 20,
1996, and treated as U.S. Persons prior to such date, may elect to continue to
be U.S.
Persons.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund will
engage in any prohibited transactions in which it would recognize a material
amount of net income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of its
interests could result in the imposition of a tax on the trust fund equal to
100% of the value of the contributed property (the "Contributions Tax"). The
Trust Fund will not accept contributions that would subject it to such tax.
In addition, a trust fund that elects to be treated as a REMIC may also be
subject to federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. "Net income from foreclosure property" generally means
gain from the sale of a foreclosure property other than qualifying rents and
other qualifying income for a real estate investment trust. It is not
anticipated that the Trust Fund will recognize net income from foreclosure
property subject to federal income tax.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Offered Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fail to provide the Trustee or their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
The Trustee will be required to report annually to the Internal Revenue
Service (the "IRS"), and to each Certificateholder of record, the amount of
interest paid (and OID accrued, if any) on the Offered Certificates (and the
amount of interest withheld for federal income taxes, if any) for each calendar
year, except as to exempt holders (generally, holders that are corporations,
certain tax-exempt organizations or nonresident aliens who provide certification
as to their status as nonresidents). As long as the only holder of record of a
Class of Offered Certificates is Cede, as nominee of DTC, the IRS and
Certificate Owners of such Class will receive tax and other information,
including the amount of interest paid on such Certificates owned, from
Participants and Financial Intermediaries rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Financial Intermediaries and certain other persons to complete
their reports.) Each non-exempt Certificate Owner will be required to provide,
under penalty of perjury, a certificate on IRS form W-9 containing his or her
name, address, correct federal taxpayer identification number and a statement
that he or she is not subject to backup withholding. Should a nonexempt
Certificate Owner fail to provide the required certification, the Participants
or Financial Intermediaries (or the Paying Agent) will be required to withhold
31% of the interest (and principal) otherwise payable to the holder, and remit
the withheld amount to the IRS as a credit against the holder's federal income
tax liability.
Such amounts will be deemed distributed to the affected Certificate Owner
for all purposes of the related Certificates and the Pooling and Servicing
Agreement.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Offered Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA and/or a plan or other arrangement subject to the
excise tax provisions set forth under Section 4975 of the Code (each of the
foregoing, a "Plan") from engaging in certain transactions involving such Plan
and its assets unless a statutory, regulatory or administrative exemption
applies to the transaction. Section 4975 of the Code imposes certain excise
taxes on prohibited transactions involving plans described under that Section;
ERISA authorizes the imposition of civil penalties for prohibited transactions
involving plans not covered under Section 4975 of the Code. Any Plan fiduciary
which proposes to cause a Plan to acquire any of the Offered Certificates should
consult with its counsel with respect to the potential consequences under ERISA
and the Code of the Plan's acquisition and ownership of such Certificates. See
"ERISA Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Offered Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, investments by Plans are 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. A fiduciary which decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor (the "DOL") has granted to Greenwich Capital
Markets, Inc. an administrative exemption (Prohibited Transaction Exemption
90-59; Exemption Application No. D-8374) (the "Exemption") from certain of the
prohibited transaction rules of ERISA and the related excise tax provisions of
Section 4975 of the Code with respect to the initial purchase, the holding and
the subsequent resale by Plans of certificates in pass-through trusts that
consist of certain receivables, loans and other obligations that meet the
conditions and requirements of the Exemption. The Exemption applies to mortgage
loans such as the Mortgage Loans in the Trust Fund.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the certificates by a Plan is 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;
(2) the rights and interest evidenced by the certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
certificates of the trust fund;
(3) the certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit
Rating Co. ("DCR") or Fitch IBCA, Inc. ("Fitch" and, together with S&P, Moody's
and DCR, the "Exemption Rating Agencies");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not more than
reasonable compensation for underwriting the certificates; the sum of all
payments made to and retained by the seller pursuant to the assignment of the
loans to the trust fund represents not more than the fair market value of such
loans; the sum of all payments made to and retained by the servicer and any
other servicer represents not more than reasonable compensation for such
person's services under the agreement pursuant to which the loans are pooled and
reimbursements of such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest generic rating categories by an Exception
Rating Agency for at least one year prior to the Plan's acquisition of
certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust as to which the fiduciary (or
its affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements, (i) in the case of an acquisition in connection with
the initial issuance of certificates, at least fifty percent (50%) of each class
of certificates in which Plans have invested is acquired by persons independent
of the Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor
with respect to five percent (5%) or less of the fair market value of the
obligations contained in the trust; (iii) the Plan's investment in certificates
of any class does not exceed twenty-five percent (25%) of all of the
certificates of that class outstanding at the time of the acquisition; and (iv)
immediately after the acquisition, no more than twenty-five percent (25%) of the
assets of any Plan with respect to which such person is a fiduciary are invested
in certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Exemption does not apply to Plans
sponsored by the Underwriter, the Trustee, the Master Servicer, any obligor with
respect to Mortgage Loans included in the Trust Fund constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
Trust Fund, or any affiliate of such parties (the "Restricted Group").
It is expected that the Exemption will apply to the acquisition and holding
by Plans of the Class A Certificates and that all conditions of the Exemption
other than those within the control of the investors will be met.
BECAUSE THE CHARACTERISTICS OF THE CLASS M-1, CLASS M-2 AND CLASS B
CERTIFICATES MAY NOT MEET THE REQUIREMENTS OF PTCE 83-1, THE EXEMPTION OR ANY
OTHER ISSUED EXEMPTION UNDER ERISA, THE PURCHASE AND HOLDING OF CLASS M-1, CLASS
M-2 AND CLASS B CERTIFICATES BY A PLAN OR BY INDIVIDUAL RETIREMENT ACCOUNTS OR
OTHER PLANS SUBJECT TO SECTION 4975 OF THE CODE MAY RESULT IN PROHIBITED
TRANSACTIONS OR THE IMPOSITION OF EXCISE TAXES OR CIVIL PENALTIES. CONSEQUENTLY,
INITIAL ACQUISITIONS AND TRANSFERS OF THE CLASS M-1, CLASS M-2 AND CLASS B
CERTIFICATES WILL NOT BE REGISTERED BY THE TRUSTEE UNLESS THE TRUSTEE RECEIVES:
(I) A REPRESENTATION FROM THE ACQUIROR OR TRANSFEREE OF SUCH CERTIFICATE, TO THE
EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN SUBJECT TO SECTION
406 OF ERISA OR A PLAN OR ARRANGEMENT SUBJECT TO SECTION 4975 OF THE CODE, NOR A
PERSON ACTING ON BEHALF OF ANY SUCH PLAN OR ARRANGEMENT NOR USING THE ASSETS OF
ANY SUCH PLAN OR ARRANGEMENT TO EFFECT SUCH TRANSFER OR (II) IF THE PURCHASER IS
AN INSURANCE COMPANY, A REPRESENTATION THAT THE PURCHASER IS AN INSURANCE
COMPANY WHICH IS PURCHASING SUCH CERTIFICATES WITH FUNDS CONTAINED IN AN
"INSURANCE COMPANY GENERAL ACCOUNT" (AS SUCH TERM IS DEFINED IN SECTION V(E) OF
PROHIBITED TRANSACTION CLASS EXEMPTION 95-60 ("PTCE 95-60")) AND THAT THE
PURCHASE AND HOLDING OF SUCH CERTIFICATES ARE COVERED UNDER PTCE 95-60. SUCH
REPRESENTATION AS DESCRIBED ABOVE SHALL BE DEEMED TO HAVE BEEN MADE TO THE
TRUSTEE BY THE ACQUIROR OR TRANSFEREE'S ACCEPTANCE OF A CLASS M-1, CLASS M-2 OR
CLASS B CERTIFICATE. IN THE EVENT THAT SUCH REPRESENTATION IS VIOLATED, SUCH
ATTEMPTED TRANSFER OR ACQUISITION SHALL BE VOID AND OF NO EFFECT.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences in
their specific circumstances, prior to making an investment in the Offered
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Offered Certificates 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 CONSIDERATIONS
The Offered Certificates will NOT constitute "mortgage related securities"
within the meaning of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"), because some of the Mortgages securing the Mortgage 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 Offered Certificates. See "Legal Investment"
in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and the Underwriter (an affiliate of the Depositor), the
Depositor has agreed to sell to the Underwriter, and the Underwriter has agreed
to purchase from the Depositor, the Offered Certificates. Distribution of the
Offered Certificates will be made by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. In connection with the sale of the Offered Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
The Depositor has been advised by the Underwriter that it intends to make a
market in the Offered Certificates but has no obligation to do so. There can be
no assurance that a secondary market for the Offered Certificates will develop
or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Offered
Certificates will be passed upon for the Depositor and for the Underwriter by
Brown & Wood LLP, New York, New York, and for the Seller by Morrison & Foerster
LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that (i) the
Class A Certificates be rated "AAA" by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P") and by Duff & Phelps Credit Rating Company
("DCR" and, together with S&P the "Rating Agencies"), (ii) the M-1 Certificates
be rated "AA" by S&P and DCR, (iii) the M-2 Certificates be rated "A" by S&P and
DCR and (iv) the Class B Certificates be rated "BBB" by S&P and DCR.
The ratings assigned by S&P to mortgage pass-through certificates address
the likelihood of the receipt of all distributions on the mortgage loans by the
related certificateholders under the agreements pursuant to which such
certificates are issued. S&P's ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on the mortgage pool is adequate to make the
payments required by such certificates. S&P's ratings on such certificates do
not, however, constitute a statement regarding frequency of prepayments of the
mortgage loans.
Similarly, the ratings assigned by DCR to mortgage pass-through
certificates address the likelihood of the receipt of all distributions on the
mortgage loans by the related certificateholders under the agreements pursuant
to which such certificates are issued. DCR ratings take into consideration the
credit quality of the related mortgage pool, including any credit support
providers, structural and legal aspects associated with such certificates, and
the extent to which the payment stream on the mortgage pool is adequate to make
the payments required by such certificates. DCR ratings on such certificates do
not, however, constitute a statement regarding frequency of prepayments of the
mortgage loans.
The ratings on the Offered Certificates address the likelihood of the
receipt by the holders of the Offered Certificates of all distributions on the
Mortgage Loans to which they are entitled. The ratings on the Offered
Certificates also address the structural, legal and issuer-related aspects of
the Offered Certificates, including the nature of the Mortgage Loans. In
general, the ratings on the Offered Certificates address credit risk and not
prepayment risk. The ratings on the Offered Certificates do not represent any
assessment of the likelihood that principal prepayments of the Mortgage Loans
will be made by borrowers or the degree to which the rate of such prepayments
might differ from that originally anticipated. The ratings on the Offered
Certificates do not address the likelihood of the payment of any Basis Risk
Shortfall Amount. As a result, the initial ratings assigned to the Offered
Certificates do not address the possibility that holders of the Offered
Certificates might suffer a lower than anticipated yield in the event of
principal payments on the Offered Certificates resulting from rapid prepayments
of the Mortgage Loans or the application of the General Excess Available Amount
as described herein, or in the event that the Trust Fund is terminated prior to
the Assumed Final Maturity Date of the Classes of Offered Certificates.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Offered
Certificates 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 Offered Certificates 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 Offered Certificates.
INDEX OF DEFINED TERMS
Accrual Period.............................................................S-51
Adjustable Rate Mortgage Loans....................................ii, S-2, S-15
Adjustment Date.......................................................S-2, S-23
Advance....................................................................S-42
Allocable Loss Amount.................................................S-6, S-52
Assumed Final Maturity Date................................................S-61
Available Funds............................................................S-50
Available Funds Cap...................................................S-5, S-55
Balloon Loan...............................................................S-16
Balloon Payment............................................................S-16
Basic Principal Distribution Amount........................................S-52
Basis Risk Shortfall Amount...........................................S-5, S-56
BCD Mortgage Loan..........................................................S-37
Beneficial Owner...........................................................S-46
Book-Entry Certificates....................................................S-46
Call Option Date................................................S-5, S-52, S-55
Cap Contract...............................................................S-67
Cede........................................................................S-3
Cedel.......................................................................S-3
Cedel Participant..........................................................S-48
CERCLA.....................................................................S-13
Certificate Owners....................................................S-3, S-46
Certificate Principal Balance.........................................S-1, S-52
Certificates.......................................................1, S-1, S-45
Chase.......................................................................S-3
Citibank....................................................................S-3
Citiscape..................................................................S-36
Cityscape Loans............................................................S-32
Class A Principal Distribution Amount......................................S-52
Class B Principal Distribution Amount......................................S-52
Class M-1 Principal Distribution Amount....................................S-52
Class M-2 Principal Distribution Amount....................................S-52
Closing Date.......................................................1, S-2, S-60
Code.......................................................................S-67
Collection Account.........................................................S-42
Commission..................................................................iii
Compensating Interest......................................................S-43
Contributions Tax..........................................................S-69
Cooperative................................................................S-48
Cumulative Loss Trigger....................................................S-55
Cut-off Date.................................................ii, S-1, S-2, S-15
Cut-off Date Principal Balance..............................................S-1
DCR.............................................................S-8, S-71, S-73
Debt Ratio.................................................................S-32
Defective Mortgage Loans...................................................S-41
Definitions................................................................S-51
Definitive Certificate.....................................................S-46
Delayed First Adjustment Mortgage Loan................................S-3, S-15
Delinquency Percentage.....................................................S-53
Delinquent.................................................................S-53
Depositor..............................................................S-1, S-2
Depository...................................................................ii
Determination Date..........................................................S-7
Directing Holder...........................................................S-40
Distribution Account.......................................................S-42
Distribution Date..................................................1, S-4, S-46
DOL........................................................................S-70
DTC...................................................................S-3, S-78
Due Date...................................................................S-15
Due Period.................................................................S-53
Eligible Account...........................................................S-42
Eligible Substitute Mortgage Loan..........................................S-41
ERISA.................................................................S-7, S-70
Euroclear...................................................................S-3
Euroclear Operator.........................................................S-48
Euroclear Participants.....................................................S-48
European Depositaries.................................................S-3, S-46
Excess Reserve Fund Account...........................................S-6, S-57
Exemption..................................................................S-70
Exemption Rating Agencies..................................................S-71
Extra Principal Distribution Amount........................................S-53
Financial Intermediary.....................................................S-46
Fitch......................................................................S-71
Fixed Rate Mortgage Loans.........................................ii, S-2, S-15
Foreclosure Ratio..........................................................S-39
General Excess Available Amount............................................S-53
Global Securities..........................................................S-78
Gross Margin..........................................................S-3, S-23
HUD........................................................................S-37
IML........................................................................S-47
Index..................................................................ii, S-15
Initial Subsidiary REMIC....................................................S-7
Interest Distributable Amount..............................................S-53
IRS........................................................................S-69
LIBOR Business Day.........................................................S-56
LIBOR Determination Date...................................................S-56
Liquidated Mortgage Loan...................................................S-54
Loan Rates..................................................................S-2
Loss Reimbursement Entitlement.............................................S-53
Majority Residual Interestholder............................................S-7
Master REMIC................................................................S-7
Master Servicer........................................................S-1, S-2
Maximum Cap...........................................................S-5, S-56
Maximum Collateral Amount..................................................S-53
Maximum Loan Rate..........................................................S-23
Mezzanine Certificates.............................................1, S-1, S-45
Minimum Loan Rate..........................................................S-23
Monthly Interest Distributable Amount......................................S-53
Moody's....................................................................S-71
Mortgage...................................................................S-15
Mortgage Loan Schedule.....................................................S-40
Mortgage Loans..........................................................ii, S-1
Mortgage Pool................................................................ii
Mortgage Properties........................................................S-15
Mortgaged Properties........................................................S-1
Net Gains/(Losses).........................................................S-39
Net income from foreclosure property.......................................S-69
Net Liquidation Proceeds...................................................S-54
Non-U.S. Person............................................................S-69
Ocwen......................................................................S-36
Offered Certificates...............................................1, S-1, S-45
OID........................................................................S-67
One-Month LIBOR........................................................ii, S-56
Original Certificate Principal Balance................................S-1, S-52
Originator.............................................................ii, S-32
Overcollateralization Deficiency Amount....................................S-53
Overcollateralization Release Amount.......................................S-54
Overcollateralization Stepdown Trigger Event...............................S-55
Overcollateralization Target Amount........................................S-54
Overcollateralized Amount..................................................S-54
Pass-Through Margin...................................................S-5, S-55
Pass-Through Rates..........................................................S-5
Periodic Rate Cap..........................................................S-23
Plan..................................................................S-7, S-70
Pool Principal Balance.................................................S-1, S-6
Pooling and Servicing Agreement...................................ii, S-1, S-45
Prepayment Assumption......................................................S-61
Prepayment Interest Shortfall..............................................S-44
Prepayment Period..........................................................S-50
Principal Balance...........................................................S-1
Principal Distribution Amount..............................................S-54
Principal Prepayment.......................................................S-54
Principal Remittance Amount................................................S-54
Prohibited Transactions Tax................................................S-69
Prospectus..................................................................iii
PTCE 95-60.................................................................S-72
Purchase Agreement...........................................................ii
Purchase Price.............................................................S-41
Purchaser..................................................................S-32
Qualifying Rate............................................................S-33
Rating Agencies.......................................................S-8, S-73
Realized Loss..............................................................S-54
Record Date...........................................................S-4, S-46
Reference Banks............................................................S-56
Regular Certificates........................................................S-7
Related Documents..........................................................S-40
Relevant Depositary........................................................S-46
Relief Act.................................................................S-42
REMIC........................................................................ii
Required Reserve Amount....................................................S-57
Reserve Interest Rate......................................................S-56
Residual Certificates..............................................1, S-1, S-45
Restricted Group...........................................................S-71
Rolling Delinquency Percentage.............................................S-54
Rules......................................................................S-46
S&P.............................................................S-8, S-71, S-73
Seller.......................................................ii, S-1, S-2, S-32
Senior Certificates................................................1, S-1, S-45
Senior Credit Enhancement Percentage.......................................S-54
Senior Specified Enhancement Percentage....................................S-55
Servicing Advance..........................................................S-43
Servicing Fee..............................................................S-43
Servicing Fee Rate.........................................................S-43
SMMEA.................................................................S-8, S-72
Special Servicer......................................................S-1, S-36
Special Servicer Fee.......................................................S-37
Special Servicer Incentive Fee.............................................S-37
Specially Serviced Mortgage Loan...........................................S-37
Stepdown Date..............................................................S-55
Structuring Assumptions....................................................S-61
Subordinate Certificates...........................................1, S-1, S-45
Subservicer................................................................S-36
Subsidiary REMIC............................................................S-7
Substitution Adjustment....................................................S-41
Tax Counsel................................................................S-67
Telerate Page 3750.........................................................S-56
Terms and Conditions.......................................................S-48
Total Portfolio............................................................S-39
Trigger Event..............................................................S-55
Trust Fund..............................................................ii, S-1
Trustee................................................................S-1, S-2
Trustee Fee................................................................S-43
Trustee Fee Rate...........................................................S-43
U.S. Person................................................................S-80
Underwriter..............................................................1, iii
Unpaid Interest Shortfall Amount...........................................S-55
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Ocwen
Mortgage Loan Asset Backed Certificates, Series 1998-OFS3 (the "Global
Securities") will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of The Depository Trust
Company ("DTC"), Cedel or Euroclear. The Global Securities will be tradeable as
home market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional eurobonds, except that there
will be no temporary global security and no "lock-up" or restricted period.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no `lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. Cedel or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be system and by the clearing system, in accordance with its usual
procedures, to the Cedel Participant's or Euroclear Participant's account. The
securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. This summary does not deal
with all aspects of U.S. Federal income tax withholding that may be relevant to
foreign holders of the Global Securities. Investors are advised to consult their
own tax advisors for specific tax advice concerning their holding and disposing
of the Global Securities.
=================================================================== ===============================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN OCWEN MORTGAGE LOAN ASSET
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR BACKED CERTIFICATES, SERIES
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON 1998-OFS3
AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR THE UNDERWRITER.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE OR
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THEIR RESPECTIVE DATES.
$226,326,000 CLASS A
_________________________ VARIABLE PASS-THROUGH RATE
TABLE OF CONTENTS
$10,465,000 CLASS M-2
PAGE VARIABLE PASS-THROUGH RATE
PROSPECTUS SUPPLEMENT
$8,504,739 CLASS B
Incorporation of Certain Documents By Reference......... iii VARIABLE PASS-THROUGH RATE
Summary of Terms........................................ S-1
Risk Factors............................................ S-10
The Mortgage Pool....................................... S-15
Underwriting Standards.................................. S-33
The Master Servicer..................................... S-37
Ocwen Federal Bank FSB.................................. S-37
The Pooling And Servicing Agreement..................... S-42
Description Of The Certificates......................... S-47 FINANCIAL ASSET SECURITIES CORP.
Yield, Prepayment And Maturity (DEPOSITOR)
Considerations ......................................... S-61
Use Of Proceeds......................................... S-70 -----------------------------
Certain Material Federal Income Tax Consequences........ S-70
State Taxes............................................. S-73 PROSPECTUS SUPPLEMENT
Erisa Considerations.................................... S-73
Legal Investment Considerations......................... S-75 -----------------------------
Method Of Distribution.................................. S-75
Legal Matters........................................... S-76 [GREENWICH CAPITAL MARKETS, INC.]
Ratings................................................. S-76
Index Of Defined Terms.................................. S-77 IN LOGO
PROSPECTUS
-----------------------------
Prospectus Supplement or Current Report on Form 8-K..... 2
Incorporation of Certain Information by Reference....... 2 September 28, 1998
Available Information................................... 2
Reports to Securityholders.............................. 3
Summary of Terms........................................ 4
Risk Factors............................................ 11
The Trust Fund.......................................... 16
Use of Proceeds......................................... 22
The Depositor........................................... 22
Loan Program .......................................... 22
Description of the Securities.......................... 24
Credit Enhancement..................................... 34
Yield and Prepayment Considerations ................... 40
The Agreements......................................... 42
Certain Legal Aspects of the Loans..................... 55
Certain Material Federal Income Tax Considerations..... 67
Fasit Securities....................................... 87
State Tax Considerations............................... 90
ERISA Considerations................................... 90
Legal Investment ...................................... 94
Method of Distribution.................................. 95
Legal Matters........................................... 96
Financial Information ................................. 96
Rating................................................. 96
=================================================================== ===============================================================
PROSPECTUS
ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
This Prospectus relates to the issuance of Asset Backed Certificates
(the "Certificates") and the Asset Backed Notes (the "Notes" and, together with
the Certificates, the "Securities"), which may be sold from time to time in one
or more series (each, a "Series") by Financial Asset Securities Corp. (the
"Depositor") on terms determined at the time of sale and described in this
Prospectus and the related Prospectus Supplement. The Securities of a Series
will evidence beneficial ownership of a trust fund (a "Trust Fund"). As
specified in the related Prospectus Supplement, the Trust Fund for a Series of
Securities will include certain assets (the "Trust Fund Assets") which will
primarily consist of (i) closed-end and/or revolving home equity loans (the
"Home Equity Loans") secured by liens on one- to four-family residential
properties, which may be subordinated to one or more senior liens on such
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 Considerations."
----------
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN
THE SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 14.
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 28, 1998
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things, set
forth with respect to such Securities, as appropriate: (i) a description of the
class or classes of Securities and the Pass-Through Rate or method of
determining the rate or the amount of interest, if any, to be passed through to
each such class; (ii) the aggregate principal amount and Distribution Dates
relating to such Series and, if applicable, the initial and final scheduled
Distribution Dates for each class; (iii) information as to the assets comprising
the Trust Fund, including the general characteristics of the Trust Fund Assets
included therein and, if applicable, the insurance policies, surety bonds,
guaranties, letters of credit or other instruments or agreements included in the
Trust Fund or otherwise, and the amount and source of any reserve account; (iv)
the circumstances, if any, under which the Trust Fund may be subject to early
termination; (v) the method used to calculate the amount of principal to be
distributed with respect to each class of Securities; (vi) the order of
application of distributions to each of the classes within such Series, whether
sequential, pro rata, or otherwise; (vii) the Distribution Dates with respect to
such Series; (viii) additional information with respect to the method of
distribution of such Securities; (ix) whether one or more REMIC elections will
be made and designation of the regular interests and residual interests; (x) the
aggregate original percentage ownership interest in the Trust Fund to be
evidenced by each class of Securities; (xi) information as to the Trustee; (xii)
information as to the nature and extent of subordination with respect to any
class of Securities that is subordinate in right of payment to any other class;
and (xiii) information as to the Master Servicer.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 14 or 15(d) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act") prior to the termination of the offering
of Securities evidencing interests therein. Upon request by any person to whom
this Prospectus is delivered in connection with the offering of one or more
classes of Securities, the Depositor will provide or cause to be provided
without charge a copy of any such documents and/or reports incorporated herein
by reference, in each case to the extent such documents or reports relate to
such classes of Securities, other than the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests to the Depositor should be directed in writing to: Paul D. Stevelman,
Assistant Secretary, Financial Asset Securities Corp., 600 Steamboat Road,
Greenwich, Connecticut 06830, telephone number (203) 625-2756. The Depositor has
determined that its financial statements are not material to the offering of any
Securities.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part of
the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048. In addition, the Securities and Exchange Commission (the
"Commission") maintains a Web site at http://www.sec.gov containing reports,
proxy and information statements and other information regarding registrants,
including the Depositor, that file electronically with the Commission.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund for a
Series of Securities are required under an Agreement to be forwarded to
Securityholders. However, such reports will neither be examined nor reported on
by an independent public accountant. See "Description of the Securities--Reports
to Securityholders".
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement with respect to the Series offered thereby and to the related
Agreement (as such term is defined below) which will be prepared in connection
with each Series of Securities. Unless otherwise specified, capitalized terms
used and not defined in this Summary of Terms have the meanings given to them in
this Prospectus and in the related Prospectus Supplement.
Title of Securities................. Asset Backed Certificates (the
"Certificates") and Asset Backed Notes
(the "Notes" and, together with the
Certificates, the "Securities"), which
are issuable in Series.
Depositor........................... Financial Asset Securities Corp., a
Delaware corporation, an indirect
limited purpose finance subsidiary of
National Westminster Bank Plc and an
affiliate of Greenwich Capital Markets,
Inc. See "The Depositor" herein.
Trustee............................. The trustee (the "Trustee") for each
Series of Securities will be specified
in the related Prospectus Supplement.
See "The Agreements" herein for a
description of the Trustee's rights and
obligations.
Master Servicer..................... The entity or entities named as Master
Servicer (the "Master Servicer") will be
specified in the related Prospectus
Supplement. See "The Agreements--Certain
Matters Regarding the Master Servicer
and the Depositor".
Trust Fund Assets................... Assets of the Trust Fund for a Series of
Securities will include certain assets
(the "Trust Fund Assets") which will
primarily consist of (a) Loans or (b)
Private Asset Backed Securities,
together with payments in respect of
such Trust Fund Assets and certain other
accounts, obligations or agreements, in
each case as specified in the related
Prospectus Supplement. The Loans will be
collected in a pool (each, a "Pool") as
of the first day of the month of the
issuance of the related Series of
Securities or such other date specified
in the Prospectus Supplement (the
"Cut-off Date"). Trust Fund assets also
may include insurance policies, cash
accounts, reinvestment income,
guaranties, letters of credit or other
assets to the extent described in the
related Prospectus Supplement. See
"Credit Enhancement". In addition, if
the related Prospectus Supplement so
provides, the related Trust Funds'
assets will include the funds on deposit
in an account (a "Pre-Funding Account")
which will be used to purchase
additional Loans during the period
specified in the related Prospectus
Supplement. See "The
Agreements--Pre-Funding Accounts".
A. Loans........................... The Loans will consist of (i) closed-end
loans (the "Closed-End Loans") and/or
revolving home equity loans or certain
balances therein (the "Revolving Credit
Line Loans", together with the
Closed-End Loans, the "Home Equity
Loans"), and (ii) home improvement
installment sales contracts and
installment loan agreements (the "Home
Improvement Contracts"). The Home Equity
Loans and the Home Improvement Contracts
are collectively referred to herein as
the "Loans". All Loans will have been
purchased by the Depositor, either
directly or through an affiliate, from
one or more Sellers.
As specified in the related Prospectus
Supplement, the Home Equity Loans will,
and the Home Improvement Contracts may,
be secured by mortgages or deeds of
trust or other similar security
instruments creating a lien on a
mortgaged property (the "Mortgaged
Property"), which may be subordinated to
one or more senior liens on the
Mortgaged Property, as described in the
related Prospectus Supplement. As
specified in the related Prospectus
Supplement, Home Improvement Contracts
may be unsecured or secured by purchase
money security interests in the Home
Improvements financed thereby. The
Mortgaged Properties and the Home
Improvements are collectively referred
to herein as the "Properties".
B. Private Asset-
BackedSecurities.............. 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
Considerations.................... 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 Considerations".
ERISA Considerations................ A fiduciary of any employee benefit plan
or other retirement plan or arrangement
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its 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 SecuritiesnGeneral"
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 n
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 20% (by principal balance) of the Trust Fund Assets for
any particular Series of Securities will be delinquent by their terms as of the
related Cut-off Date.
OTHER CONSIDERATIONS
There is no assurance that the market value of the Trust Fund Assets or
any other assets of a Series will at any time be equal to or greater than the
principal amount of the Securities of such Series then outstanding, plus accrued
interest thereon. Moreover, upon an event of default under the Agreement for a
Series and a sale of the assets in the Trust Fund or upon a sale of the assets
of a Trust Fund for a Series of Securities, the Trustee, the Master Servicer,
the credit enhancer, if any, and any other service provider specified in the
related Prospectus Supplement generally will be entitled to receive the proceeds
of any such sale to the extent of unpaid fees and other amounts owing to such
persons under the related Agreement prior to distributions to Securityholders.
Upon any such sale, the proceeds thereof may be insufficient to pay in full the
principal of and interest on the Securities of such Series.
THE TRUST FUND
The Certificates of each Series will represent interests in the assets
of the related Trust Fund, and the Notes of each Series will be secured by the
pledge of the assets of the related Trust Fund. The Trust Fund for each Series
will be held by the Trustee for the benefit of the related Securityholders. Each
Trust Fund will consist of certain assets (the "Trust Fund Assets") consisting
of a pool (each, a "Pool") comprised of Loans or Private Asset Backed
Securities, in each case as specified in the related Prospectus Supplement,
together with payments in respect of such Trust Fund Assets and certain other
accounts, obligations or agreements, in each case as specified in the related
Prospectus Supplement.1 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.
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1 Whenever the terms "Pool", "Certificates" and "Notes" are used in this
Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Pool and the Certificates
representing certain undivided interests in, or Notes secured by the
assets of, a single trust fund (the "Trust Fund") consisting primarily
of the Loans in such Pool. Similarly, the term "Pass-Through Rate" will
refer to the Pass-Through Rate borne by the Certificates or Notes of
one specific Series and the term "Trust Fund" will refer to one
specific Trust Fund.
The Trust Fund Assets will be acquired by the Depositor, either
directly or through affiliates, from originators or sellers which may be
affiliates of the Depositor (the "Sellers"), and conveyed by the Depositor to
the related Trust Fund. Loans acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Loan ProgramnUnderwriting 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 proceeds of the Closed-End Loans may have been
applied to the purchase of the related Property.
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
EnhancementnSubordination".
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 Considerations--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 AgreementsnHazard 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 LoansnAnti-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 AgreementsnCollection 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 SecuritiesnCompensating
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 ProgramnRepresentations 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
FundnPrivate 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 "nSub-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 "nSub-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
ProgramnRepresentations by Sellers; Repurchases" or
"nAssignment of Trust Fund Assets" above and all proceeds of
any Loan repurchased as described under "nTermination;
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 "nHazard 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 "nPayments 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 "nServicing 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 LoansnDue-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 EnhancementnSpecial
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 66K% 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 Considerations" 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 (the "Relief Act")
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.
As used herein, the term "U.S. Person" means a citizen or resident of
the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States, any state thereof or the
District of Columbia (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations), an estate whose income
is subject to U.S. federal income tax regardless of its source of income, or a
trust if a court within the United States is able to exercise primary
supervision of the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in regulations,
certain trusts in existence on August 20, 1996 and treated as United States
Persons prior to such date that elect to continue to be treated as United States
persons shall be considered U.S. Persons as well.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent otherwise provided
in the related Prospectus Supplement, if the Securities are regular interests in
a REMIC ("Regular Interest Securities") or represent interests in a grantor
trust, Tax Counsel is of the opinion that: (i) Securities held by a domestic
building and loan association will constitute "loans... secured by an interest
in real property" within the meaning of Code section 7701(a)(19)(C)(v); and (ii)
Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code section 856(c)(4)(A) and interest on
Securities will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
section 856(c)(3)(B).
Interest and Acquisition Discount. In the opinion of Tax Counsel,
Regular Interest Securities are generally taxable to holders in the same manner
as evidences of indebtedness issued by the REMIC. Stated interest on the Regular
Interest Securities will be taxable as ordinary income and taken into account
using the accrual method of accounting, regardless of the holder's normal
accounting method. Interest (other than original issue discount) on Securities
(other than Regular Interest Securities) that are characterized as indebtedness
for federal income tax purposes will be includible in income by holders thereof
in accordance with their usual methods of accounting. Securities characterized
as debt for federal 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") 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 application of recently finalized regulations under
Section 171 issued December 30, 1997.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if
a REMIC election is made with respect to a Series of Securities, in the opinion
of Tax Counsel (i) Securities held by a domestic building and loan association
will constitute "a regular or a residual interest in a REMIC" within the meaning
of Code Section 7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's
assets consist of cash, government securities, "loans secured by an interest in
real property," and other types of assets described in Code Section
7701(a)(19)(C)); and (ii) Securities held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(4)(A),
and income with respect to the Securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B) (assuming, for both
purposes, that at least 95% of the REMIC's assets are qualifying assets). If
less than 95% of the REMIC's assets consist of assets described in 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.
. 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)(4)(A) of the Code, and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; and interest income
attributable to the Securities should be considered to represent "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code. Reserves or
funds underlying the Securities may cause a proportionate reduction in the
above-described qualifying status categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, in the opinion of Tax Counsel, a holder's tax
basis in its Security is the price such holder pays for a Security, plus amounts
of original issue or market discount included in income and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a Security, measured by the difference between the amount realized and the
Security's basis as so adjusted such gain will generally be capital gain or
loss, assuming that the Security is held as a capital asset and will generally
be long-term capital gain or loss if the holding period of the security is one
year or more. Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to such Regular Interest
Security.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a holder, other than a
holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to distributions
or the proceeds of a sale of certificates to or through brokers that represent
interest or original issue discount on the Securities. This withholding
generally applies if the holder of a Security (i) fails to furnish the 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.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a 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 Code a sale or exchange of 50 percent or
more of the capital and profits in the issuer entity within a 12-month tax
period would cause a deemed contribution of assets of the issuer entity (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. The New Regulations described herein make
certain modifications to the backup withholding and information reporting rules.
The New Regulations will generally be effective for payments made after December
31, 1999, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities. Although the
FASIT provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders. Investors
also should note that the FASIT discussions contained herein constitutes only a
summary of the federal income tax consequences to holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series. The Prospectus Supplement for
each Series of Securities will indicate whether one or more FASIT elections will
be made for that Series and which Securities of such Series will be designated
as Regular Securities, and which, if any, will be designated as Ownership
Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (A) the composition of the FASIT's assets and (B) the nature of
the Securityholders' interest in the FASIT are met on a continuing basis, and
(iii) the Trust Fund is not a regulated company as defined in Section 851(a) of
the Code.
Asset Composition. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as REMIC regular interests if issued by a
REMIC (generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only ("IO") type rate, (iii)
foreclosure property, (iv) certain hedging instruments (generally, interest and
currency rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks associated with being
the obligor on FASIT interests, (v) contract rights to acquire qualifying debt
instruments or qualifying hedging instruments, (vi) FASIT regular interests, and
(vii) REMIC regular interests. Permitted assets do not include any debt
instruments issued by the holder of the FASIT's ownership interest or by any
person related to such holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interest (i.e., certain qualified
floating rates and weighted average rates). See "Certain Material Federal Income
Tax Considerations--Taxation of Debt Securities--Variable Rate Debt Securities."
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security consists
of a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the Security, the Security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "Certain Material Federal Income Tax Considerations--FASIT
Securities--Tax Treatment of FASIT Regular Securities--Treatment of High-Yield
Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and the interests therein for federal income tax purposes is uncertain.
The former FASIT might be treated as a grantor trust, as a separate association
taxed as a corporation, or as a partnership. The FASIT Regular Securities could
be treated as debt instruments for federal income tax purposes or as equity
interests. Although the Code authorizes the Treasury to issue regulations that
address situations where a failure to meet the requirements for FASIT status
occurs inadvertently and in good faith, such regulations have not yet been
issued. It is possible that disqualification relief might be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
FASIT's income for a period of time in which the requirements for FASIT status
are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by holders
of FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Securities. As in the case of holders of REMIC Regular
Securities, holders of FASIT Regular Securities must report income from such
Securities under an accrual method of accounting, even if they otherwise would
have used the case receipts and disbursements method. Except in the case of
FASIT Regular Securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Securityholder and a
principal payment on such Security will be treated as a return of capital to the
extent that the Securityholder's basis is allocable to that payment. FASIT
Regular Securities issued with original issue discount or acquired with market
discount or premium generally will treat interest and principal payments on such
Securities in the same manner described for REMIC Regular Securities. See
"Certain Material Federal Income Tax Considerations--Taxation of Debt
Securities," "--Market Discount," and "--Premium" above. High-Yield Securities
may be held only by fully taxable domestic corporations, other FASITs, and
certain securities dealers. Holders of High-Yield Securities are subject to
limitations on their ability to use current losses or net operating loss
carryforwards or carrybacks to offset any income derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "Certain Material Federal Income Tax
Considerations--Sale or Exchange." In addition, if a FASIT Regular Security
becomes wholly or partially worthless as a result of Default and Delinquencies
of the underlying Assets, the holder of such Security should be allowed to
deduct the loss sustained (or alternatively be able to report a lesser amount of
income). See "Certain Material Federal Income Tax Considerations--Taxation of
Debt Instruments--Effects of Default and Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC Securities would
be so considered. See "Certain Material Federal Income Tax
Considerations--Taxation of Debt Securities--Status as Real Property Loans." In
addition, FASIT Regular Securities held by a financial institution to which
Section 585 of the Code applies will be treated as evidences of indebtedness for
purposes of Section 582(c)(1) of the Code. FASIT Securities will not qualify as
"Government Securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular Federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT Regular Security and that have the same features as High-Yield
Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the holders of High-Yield
Interests. See "Certain Material Federal Income Tax Considerations--Treatment of
High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable Federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income derived
from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent holders of
REMIC Securities would be subject. See "Certain Material Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
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.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Exemption which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans (the "Obligations") supporting payments to
certificateholders, and having a value equal to no more than twenty-five percent
(25%) of the total principal amount of the certificates being offered by the
trust, to be transferred to the trust within a 90-day or three-month period
following the closing date ("Pre-Funding Period"), instead of requiring that all
such Obligations be either identified or transferred on or before the closing
date. The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding
account to the total principal amount of the certificates
being offered (the "Pre-Funding Limit") must not exceed
twenty-five percent (25%).
(2) All Obligations transferred after the closing date (the
"Additional Obligations") must meet the same terms and
conditions for eligibility as the original Obligations used to
create the trust, which terms and conditions have been
approved by an Exemption Rating Agency.
(3) The transfer of such Additional Obligations to the trust
during the Pre-Funding Period must not result in the
certificates to be covered by the Exemption receiving a lower
credit rating from an Exemption Rating Agency upon termination
of the Pre-Funding Period than the rating that was obtained at
the time of the initial issuance of the certificates by the
trust.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "Average Interest
Rate") for all of the Obligations in the trust at the end of
the Pre-Funding Period must not be more than 100 basis points
lower than the average interest rate for the Obligations which
were transferred to the trust on the closing date.
(5) Either:
(i) the characteristics of the Additional
Obligations must be monitored by an insurer or other credit
support provider which is independent of the depositor; or
(ii) an independent accountant retained by
the depositor must provide the depositor with a letter (with
copies provided to each Exemption Rating Agency rating the
certificates, the related underwriter and the related trustee)
stating whether or not the characteristics of the Additional
Obligations conform to the characteristics described in the
related prospectus or prospectus supplement and/or pooling and
servicing agreement. In preparing such letter, the independent
accountant must use the same type of procedures as were
applicable to the Obligations which were transferred to the
trust as of the closing date.
(6) The Pre-Funding Period must end no later than three months
or 90 days after the closing date or earlier in certain
circumstances if the pre-funding account falls below the
minimum level specified in the pooling and servicing agreement
or an event of default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the
pre-funding may be invested only in investments which are
permitted by the Exemption Rating Agencies rating the
certificates and must:
(i) be direct obligations of, or obligations
fully guaranteed as to timely payment of principal and
interest by, the United States or any agency or
instrumentality thereof (provided that such obligations are
backed by the full faith and credit of the United States); or
(ii) have been rated (or the obligor has
been rated) in one or the three highest generic rating
categories by an Exemption Rating Agency ("Permitted
Investments").
(8) The related prospectus or prospectus supplement must
describe:
(i) any pre-funding account and/or
capitalized interest account used in connection with a
pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of
the Pre-Funding Limit for the trust; and
(iv) that the amounts remaining in the
pre-funding account at the end of the Pre-Funding Period will
be remitted to certificateholders as repayments of principal.
(9) The related pooling and servicing agreement must describe
the Permitted Investments for the pre-funding account and/or
capitalized interest account and, if not disclosed in the
related prospectus or prospectus supplement, the terms and
conditions for eligibility of Additional Obligations.
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.