PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 4, 1998)
$250,000,000
GMAC MORTGAGE CORPORATION
SELLER AND SERVICER
GMACM REVOLVING HOME EQUITY LOAN TRUST 1999-1
ISSUER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 1999-1
- --------------------------
THE TRUST
BEFORE YOU DECIDE TO o will issue the term notes, the variable funding notes and the certificates. Only the
INVEST, READ THIS term notes are offered by this prospectus supplement.
PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS, o will make payments on the notes and the certificates primarily from collections on a
ESPECIALLY THE RISK pool of home equity revolving credit line loans made under credit line agreements and
FACTORS BEGINNING ON home equity loans and related promissory notes that have been transferred to the trust.
PAGE S-13 HEREIN AND ON
PAGE 18 OF THE ATTACHED THE TERM NOTES
PROSPECTUS.
o will accrue interest at a certificate rate, which will adjust monthly, based on
The term notes will be one-month LIBOR plus a fixed margin, subject to the maximum rate described herein.
obligations of the trust
only. The term notes o currently have no trading market.
and the assets of the
trust will not be o are not deposits and are not insured or guaranteed by any governmental agency.
obligations of GMAC
Mortgage Corporation, CREDIT ENHANCEMENT
Bear Stearns Asset
Backed Securities, Inc., o An irrevocable and unconditional financial guaranty insurance policy issued by
or any of their Ambac Assurance Corporation, which will protect holders of the term notes against certain
respective affiliates. shortfalls in amounts due to be distributed at the times and to the extent described
-------------------------- herein;
o Excess spread, to the extent described in this prospectus supplement; and
o Overcollateralization, to the extent described herein.
[AMBAC logo]
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. IT IS ILLEGAL FOR ANYONE
TO TELL YOU OTHERWISE.
--------------------
Bear, Stearns & Co. Inc. is acting as representative of the underwriters
for the issuance of the term notes. Delivery of the term notes is expected to
be made in book entry form on or about June 17, 1999. The term notes will be
offered in the United States and Europe.
--------------------
BEAR, STEARNS & CO. INC. NEWMAN & ASSOCIATES, INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 10, 1999
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS:
We tell you about the certificates in two separate documents that
progressively provide more detail: (i) the accompanying prospectus, which
provides general information, some of which may not apply to a particular
series of securities, including your term notes; and (ii) this prospectus
supplement, which describes the specific terms of your term notes and may be
different from the information in the prospectus.
If the terms of your term notes vary between this prospectus supplement
and the prospectus, you should rely on the information in this prospectus
supplement.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following Table of Contents provides the
pages on which these captions can be found.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Principal Terms"
beginning on page S-74 in this prospectus supplement.
If you require additional information, the mailing address of the
principal executive office of the depositor is Bear Stearns Asset Backed Asset
Securities, Inc., 245 Park Avenue, New York, New York 10167 and its telephone
number is (212) 272-4095. For other means of acquiring additional information
about the depositor or the term notes, see "Incorporation of Certain
Information by Reference" beginning on page 4 of the attached prospectus.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Summary................................................................... S-4
Risk Factors..............................................................S-13
Description of the Mortgage Loans.........................................S-18
The Seller and Servicer...................................................S-39
The Issuer................................................................S-42
The Owner Trustee.........................................................S-43
The Indenture Trustee.....................................................S-43
The Enhancer..............................................................S-44
Description of the Securities.............................................S-46
Description of the Policy.................................................S-54
Yield and Prepayment Considerations.......................................S-54
The Agreements............................................................S-60
Use of Proceeds...........................................................S-70
Certain Federal Income Tax Considerations.................................S-70
ERISA Considerations......................................................S-71
Legal Investment..........................................................S-71
Underwriting..............................................................S-71
Experts...................................................................S-72
Legal Matters.............................................................S-72
Ratings...................................................................S-72
PROSPECTUS
Prospectus Supplement........................................................3
Reports to Holders...........................................................3
Available Information........................................................3
Incorporation of Certain Documents by Reference..............................4
Summary of Terms.............................................................5
Risk Factors................................................................18
Description of the Securities...............................................24
The Trust Funds.............................................................28
Enhancement.................................................................36
Servicing of Loans..........................................................38
The Agreements..............................................................45
Certain Legal Aspects of the Loans..........................................54
The Depositor...............................................................64
Use of Proceeds.............................................................65
Certain Federal Income Tax Considerations...................................65
State Tax Considerations....................................................87
FASIT Securities............................................................87
ERISA Considerations........................................................90
Legal Matters...............................................................96
Financial Information.......................................................96
Rating......................................................................96
Legal Investment............................................................97
Plan of Distribution........................................................97
Glossary of Terms...........................................................99
SUMMARY
THE FOLLOWING IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. CAPITALIZED TERMS USED HEREIN BUT NOT OTHERWISE
DEFINED HAVE THE MEANINGS ASSIGNED TO THEM IN THE PROSPECTUS. WE REFER YOU TO
THE INDEX OF DEFINED TERMS BEGINNING ON PAGE S-74 HEREIN FOR THE LOCATION
HEREIN OF THE DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED HEREIN.
Issuer......................................The GMACM Revolving Home Equity Loan Trust 1999-1, a Delaware
business trust, will be formed pursuant to a trust agreement. The
assets of the issuer will consist of:
o the home equity revolving credit line loans and home
equity loans transferred to the issuer on the closing
date;
o additional draws under the home equity revolving credit
line loans during the period from the closing date to but
excluding the beginning of the rapid amortization period,
as described in this prospectus supplement;
o home equity revolving credit line loans and home equity
loans sold to the issuer after the closing date; and
o certain related assets.
The Term Notes..............................$250,000,000 Home Equity Loan-Backed Term Notes, Series 1999-1, are
offered by this prospectus supplement. The term notes will be issued
pursuant to an indenture to be dated as of June 17, 1999, between the
issuer and Norwest Bank Minnesota, National Association, as indenture
trustee.
The Variable Funding Notes..................Home Equity Loan-Backed Variable Funding Notes, Series 1999-1. The
variable funding notes are not offered by this prospectus
supplement.
The Certificates............................Home Equity Loan-Backed Certificates, Series 1999-1. The
certificates are not offered by this prospectus supplement.
Depositor...................................Bear Stearns Asset Backed Securities, Inc.
FOR MORE INFORMATION ON THE DEPOSITOR, WE REFER YOU TO "THE
DEPOSITOR" IN THE ACCOMPANYING PROSPECTUS.
Seller and Servicer.........................GMAC Mortgage Corporation, a Pennsylvania corporation, will be the
seller and servicer of the mortgage loans. The servicer will be
obligated to service the mortgage loans pursuant to the servicing
agreement to be dated as of June 17, 1999, among the servicer, the
issuer and the indenture trustee. Newman & Associates, Inc., one of
the underwriters, is an affiliate of the seller and servicer.
WE REFER YOU TO "THE AGREEMENTS--THE SERVICING AGREEMENT" AND "THe
SELLER AND SERVICER --GENERAL" IN THIS PROSPECTUS SUPPLEMENT FOr
FURTHER INFORMATION ON THE SELLER AND SERVICER.
Owner Trustee...............................Wilmington Trust Company.
WE REFER YOU TO "THE OWNER TRUSTEE" IN THIS PROSPECTUS SUPPLEMENT
FOR FURTHER INFORMATION ON THE OWNER TRUSTEE.
Indenture Trustee...........................Norwest Bank Minnesota, National Association.
WE REFER YOU TO "THE INDENTURE TRUSTEE" IN THIS PROSPECTUS
SUPPLEMENT FOR FURTHER INFORMATION ON THE INDENTURE TRUSTEE.
Cut-Off Date................................The close of business on June 1, 1999.
Closing Date................................On or about June 17, 1999.
Payment Date................................The 18th day of each month (or, if that day is not a Business Day,
the next Business Day), beginning on July 19, 1999.
Denominations and Registration..............The term notes will be issued in minimum denominations of $25,000 and
integral multiples of $1,000 in excess of that amount. The term
notes will initially be issued in book-entry form. Those acquiring
beneficial ownership interests in the term notes, the term note
owners, may elect to hold their term notes through The Depository
Trust Company in the United States, or Cedelbank or the Euroclear
System in Europe. Transfers within The Depository Trust Company,
Cedelbank or the Euroclear System will be in accordance with the
usual rules and operating procedures of that system. No term note
owner can receive a physical certificate representing their interest,
except if definitive term notes are issued under the limited
circumstances described in this prospectus supplement. All
references in this prospectus supplement to any term notes reflect
the rights of term note owners only as those rights may be exercised
through The Depository Trust Company and its participating
organizations for so long as those term notes are in book-entry form.
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES--BOOK-ENTRY NOTES"
In THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE
SECURITIES--BOOK-ENTRY SECURITIES" IN THE ATTACHED PROSPECTUS FOR
FURTHER INFORMATION.
The Mortgage Pool...........................Unless we indicate otherwise, the statistical information we present
in this prospectus supplement reflects the initial pool of mortgage
loans as of the cut-off date. The aggregate outstanding principal
balance of the initial mortgage loans as of the cut-off date is
approximately $181,375,839.80. The outstanding principal balance of
each mortgage loan as of the related cut-off date is the "cut-off
date balance".
o home equity revolving credit line loans to be sold to the
issuer will be adjustable rate home equity revolving credit
line loans evidenced by the related credit line agreements
and secured by the related mortgages or deeds of trust on
residential properties.
o No more than approximately 95.73% of the initial home equity
revolving credit line loans (by cut-off date balance) are
secured by second or more junior mortgages or deeds of trust
and the rest are secured by first mortgages or deeds of
trust.
The property of the trust will include:
o the unpaid principal balance of the home equity revolving
credit line loans and home equity loans as of the close of
business on the cut-off date, June 1, 1999;
o the unpaid principal balance as of the related subsequent
cut-off date of home equity revolving credit line loans and
home equity loans added to the property of the trust after
the closing date; and
o any additions to the home equity revolving credit line loans
as a result of draws or new advances of money made pursuant
to the applicable credit line agreement after the cut-off
date or related subsequent cut-off date.
The unpaid principal balance of a home equity revolving credit
line loan on any day will be equal to:
o its cut-off date balance, PLUS
o any additional balances relating to that home equity
revolving credit line loan sold to the issuer before
that day, MINUS
o all collections credited against the principal balance
of that home equity revolving credit line loan in
accordance with the related credit line agreement since
the cut-off date or related subsequent cut-off date. The
principal balance of a liquidated home equity revolving
credit line loan after the final recovery of related
liquidation proceeds will be zero.
The home equity loans to be sold to the issuer will be fixed rate
closed-end home equity loans evidenced by promissory notes and
secured by mortgages on the related mortgaged properties. No more
than approximately 98.44% of the initial home equity loans (by
cut-off date balance) are secured by second or more junior
mortgages or deeds of trust and the remainder are secured by first
mortgages or deeds of trust. The initial home equity loans provide
for substantially equal payments in an amount sufficient to
amortize the home equity loans over their terms.
Loan Rate...................................The loan rate of each mortgage loan is the per annum interest rate
required to be paid by the mortgagor under the terms of the
related mortgage note or credit line agreement. The loan rate
borne by each mortgage loan, after the completion of any initial
teaser period during which the loan rate may be fixed or set at a
discounted variable rate for a period of from three to six months,
is:
o in the case of a home equity revolving credit line loan,
adjustable on the date specified in the related credit line
agreement to a rate based on an index; and
o in the case of a home equity loan, fixed as of the date of
its origination.
Interest on each home equity revolving credit line loan is
computed daily and payable monthly on the average daily
outstanding principal balance of such home equity revolving credit
line loan. After any initial teaser period during which the loan
rate may be fixed or set at a discounted variable rate for
approximately three to six months, the loan rate on each home
equity revolving credit line loan will be adjusted on each
adjustment date to a rate equal to the sum of the index and a
fixed percentage specified in the related credit line agreement,
and is generally subject to a maximum loan rate over the life of
the home equity revolving credit line loan specified in such
credit line agreement. As of the cut-off date, the weighted
average loan rate for the home equity revolving credit line loans,
after the expiration of any applicable teaser periods, is
approximately 9.481% and for the home equity loans is
approximately 9.712%.
WE REFER YOU TO "MORTGAGE LOANS--INITIAL HELOC CHARACTERISTICS"
AND "--INITIAL HEL CHARACTERISTICS" IN THIS PROSPECTUS SUPPLEMENT
FOr FURTHER INFORMATION.
Pre-Funding Account.........................On the closing date, approximately $68,624,160.20 will be deposited
into an account designated the "pre-funding account". This amount
will come from the proceeds of the sale of the term notes. During
the pre-funding period as described in this prospectus supplement,
funds on deposit in the pre-funding account will be used by the
issuer to buy mortgage loans from the seller from time to time. The
pre-funding period will be the period from the closing date to the
earliest of:
o the date on which the amount on deposit in the pre-funding
account is less than $100,000;
o December 31, 1999; or
o the occurrence of a managed amortization event or a rapid
amortization event, as further described herein.
The mortgage loans sold to the trust after the closing date, as
well as all initial mortgage loans, will conform to certain
specified characteristics. After the end of the pre-funding
period, mortgage loans will continue to be purchased by the issuer
through the end of the revolving period, as described in this
prospectus supplement, subject to certain conditions.
WE REFER YOU TO "DESCRIPTION OF THE MORTGAGE LOANS-CONVEYANCE OF
SUBSEQUENT MORTGAGE LOANS, THE PRE-FUNDING ACCOUNT AND THE FUNDING
ACCOUNT" IN THIS PROSPECTUS SUPPLEMENT FOR FURTHER INFORMATION.
Capitalized Interest Account................On the closing date, if required by Ambac Assurance Corporation,
part of the proceeds of the sale of the term notes will be
deposited into an account designated the "capitalized interest
account", which will be held by the indenture trustee. Amounts on
deposit in the capitalized interest account will be withdrawn on
each payment date during the pre-funding period to cover any
shortfall in interest payments on the notes due to the pre-funding
feature during the pre-funding period. Any amounts remaining in
the capitalized interest account at the end of the pre-funding
period will be paid to the seller.
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES--CAPITALIZED
INTERESt ACCOUNT" IN THIS PROSPECTUS SUPPLEMENT FOR FURTHER
INFORMATION.
Funding Account.............................An account designated the "funding account" will be set up with
the indenture trustee on the closing date. On each payment date
during the revolving period, the indenture trustee will deposit
principal collections for the related collection period into the
funding account, and will apply them first to buy additional
balances arising under home equity revolving credit line loans in
the trust and thereafter to buy more mortgage loans, to the extent
they are available. If not all principal collections in the
funding account have been applied to buy additional balances and
mortgage loans at the end of the revolving period, the amount left
in the funding account will be paid to noteholders as a payment of
principal. During the revolving period, we expect that mortgage
loans bought with amounts in the funding account will primarily be
home equity revolving credit line loans.
WE REFER YOU TO "DESCRIPTION OF THE MORTGAGE LOANS--CONVEYANCE Of
SUBSEQUENT MORTGAGE LOANS, THE PRE-FUNDING ACCOUNT AND THE FUNDING
ACCOUNT" IN THIS PROSPECTUS SUPPLEMENT FOR FURTHER INFORMATION.
Interest Payments...........................Interest payments on the term notes will be made monthly on each
payment date, beginning in July 1999, at the note rate described
below for the related interest period, subject to the limitations
set forth below, which may result in interest shortfalls, as
described below. The note rate for each interest period will be a
floating rate equal to the least of:
o LIBOR plus 0.29% per annum (or, on any payment date on which
the aggregate term note balance is less than 10% of the
initial aggregate term note balance, LIBOR plus 0.58% per
annum);
o the net loan rate, as described in this prospectus supplement
under "Description of the Securities--Interest Payments on
the Notes"; and
o 14.50% per annum.
However, on any payment date for which the related note rate has
been determined by the second bullet point above, the interest
shortfall will be determined. Interest shortfalls and interest on
them at the note rate (as adjusted from time to time) will be paid
on later payment dates, to the extent funds are available for that
purpose as described under "Description of the
Securities--Priority of Distributions". Interest shortfalls will
not be covered by the financial guaranty insurance policy and may
remain unpaid on the final payment date for the term notes.
Interest on the notes for each payment date will accrue from the
preceding payment date (or, in the case of the first payment date,
from the closing date) through the day before that payment date,
on the basis of the actual number of days in that interest period
and a 360-day year.
All interest payments on the notes for any payment date will be
allocated to the term notes and the variable funding notes pro
rata based on their respective interest accruals. The interest
rate on the variable funding notes for any payment date will not
significantly exceed the note rate for the related interest
period.
Principal Payments..........................With respect to any payment date during the revolving period, no
principal will be paid on the notes, and all principal collections
will be deposited into the funding account and used to purchase
additional balances relating to home equity revolving credit line
loans and to purchase additional mortgage loans. On each payment
date during the managed amortization period, the aggregate amount
payable as principal of the notes will be equal to net principal
collections for that payment date, as further described in this
prospectus supplement. On each payment date during the rapid
amortization period, the aggregate amount payable as principal of
the notes will be equal to principal collections for that payment
date. In addition, on each payment date after the end of the
revolving period, to the extent of funds available for that
purpose, holders of the term notes and the holders of the variable
funding notes will be entitled to get certain additional amounts
in reduction of the note balance of the related notes, generally
equal to liquidation loss amounts, as further described in this
prospectus supplement.
All principal payments due and payable on the notes will be
allocated to the term notes and the variable funding notes pro
rata based on the outstanding principal balances thereof until
paid in full. In no event will principal payments on the notes on
any payment date exceed the related note balance of those notes on
that payment date. On the final payment date, principal will be
due and payable on the notes in an amount equal to the related
note balance remaining outstanding on that payment date.
The revolving period will be the period beginning on the closing
date and ending on the earlier of December 31, 2000 and the
occurrence of a managed amortization event or certain rapid
amortization events. The managed amortization period will be the
period beginning on the first payment date following the end of
the revolving period and ending on the earlier of December 31,
2004 and the occurrence of certain rapid amortization events. The
rapid amortization period will be the period beginning on the
earlier of the first payment date following the end of the managed
amortization period and the occurrence of certain rapid
amortization events, and ending upon the termination of the
issuer. A managed amortization event will be deemed to occur on
any date on which the amount on deposit in the funding account
equals or exceeds $10,000,000.
Allocation of Payments on the
Mortgage Loans..............................All collections on the mortgage loans will generally be allocated
by the servicer according to the terms of the related credit line
agreements or mortgage notes between amounts collected in respect
of interest and principal. We refer you to "The Agreements--The
Servicing Agreement--P & I Collections" in this prospectus
supplement, which describes the calculation of principal
collections and interest collections on the mortgage loans for the
collection period related to each payment date.
o With respect to each payment date, the portion of interest
collections available to be applied towards the payment of
interest on the notes will equal interest collections for
such payment date
o The portion of principal collections available to be applied
towards the payment of principal on the notes will equal:
o at any time during the revolving period, zero,
o at any time during the managed amortization period,
net principal collections for such payment date and
o at any time during the rapid amortization period,
principal collections for such payment date.
During the revolving period, principal collections will be applied
by the trust to buy mortgage loans and, during the period from the
closing date to the beginning of the rapid amortization period,
principal collections will be applied to purchase additional
balances, in each case to the extent they are available. Principal
collections will no longer be applied to acquire mortgage loans
after the end of the revolving period and will no longer be
applied to buy additional balances during the rapid amortization
period.
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES--PRIORITY Of
DISTRIBUTIONS" IN THIS PROSPECTUS SUPPLEMENT FOR A DESCRIPTION OF
EVENTS THAT WOULD CAUSE THE RAPID AMORTIZATION PERIOD TO BEGIN.
Credit Enhancement..........................The credit enhancement provided for the benefit of the noteholders
will consist of:
o excess spread;
o overcollateralization; and
o the financial guaranty insurance policy,
each as further described in this prospectus supplement.
The Enhancer................................Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance
corporation.
WE REFER YOU TO "THE ENHANCER" IN THIS PROSPECTUS SUPPLEMENT FOR
FURTHER INFORMATION.
Optional Redemption.........................A principal payment may be made to redeem the term notes upon the
exercise by the servicer of its option to purchase the mortgage
loans and the related assets of the trust after the aggregate
balance of the term notes is reduced to an amount less than or
equal to 10% of their initial balance. The purchase price payable
by the servicer for these mortgage loans will be the sum of:
o the aggregate outstanding principal balance of the mortgage
loans, plus accrued and unpaid interest thereon at the
weighted average of the net loan rates of these mortgage
loans through the day preceding the payment date of this
purchase;
o an amount equal to any interest shortfalls plus accrued and
unpaid interest on these interest shortfalls; and
o all amounts due and owing Ambac Assurance Corporation.
Final Payment of Principal
on the Notes................................The notes will be payable in full on the payment date in June 2027 to
the extent of the outstanding note balance on that date, if any. In
addition, the issuer will pay the notes in full upon the exercise by
the servicer of its option to purchase all of the mortgage loans in
the trust and all property acquired relating to the mortgage loans.
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES--MATURITY AND
OPTIONAl REDEMPTION" IN THIS PROSPECTUS SUPPLEMENT AND "THE
AGREEMENTS--TERMINATION--INDENTURE" IN THE ATTACHED PROSPECTUS FoR
FURTHER INFORMATION.
Optional Removal of Certain
Mortgage Loans..............................In certain instances where a mortgagor either:
o requests an increase in the credit limit on the related home
equity revolving credit line loan above the limit stated on
the related credit line agreement;
o asks to place a lien on the related mortgaged property senior
to the lien of the related mortgage loan; or
o refinances the senior lien resulting in a combined
loan-to-value ratio above the prior combined loan-to-value
ratio for that loan;
then the servicer will have the option to purchase from the trust
that home equity revolving credit line loan, as further described
in this prospectus supplement.
ERISA Considerations........................The term notes are eligible for purchase by pension,
profit-sharing or other employee benefit plans as well as
individual retirement accounts and certain types of Keogh Plans.
However, any fiduciary or other investor of assets of a plan that
proposes to acquire or hold the term notes on behalf of or with
assets of any plan should consult with its counsel with respect to
the potential applicability of the fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of
ERISA and the Internal Revenue Code of 1986, as amended, to the
proposed investment.
WE REFER YOU TO "ERISA CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE ATTACHED PROSPECTUS FOR FURTHER INFORMATION.
Certain Federal Income
Tax Considerations..........................In the opinion of Brown & Wood LLP, special tax counsel to the
depositor, for federal income tax purposes, the term notes will be
characterized as indebtedness, and the issuer, as created and
governed pursuant to the terms and conditions of the trust
agreement, will not be characterized as an association (or a
publicly traded partnership) taxable as a corporation for federal
income tax purposes, or as a "taxable mortgage pool" within the
meaning of section 7701(i) of the Internal Revenue Code of 1986,
as amended. In addition, each noteholder, by its acceptance of a
note, will agree to treat that note as debt for federal, state and
local tax purposes.
FOR FURTHER INFORMATION REGARDING CERTAIN INCOME TAX
CONSIDERATIONS IN RESPECT OF AN INVESTMENT IN THE TERM NOTES, WE
REFER YOU TO "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" IN THIS
PROSPECTUS SUPPLEMENT AND IN THE ATTACHED PROSPECTUS AND "STATE
TAX CONSIDERATIONS" IN THE ATTACHED PROSPECTUS.
Legal Investment............................The term notes will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended, because the property of the trust includes
mortgage loans secured by subordinate liens on the related
mortgaged properties. Institutions the investment activities of
which are subject to legal investment laws and regulations or to
review by certain regulatory authorities may be subject to
restrictions on investment in the term notes.
WE REFER YOU TO "LEGAL INVESTMENT" IN THIS PROSPECTUS SUPPLEMENT
FOR FURTHER INFORMATION.
Ratings.....................................It is a condition to the issuance of the term notes that they be
rated at least "Aaa" by Moody's Investors Service, Inc. and "AAA" by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. A
security rating is not a recommendation to buy, sell or hold
securities, and may be subject to revision or withdrawal at any time
by the assigning rating organization. A security rating does not
address the frequency of prepayments of the mortgage loans or draws
on the home equity revolving credit line loans, the likelihood of the
receipt of any amounts in respect of interest shortfalls or any
corresponding effect on the yield to investors.
WE REFER YOU TO "YIELD AND PREPAYMENT CONSIDERATIONS" AND
"RATINGS" IN THIS PROSPECTUS SUPPLEMENT FOR FURTHER INFORMATION.
RISK FACTORS
YOU SHOULD CONSIDER THE FOLLOWING INFORMATION CAREFULLY, AS WELL AS THE
INFORMATION BEGINNING ON PAGE 18 OF THE ATTACHED PROSPECTUS, SINCE IT
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT
IN THE TERM NOTES. CAPITALIZED TERMS USED HEREIN BUT NOT OTHERWISE DEFINED
HAVE THE MEANINGS ASSIGNED TO THEM IN THE PROSPECTUS. WE REFER YOU TO THE
INDEX OF DEFINED TERMS BEGINNING ON PAGE S-74 HEREIN FOR THE LOCATION HEREIN
OF THE DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED HEREIN.
THERE IS A RISK THAT THE MORTGAGED PROPERTIES MIGHT NOT BE ADEQUATE SECURITY
FOR THE MORTGAGE LOANS.
Although the Mortgage Loans are secured by liens on Mortgaged Properties,
this collateral may not give assurance of repayment of the Mortgage Loans
comparable to that many first lien lending programs provide, and the Mortgage
Loans (especially those with high CLTVs) may have risk of repayment
characteristics more similar to unsecured consumer loans.
Approximately 96.62% (by aggregate Cut-Off Date Balance) of the Initial
Mortgage Loans are secured by second or more junior Mortgages that are
subordinate to the rights of the mortgagee under a senior mortgage or
mortgages. The proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the outstanding Principal Balance of
these Mortgage Loans only to the extent that the claims of the senior
mortgages have been satisfied in full, including any related foreclosure
costs. If the Servicer determines that it would be uneconomical to foreclose
on the related Mortgaged Property, the Servicer may write off the entire
outstanding Principal Balance of the related Mortgage Loan. These
considerations will be particularly applicable to Mortgage Loans secured by
second or more junior Mortgages that have high Combined Loan-to-Value Ratios
because, in these cases, the Servicer is more likely to determine that
foreclosure would be uneconomical. These losses will be borne by Noteholders
if the applicable credit enhancement is insufficient to absorb them.
Defaults on Mortgage Loans are generally expected to occur with greater
frequency in their early years. The rate of default of Mortgage Loans secured
by junior Mortgages may be greater than that of Mortgage Loans secured by
senior Mortgages on comparable properties.
We cannot assure you that the values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market experiences an
overall decline in value, this could extinguish the value of the interest of a
junior mortgagee in the Mortgaged Property before having any adverse effect on
the interest of the related senior mortgagees.
THERE ARE RISKS RELATED TO RELYING ON THE CREDIT OF THE MORTGAGORS.
As a result of the above considerations, the underwriting standards and
procedures applicable to the Mortgage Loans, as well as the repayment
prospects of the Mortgage Loans, may be more dependent on the creditworthiness
of the borrower and less dependent on the adequacy of the Mortgaged Property
as collateral than would be the case under many first lien lending programs.
As to the Mortgage Loans, future changes in the borrower's economic
circumstances will have a significant effect on the likelihood of repayment,
since additional draws on the HELOCs may be made by the borrower in the future
up to the applicable credit limit. Although the HELOCs are generally subject
to provisions whereby the Servicer may reduce the applicable credit limit as a
result of a material adverse change in the borrower's economic circumstances,
the Servicer generally will not monitor for these changes and may not become
aware of them until after the borrower has defaulted. Under certain
circumstances, a borrower with a HELOC may draw his entire credit limit in
response to personal financial needs resulting from an adverse change in
circumstances.
Under the home equity program of the Seller (the "GMACM HOME EQUITY
PROGRAM") relating to the HELOCs, the Seller generally qualifies Mortgagors
based on an assumed payment that reflects a Loan Rate significantly lower than
the related Maximum Loan Rate. The repayment of any HELOC may thus be
dependent on the ability of the related Mortgagor to make larger interest
payments if the Loan Rate of the related Mortgage Loan is adjusted during the
life of the HELOC.
Future changes in a borrower's economic circumstances may result from a
variety of unforeseeable personal factors, including loss of employment,
reduction in income, illness and divorce. Any increase in prevailing market
interest rates may adversely affect a borrower by increasing debt service on
the related HELOC or other similar debt of the borrower. In addition, changes
in the payment terms of any related senior mortgage loan may adversely affect
the borrower's ability to pay principal and interest on the senior mortgage
loan. For example, these changes may result if the senior mortgage loan is an
adjustable rate loan and the interest rate on the loan increases, which may
occur with or without an increase in prevailing market interest rates if the
increase is due to the phasing out of a reduced initial rate. Specific
information about these senior mortgage loans, other than the amount of these
loans at origination of the corresponding Mortgage Loan, is not available, and
we are not including it in this Prospectus Supplement.
General economic conditions, both on a national and regional basis, will
also have an impact on the ability of borrowers to repay their Mortgage Loans.
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and, as a
result, will experience higher rates of loss and delinquency than mortgage
loans generally. For example, a region's economic condition and housing market
may be directly, or indirectly, adversely affected by natural disasters or
civil disturbances such as earthquakes, hurricanes, floods, eruptions or
riots. The economic impact of any of these types of events may also be felt in
areas beyond the region immediately affected by the disaster or disturbance.
The Mortgage Loans may be concentrated in these regions, and this
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without this concentration. You
should note that approximately 39.49% and 12.68% (by aggregate Cut-Off Date
Balance) of the Initial Mortgage Loans are secured by Mortgaged Properties
located in the States of California and Michigan, respectively. In addition,
any change in the deductibility for federal income tax purposes of interest
payments on home equity loans may also have an adverse impact on the ability
of borrowers to repay their Mortgage Loans.
THERE ARE RISKS RELATED TO THE INTEREST-ONLY FEATURE FOR CERTAIN HELOCS.
As to approximately 64.99% (by Cut-Off Date Balance) of the Initial
HELOCs, the borrowers are not required to make any principal payments until
the maturity of their loans (the "BALLOON LOANS"). As such, these borrowers
generally must pay the entire remaining principal amount of their HELOC at its
maturity. The ability of these borrowers to make such a payment may depend on
the ability of these borrowers to get refinancing of the balance due on their
HELOC or to sell the related Mortgaged Property. An increase in interest rates
over the Loan Rate applicable at the time their HELOC was originated may have
an adverse effect on their ability to get refinancing, to make the required
monthly payment or to pay the balance of their HELOC at its maturity.
Collections on the HELOCs may also vary due to seasonal purchasing and payment
habits of borrowers.
In the case of Balloon Loans, the required minimum monthly payments on
such HELOCs will not amortize the outstanding principal amount of such HELOCs
prior to maturity, which amount may include substantial draws recently made.
Furthermore, HELOCs generally have adjustable rates that are subject to much
higher maximum rates than typically apply to adjustable rate first mortgage
loans, and which may be as high as applicable usury limitations. Borrowers
under these HELOCs are generally qualified based on an assumed payment that
reflects either the initial interest rate or a rate significantly lower than
the maximum rate.
With respect to certain HELOCs, general credit risk may also be greater
to Noteholders than to holders of instruments representing interests solely in
level payment first mortgage loans, since no payment of principal generally is
required until after either a five, ten or fifteen year Draw Period under the
related Credit Line Agreements. Minimum monthly payments will at least equal
and may exceed accrued interest. Even assuming that the Mortgaged Properties
provide adequate security for the HELOCs, there could be substantial delays in
connection with the liquidation of HELOCs that are delinquent, and shortfalls
in payments to you could occur if the credit support described in this
prospectus supplement is insufficient to absorb these losses. Further,
liquidation expenses (such as legal fees, real estate taxes, and maintenance
and preservation expenses) will reduce the liquidation proceeds otherwise
payable to Noteholders. In the event any Mortgaged Property fails to provide
adequate security for the related Mortgage Loan, any losses in connection with
such Mortgage Loan will be borne by the Noteholders to the extent that the
applicable credit enhancement is insufficient to absorb these losses.
THERE IS A RISK THAT LOAN RATES MAY REDUCE THE NOTE RATE ON THE TERM NOTES.
The Note Rate on the Term Notes will be a floating rate, as described in
this prospectus supplement. The Loan Rates of the HELs are fixed and do not
adjust. As such, if one-month LIBOR rises, you could get interest at a rate
less than LIBOR plus the specified margin due to these limitations on the Note
Rate. In addition, the weighted average Loan Rate of the Mortgage Loans will
change, and may decrease, over time due to scheduled amortization of the
Mortgage Loans, prepayments of Mortgage Loans, transfers to the Issuer of
Subsequent Mortgage Loans and removal of Mortgage Loans by the Seller. We
cannot assure you that the weighted average Loan Rate of the Mortgage Loans
will not decrease after the Closing Date.
THERE ARE RISKS RELATING TO YIELD AND PREPAYMENT CONSIDERATIONS.
The yield to maturity of the Term Notes will depend on the rate and
timing of principal payments (including payments in excess of required
installments, prepayments or terminations, liquidations and repurchases) on
the Mortgage Loans, the rate and timing of draws on the related HELOCs, and
the price you pay for your Term Notes. This yield may be adversely affected by
a higher or lower than anticipated rate of principal payments or draws on the
related HELOCs. The Mortgage Loans may be prepaid in full or in part without
penalty. The rate and timing of defaults on the Mortgage Loans will also
affect the yield to maturity of the Term Notes.
During the Revolving Period, if the Seller does not sell enough
Additional Balances and/or Subsequent Mortgage Loans to the Issuer, the Issuer
will not fully apply amounts on deposit in the Funding Account to the purchase
of Additional Balances and Subsequent Mortgage Loans by the end of the
Revolving Period. These remaining amounts will be paid to the Noteholders as
principal on the first Payment Date following the end of the Revolving Period.
See "Yield and Prepayment Considerations" herein.
THERE ARE RISKS RELATING TO LIMITATIONS ON THE REPURCHASE OR REPLACEMENT OF
DEFECTIVE MORTGAGE LOANS BY THE SELLER.
We cannot assure you that, at any particular time, the Seller will be
able, financially or otherwise, to repurchase or replace Defective Mortgage
Loans as described in this prospectus supplement. If the Seller repurchases or
is required to repurchase defective mortgage loans from any other series of
asset backed securities, the financial ability of the Seller to repurchase
Defective Mortgage Loans from the Issuer may be adversely affected. In
addition, other events relating to the Seller and its operations could occur
that would adversely affect the financial ability of the Seller to repurchase
Defective Mortgage Loans from the Issuer, including the termination of
borrowing arrangements that provide the Seller with funding for its
operations, or the sale or other disposition of all or any significant portion
of the Seller's assets. If the Seller does not repurchase or replace a
Defective Mortgage Loan, then the Servicer, on behalf of the Issuer, will try
to recover the maximum amount possible with respect to such Defective Mortgage
Loan, and any resulting delay or loss will be borne by the Noteholders, to the
extent that the related credit enhancement does not cover this delay or loss.
THERE ARE RISKS RELATED TO POSSIBLE VARIATIONS IN THE SUBSEQUENT MORTGAGE
LOANS FROM THE INITIAL MORTGAGE LOANS.
Each Subsequent Mortgage Loan will satisfy the eligibility criteria
referred to in this prospectus supplement at the time the Seller transfers it
to the Issuer. However, the Seller may originate or acquire Subsequent
Mortgage Loans using credit criteria different from those it applied to the
Initial Mortgage Loans. As such, these Subsequent Mortgage Loans may be of a
different credit quality from the Initial Mortgage Loans. Thus, after the
transfer of Subsequent Mortgage Loans to the Issuer, the aggregate
characteristics of the Mortgage Loans then part of the Trust Estate may vary
from those of the Initial Mortgage Loans. See "Description of the Mortgage
Loans--Conveyance of Subsequent Mortgage Loans, the Pre-Funding Account and
the Funding Account".
THERE ARE RISKS RELATING TO CERTAIN LEGAL CONSIDERATIONS.
The Mortgage Loans are secured by Mortgages. With respect to Mortgage
Loans that are secured by first Mortgages, the Servicer may, under certain
circumstances, agree to a new mortgage lien on the related Mortgaged Property
having priority over that Mortgage. Mortgage Loans secured by second Mortgages
are entitled to proceeds that remain from the sale of the related Mortgaged
Property after any senior mortgage loans and prior statutory liens have been
satisfied. If these proceeds are insufficient to satisfy these senior loans
and prior liens in the aggregate, the Issuer, and accordingly, the
Noteholders, will bear the risk of delay in distributions while the Servicer
gets a deficiency judgment (to the extent available in the related state)
against the related Mortgagor, and also bear the risk of loss if the Servicer
cannot get or realize upon that deficiency judgment. See "Certain Legal
Aspects of the Loans" in the Prospectus.
If the Seller becomes insolvent, the receiver of the Seller may try to
recharacterize the Seller's sale of the Mortgage Loans as a borrowing by the
Seller secured by a pledge of the Mortgage Loans. If the receiver decided to
challenge this transfer, you could experience delays in payments on your Term
Notes, and possible reductions in the amount paid. The Depositor will warrant
that the transfer of its interest in the Mortgage Loans to the Issuer is a
valid transfer and assignment of that interest.
If a conservator, receiver or trustee is appointed for the Seller, or if
certain other events relating to the insolvency of the Seller occur,
Additional Balances and Subsequent Mortgage Loans will no longer be
transferred by the Seller to the Depositor pursuant to the Purchase Agreement.
If this happens, an Event of Default under the Trust Agreement and the
Indenture will occur, and the Owner Trustee will try to sell the Mortgage
Loans (unless the Enhancer or Holders of Securities evidencing undivided
interests aggregating at least 51% of the aggregate outstanding principal
balance of the Securities instruct otherwise). This would cause early payment
of the Term Note Balance of the Term Notes.
If the Servicer becomes bankrupt or insolvent, the related bankruptcy
trustee or receiver may have the power to prevent the appointment of a
successor Servicer.
THERE ARE RISKS RELATING TO THE REPURCHASE OPTION OF THE SERVICER.
In certain instances in which a Mortgagor either:
o requests an increase in the credit limit on the related HELOC above
the limit stated in the Credit Line Agreement;
o requests to place a lien on the related Mortgaged Property senior to
the lien of the related Mortgage Loan; or
o refinances the senior lien resulting in a Combined Loan-to-Value
Ratio above the previous Combined Loan-to-Value Ratio for such loan;
then the Servicer will have the option to purchase from the Trust Estate the
related Mortgage Loan at a price equal to the Repurchase Price. There are no
limitations on the frequency of these repurchases or the characteristics of
the Mortgage Loans so repurchased. These repurchases may cause an increase in
prepayments on the Mortgage Loans, which may reduce the yield on the Term
Notes. In addition, these repurchases may affect the characteristics of the
Mortgage Loans in the aggregate with respect to Loan Rates and credit quality.
THERE ARE RISKS RELATING TO THE LIMITATIONS OF, AND THE POSSIBLE REDUCTION AND
SUBSTITUTION OF, CREDIT ENHANCEMENT.
Credit enhancement will be provided for the Term Notes in the form of:
o Excess Spread (representing excess interest collections, if
available);
o overcollateralization; and
o the Policy, to the limited extent described herein.
None of the Seller, the Depositor, the Servicer or any of their respective
affiliates will be required to take any other action to maintain, or have any
obligation to replace or supplement, this credit enhancement or any rating of
the Term Notes. To the extent that losses are incurred on the Mortgage Loans
that are not covered by Excess Spread, overcollateralization or the Policy,
Securityholders (including the Term Noteholders) will bear the risk of such
losses.
THERE ARE RISKS RELATING TO SOCIAL, ECONOMIC AND OTHER FACTORS.
The ability of the Issuer to purchase Subsequent Mortgage Loans is
largely dependent upon whether mortgagors perform their payment and other
obligations required by the related mortgage loans in order that such mortgage
loans meet the specified requirements for transfer on a Subsequent Transfer
Date as a Subsequent Mortgage Loan. The performance by these mortgagors may be
affected as a result of a variety of social and economic factors. Economic
factors include interest rates, unemployment levels, the rate of inflation and
consumer perception of economic conditions generally. However, we cannot
predict whether or to what extent economic or social factors will affect the
performance by such mortgagors and the availability of Subsequent Mortgage
Loans.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information presented in this Prospectus Supplement
relates to the Mortgage Loans as of the close of business on the Cut-Off Date
(the "INITIAL MORTGAGE LOANS"). Unless otherwise indicated, all percentages
set forth in this Prospectus Supplement are based upon the outstanding
principal balances of the Initial Mortgage Loans as of the Cut-Off Date (the
"CUT-OFF DATE BALANCE"). Mortgage Loans sold to the Issuer after the Closing
Date (the "SUBSEQUENT MORTGAGE LOANS"), will be selected using generally the
same criteria as that used to select the Initial Mortgage Loans, and generally
the same representations and warranties will be made with respect thereto. See
"Description of the Mortgage Loans--Conveyance of Subsequent Mortgage Loans,
the Pre-Funding Account and the Funding Account" herein
With respect to each adjustable rate home equity revolving credit line
loan (the "HELOCS"), the "COMBINED LOAN-TO-VALUE RATIO" or "CLTV" generally
will be the ratio, expressed as a percentage, of the sum of (i) the credit
limit thereof pursuant to the related Credit Line Agreement (the "CREDIT
LIMIT") and (ii) any outstanding principal balance, at origination of such
HELOC, of all other mortgage loans, if any, secured by senior or subordinate
liens on the related Mortgaged Property, to the Appraised Value, or, when not
available, the Stated Value. With respect to each HELOC, the "JUNIOR RATIO"
generally will be the ratio, expressed as a percentage, of the Credit Limit of
such HELOC to the sum of (i) the greater of the Cut-Off Date Balance or the
Credit Limit, if applicable, of such HELOC and (ii) the principal balance of
any related senior mortgage loan at origination of such HELOC. The "CREDIT
UTILIZATION RATE" is determined by dividing the Cut-Off Date Balance of a
HELOC by the Credit Limit of the related Credit Line Agreement. The "APPRAISED
VALUE" for any HELOC will be the appraised value of the related Mortgaged
Property determined in the appraisal used in the origination of such HELOC
(which may have been obtained at an earlier time); provided that if such HELOC
was originated simultaneously with a senior lien on the related Mortgaged
Property, the Appraised Value shall be the lesser of the appraised value at
the origination of the senior lien and the sales price for such Mortgaged
Property. However, with respect to not more than 8.590% of the HELOCs
transferred to the Issuer on the Closing Date (the "INITIAL HELOCS") for which
the documentation type is known, the "STATED VALUE" will be based on the
stated value of the Mortgaged Property given by the related Mortgagor in his
or her application. See "Description of the Mortgage Loans--Underwriting
Standards" herein.
With respect to each home equity loan (the "HELS" and, together with the
HELOCs, the "MORTGAGE LOANS"), the Combined Loan-to-Value Ratio generally will
be the ratio, expressed as a percentage, of the sum of (i) the initial
principal balance of such HEL and (ii) any outstanding principal balance, at
origination of such HEL, of all other mortgage loans, if any, secured by
senior or subordinate liens on the related Mortgaged Property, to the
Appraised Value, or, when not available, the Stated Value. The Appraised Value
for any HEL will be the appraised value of the related Mortgaged Property
determined in the appraisal used in the origination of such HEL (which may
have been obtained at an earlier time); PROVIDED, that if such HEL was
originated simultaneously with a senior lien on the related Mortgaged
Property, the Appraised Value shall be the lesser of the appraised value at
the origination of the senior lien and the sales price for such Mortgaged
Property. However, with respect to not more than 13.234% of the HELs
transferred to the Issuer on the Closing Date (the "INITIAL HELS") for which
the documentation type is known, the Stated Value will be based on the stated
value of the Mortgaged Property given by the related Mortgagor in his or her
application. See "Description of the Mortgage Loans--Underwriting Standards"
herein.
INITIAL HELOCS
The Initial HELOCs were originated or acquired by GMAC Mortgage
Corporation (the "SELLER"). No more than 95.73% (by Cut-Off Date Balance) of
the Initial HELOCs are secured by second mortgages or deeds of trust and the
remainder of which by first mortgages or deeds of trust. The Mortgaged
Properties securing the Initial HELOCs consist primarily of residential
properties. As to approximately 99.99% of the Initial HELOCs, the borrower
represented at the time of origination that the related Mortgaged Property
would be owner occupied as a primary or second home.
All percentages of the Initial HELOCs described herein are approximate
percentages determined (except as otherwise indicated) by the aggregate
Cut-Off Date Balance of the Initial HELOCs.
As of the Cut-Off Date, no Initial HELOC is 30 days or more delinquent.
The latest scheduled maturity of any Initial HELOC is December 7, 2024. With
respect to approximately 40.44% and approximately 16.55% of the Initial
HELOCs, the related Mortgaged Properties are located in the States of
California and Michigan, respectively.
LOAN TERMS OF THE HELOCS
Interest on each HELOC is calculated based on the average daily balance
outstanding during the Billing Cycle, and with respect to each HELOC, the
"BILLING CYCLE" is the calendar month preceding the related due date.
Each HELOC has a per annum interest rate required to be paid by the
Mortgagor under the terms of the related Credit Line Agreement (the "LOAN
RATE"), that is subject to adjustment on each day (each such day, an
"ADJUSTMENT DATE") to equal the sum of (a) an index (the "INDEX") which is the
prime rate (or high point in a range of prime rates) published in the "Money
Rate" column of THE WALL STREET JOURNAL and (b) the fixed percentage specified
in the related Credit Line Agreement (the "GROSS MARGIN"), provided, however,
that the Loan Rate on each Initial HELOC will in no event be greater than the
maximum Loan Rate (the "MAXIMUM LOAN RATE") set forth in the related Credit
Line Agreement (subject to the maximum rate permitted by applicable law).
As of the Cut-Off Date, approximately 61.01% of the Initial HELOCs have a
Loan Rate below the rate equal to the sum of the related Index and the Gross
Margin (such rate, the "TEASER RATE"), which is in effect during the first 6
months of the term of the loan. With respect to approximately 49.88% of the
Initial HELOCs, the Teaser Rate will be equal to the Prime Rate less 1.00%.
With respect to approximately 4.30% of the Initial HELOCs, the Gross
Margin is adjustable from time to time based on the then outstanding balance
and Combined Loan-to-Value Ratio generally as follows:
GROSS MARGINS
CLTV NOT CLTV
OUTSTANDING BALANCE MORE THAN 80% MORE THAN 80%
- ------------------- ------------- -------------
$25,000 or less 2.00% 3.00%
$25,001 to $50,000 1.75% 2.75%
$50,001 or more 1.50% 2.50%
The Gross Margins with respect to the Initial HELOCs may be reduced below
the applicable levels indicated above by 0.25% or by 0.50% in certain
instances based on specific employee status with General Motors Corporation
("GM") or its subsidiaries at the time of origination of the Initial HELOC
(with no adjustment in the event of any change in such status of the
borrower).
Each Initial HELOC had a term to maturity from the date of origination of
not more than 300 months (the "25-YEAR LOANS"), 180 months (the "15-YEAR
LOANS"), 120 months (the "10-YEAR LOANS") or 60 months (the "5-YEAR LOANS").
The related mortgagor (the "MORTGAGOR") for each Initial HELOC may make a draw
at any time during the period stated in the related Credit Line Agreement (the
"DRAW PERIOD"). In addition, with respect to certain of the Initial HELOCs,
the related Mortgagor will not be permitted to make any draw during the time
period stated in the related Credit Line Agreement (the "REPAYMENT PERIOD").
The Draw Period and the Repayment Period vary for the Initial HELOCs based on
such loan's Combined Loan-to-Value ratio at origination, State of origination
and original term to maturity. The 25-Year Loans, which comprise approximately
28.05% of the Initial HELOCs, have a Draw Period of 15 years and a Repayment
Period of 10 years. With respect to 15-Year Loans and 10-Year Loans with
Combined Loan-to-Value Ratios of 90% or less, the Draw Period will be at any
time during the term of the loan and there will be no Repayment Period, except
with respect to approximately 1.84% of the Initial HELOCs, all of which were
originated in the Commonwealth of Massachusetts, and except with respect to
approximately 0.07% of the Initial HELOCs, all of which were originated in the
State of Connecticut prior to January 1996, which will have a Draw Period of
the first 5 years of the loan and will have a Repayment Period for the last 5
years of the loan with respect to such 10-Year Loans and a Draw Period for the
first 10 years of the loan and a Repayment Period for the last 5 years with
respect to such 15-Year Loans. With respect to approximately 5.03% of the
Initial HELOCs, all of which are 15-Year Loans with Combined Loan-to-Value
Ratios greater than 90%, the Draw Period will be the first 5 years of the
loan, and the Repayment Period will be the final 10 years of the loan. With
respect to approximately 0.02% of the Initial HELOCs, all of which are 10-Year
Loans with Combined Loan-to-Value Ratios greater than 90%, and all of which
were originated prior to September 3, 1997, the Draw Period will be the first
5 years of the term of the loan, and the Repayment Period will be the final 5
years of the loan. With respect to approximately 1.89% of the Initial HELOCs,
all of which are 10-Year Loans with Combined Loan-to-Value Ratios greater than
90%, and all of which were originated on or after September 3, 1997, the Draw
Period will be 10 years and there will be no Repayment Period. With respect to
the 5-Year Loans, the Draw Period will be 5 years and there will be no
Repayment Period.
The maximum amount of each draw with respect to any HELOC is equal to the
excess, if any, of the Credit Limit over the outstanding principal balance
under such Credit Line Agreement at the time of such draw. Each HELOC may be
prepaid in full or in part at any time and without penalty, but with respect
to each HELOC, the related Mortgagor will have the right during the related
Draw Period to make a draw in the amount of any prepayment theretofore made
with respect to such HELOC. Each Mortgagor generally will have access to make
draws by check, subject to applicable law. Generally, the Credit Line
Agreement or Mortgage related to each HELOC will, subject to applicable law,
contain a customary "due-on-sale" clause.
As to each HELOC, the Mortgagor's right to receive draws during the Draw
Period may be suspended, or the Credit Limit may be reduced, for cause under a
number of circumstances, including, but not limited to: a materially adverse
change in the Mortgagor's financial circumstances; a decline in the value of
the Mortgaged Property significantly below its appraised value at origination;
or a payment default by the Mortgagor. However, generally such suspension or
reduction will not affect the payment terms for previously drawn balances.
GMAC Mortgage Corporation (the "SERVICER") will have no obligation under the
servicing agreement to be dated as of June 17, 1999, among the Servicer, the
Issuer and the Indenture Trustee (the "SERVICING AGREEMENT") to investigate as
to whether any such circumstances have occurred and may have no knowledge
thereof; therefore there can be no assurance that any Mortgagor's ability to
receive draws will be suspended or reduced in the event that the foregoing
circumstances occur. In the event of default under a HELOC, the HELOC may be
terminated and declared immediately due and payable in full. For this purpose,
a default includes, but is not limited to: the Mortgagor's failure to make any
payment as required; any action or inaction by the Mortgagor that adversely
affects the Mortgaged Property or the rights in the Mortgaged Property; or
fraud or material misrepresentation by a Mortgagor in connection with the
HELOC.
Prior to the related Repayment Period or prior to the date of maturity
for loans without Repayment Periods, the Mortgagor for each HELOC will be
obligated to make monthly payments thereon in a minimum amount that generally
will be equal to the Finance Charge (as defined below) for such Billing Cycle.
Except as described below, if such loan has a Repayment Period, during such
period, the Mortgagor will be obligated to make monthly payments consisting of
principal installments which would substantially amortize the Principal
Balance by the maturity date, plus current Finance Charges and Additional
Charges (as defined below). In addition, certain Mortgagors will be required
to pay an annual fee of up to $35.
Notwithstanding the foregoing, with respect to the Balloon Loans,
representing approximately 64.99% of the Initial HELOCs, the Mortgagor will be
obligated to make a payment on the related maturity date in an amount equal to
the related Account Balance (as defined below). Such Balloon Loans will not
have a Repayment Period and prior to the related maturity date, the related
Mortgagors will be obligated to make minimum monthly payments generally
similar to those described in the first sentence of the preceding paragraph.
See "Risk Factors--Interest-Only Feature for HELOCs" herein.
With respect to each HELOC, (a) the "FINANCE CHARGE" for any Billing
Cycle will be an amount equal to the aggregate of, as calculated for each day
in the Billing Cycle, the then-applicable Loan Rate divided by 365 multiplied
by the daily Principal Balance and (b) the "ACCOUNT BALANCE" on any day
generally will be the aggregate of the unpaid principal of the HELOC
outstanding at the beginning of such day, plus the sum of any unpaid fees,
insurance premiums and other charges, if any (collectively, "ADDITIONAL
CHARGES") and any unpaid Finance Charges that are due on such HELOC, plus the
aggregate of all related draws funded on such day, minus the aggregate of all
payments and credits that are applied to the repayment of any such draws on
such day. Payments made by or on behalf of the Mortgagor for each HELOC will
be applied to any unpaid Finance Charges that are due thereon, prior to
application, to any unpaid principal outstanding.
Approximately 0.053% of the Initial HELOCs are insured by mortgage
insurance policies covering all or a portion of any losses on each such loan,
subject to certain limitations.
INITIAL HELOC CHARACTERISTICS
Set forth below is a description of certain additional characteristics of
the Initial HELOCs as of the Cut-Off Date. Unless otherwise specified, all
principal balances of the Initial HELOCs are as of the Cut-Off Date and are
rounded to the nearest dollar. All percentages are approximate percentages by
the aggregate Cut-Off Date Balance of the Initial HELOCs (except as indicated
otherwise).
PROPERTY TYPE
PERCENT OF
NUMBER OF CUT-OFF DATE INITIAL HELOCS BY
PROPERTY TYPE INITIAL HELOCS BALANCE CUT-OFF DATE BALANCE
- ------------- -------------- ------------ --------------------
Two to Four Family........................ 43 $ 791,367.51 0.65%
Two to Four Unit (Duplex-Fourplex)........ 9 274,904.10 0.22
Condominium............................... 290 5,409,028.74 4.43
Manufactured.............................. 2 29,998.86 0.02
Multi-Family.............................. 3 32,793.49 0.03
Planned Unit Development.................. 280 5,748,537.90 4.70
Single-Family Dwelling.................... 5,517 109,903,617.96 89.94
----- --------------- ------
- -------------------------------------------
Total................... 6,144 $122,190,248.56 100.00%
===== =============== ======
OCCUPANCY TYPES
PERCENT OF
OCCUPANCY NUMBER OF CUT-OFF DATE INITIAL HELOCS BY
(AS INDICATED BY BORROWER) INITIAL HELOCS BALANCE CUT-OFF DATE BALANCE
- -------------------------- -------------- ------------ --------------------
Investment................................ 1 $ 16,173.00 0.01%
Owner Occupied - Primary Home............. 6,101 121,064,015.62 99.08
Owner Occupied - Secondary Home........... 42 1,110,059.94 0.91
----- --------------- ------
Total................... 6,144 $122,190,248.56 100.00%
===== =============== ======
PRINCIPAL BALANCES
PERCENT OF
NUMBER OF CUT-OFF DATE INITIAL HELOCS BY
RANGE OF PRINCIPAL BALANCES($) INITIAL HELOCS FBALANCE CUT-OFF DATE BALANCE
- ------------------------------ -------------- ------------ --------------------
$0.00 to $25,000.00............. 4,773 $ 56,089,461.09 45.90%
$25,000.01 to $50,000.00............. 1,042 35,239,618.77 28.84
$50,000.01 to $75,000.00............. 161 10,039,986.17 8.22
$75,000.01 to $100,000.00.............. 98 8,943,389.36 7.32
$100,000.01 to $125,000.00.............. 24 2,637,295.63 2.16
$125,000.01 to $150,000.00.............. 18 2,476,666.99 2.03
$150,000.01 to $175,000.00.............. 9 1,461,070.91 1.20
$175,000.01 to $200,000.00.............. 6 1,148,788.38 0.94
$200,000.01 to $225,000.00.............. 3 659,374.41 0.54
$225,000.01 to $250,000.00.............. 4 973,168.40 0.80
$250,000.01 to $275,000.00.............. 1 265,000.00 0.22
$275,000.01 to $300,000.00.............. 1 300,000.00 0.25
$350,000.01 to $375,000.00.............. 1 372,000.00 0.30
$425,000.01 to $450,000.00.............. 1 429,434.39 0.35
$475,000.01 to $500,000.00.............. 1 499,997.12 0.41
$650,000.01 to $675,000.00.............. 1 654,996.94 0.54
----- --------------- ------
Total................... 6,144 $122,190,248.56 100.00%
===== =============== ======
The minimum and maximum Principal Balances of the Initial HELOCs as of
the Cut-Off Date are $1,000.00 and $654,996.94, respectively, and the average
is approximately $19,887.74.
COMBINED LOAN-TO-VALUE RATIOS
PERCENT OF
RANGE OF COMBINED NUMBER OF INITIAL CUT-OFF DATE INITIAL HELOCS BY
LOAN-TO-VALUE RATIOS(%) HELOCS BALANCE CUT-OFF DATE BALANCE
- ----------------------- ----------------- ------------ --------------------
0.000% to 5.000%............ 2 $ 4,883.20 0.00%
5.001% to 10.000%............ 3 63,786.47 0.05
10.001% to 15.000%............ 5 87,490.03 0.07
15.001% to 20.000%............ 9 183,848.94 0.15
20.001% to 25.000%............ 14 799,535.67 0.65
25.001% to 30.000%............ 21 460,819.36 0.38
30.001% to 35.000%............ 28 567,998.06 0.46
35.001% to 40.000%............ 29 648,874.24 0.53
40.001% to 45.000%............ 58 993,309.06 0.81
45.001% to 50.000%............ 66 1,361,476.30 1.11
50.001% to 55.000%............ 91 1,793,326.41 1.47
55.001% to 60.000%............ 141 2,802,444.56 2.29
60.001% to 65.000%............ 174 4,465,715.29 3.65
65.001% to 70.000%............ 247 6,167,421.47 5.05
70.001% to 75.000%............ 409 9,439,087.20 7.72
75.001% to 80.000%............ 1,295 24,703,395.13 20.22
80.001% to 85.000%............ 357 6,859,264.30 5.61
85.001% to 90.000%............ 2,817 49,881,012.66 40.82
90.001% to 95.000%............ 226 6,834,391.15 5.59
95.001% to 100.000%............ 152 4,072,169.06 3.33
----- =============== ------
Total............... 6,144 $122,190,248.56 100.00%
===== =============== ======
The minimum and maximum Combined Loan-to-Value Ratios of the Initial
HELOCs as of the Cut-Off Date are 0.70% and 100.00%, respectively, and the
weighted average Combined Loan-to-Value Ratio of the Initial HELOCs as of the
Cut-Off Date is approximately 80.63%.
GEOGRAPHICAL DISTRIBUTIONS
PERCENT OF
NUMBER OF INITIAL HELOCS BY
State INITIAL HELOCS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
----- -------------- -------------------- --------------------
California...................................... 2,016 $ 49,408,801.14 40.44%
Michigan........................................ 1,185 20,216,455.23 16.55
Washington...................................... 220 5,063,033.01 4.14
New Jersey...................................... 238 4,512,662.40 3.69
New York........................................ 164 3,335,348.98 2.73
Pennsylvania.................................... 191 3,225,077.21 2.64
Other(1)........................................ 2,130 36,428,870.59 29.81
----- --------------- ------
Total....................................... 6,144 $122,190,248.56 100.00%
===== =============== ======
(1) Other includes states and the District of Columbia with under 2.5%
concentrations individually.
JUNIOR RATIOS(1)(2)
PERCENT OF
NUMBER OF INITIAL HELOCS BY
RANGE OF JUNIOR RATIOS (%) INITIAL HELOCS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
- -------------------------- -------------- -------------------- --------------------
0.00% .............................. 118 $ 5,170,880.17 4.23%
0.01% to 9.99%................. 622 8,005,039.89 6.55
10.00% to 19.99%.................. 3,272 57,293,863.66 46.89
20.00% to 29.99%.................. 1,114 25,123,874.46 20.56
30.00% to 39.99%.................. 514 12,967,293.59 10.61
40.00% to 49.99%.................. 266 6,445,078.14 5.27
50.00% to 59.99%.................. 129 3,148,304.63 2.58
60.00% to 69.99%.................. 62 2,177,025.22 1.78
70.00% to 79.99%.................. 29 1,010,738.35 0.83
80.00% to 89.99%.................. 12 451,166.22 0.37
90.00% to 99.99%.................. 6 396,984.23 0.32
----- ---------------- ------
Total................... 6,144 $122,190,248.56 100.00%
===== ================ ======
(1) The Junior Ratio of a HELOC is the ratio (expressed as a percentage)
of the credit limit of such HELOC to the sum of (a) the greater of the Cut-Off
Date Balance of such HELOC and such credit limit and (b) the outstanding
balance of any senior mortgage computed as of the date such HELOC is
underwritten.
(2) The weighted average Junior Ratio of the Initial HELOCs as of the
Cut-Off Date is approximately 22.11%.
LOAN RATES
PERCENT OF
NUMBER OF INITIAL HELOCS BY
RANGE OF LOAN RATES(%) INITIAL HELOCS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
- ---------------------- -------------- -------------------- --------------------
5.001% to 6.000%..................... 518 $ 13,635,705.46 11.16%
6.001% to 7.000%..................... 3,096 60,957,914.52 49.89
7.001% to 8.000%..................... 70 1,793,979.89 1.47
8.001% to 9.000%..................... 891 14,763,966.13 12.08
9.001% to 10.000%..................... 1,088 17,783,242.81 14.55
10.001% to 11.000%..................... 218 6,004,971.39 4.91
11.001% to 12.000%..................... 243 6,862,971.95 5.62
12.001% to 13.000%..................... 20 387,496.41 0.32
----- --------------- ------
Total....................... 6,144 $122,190,248.56 100.00%
===== =============== ======
The weighted average Loan Rate as of the Cut-Off Date is approximately
7.806%.
FULLY INDEXED GROSS MARGIN
PERCENT OF
RANGE OF FULLY INDEXED NUMBER OF INITIAL HELOCS BY
GROSS MARGINS(%) INITIAL HELOCS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
- ---------------------- -------------- -------------------- --------------------
0.000% to 1.000%..................... 2,393 $ 50,041,506.03 40.95%
1.001% to 2.000%..................... 2,810 47,090,379.08 38.54
2.001% to 3.000%..................... 456 12,059,181.84 9.87
3.001% to 4.000%..................... 441 12,085,216.72 9.89
4.001% to 5.000%..................... 44 913,964.89 0.75
----- --------------- ------
Total................ 6,144 $122,190,248.56 100.00%
===== =============== ======
The minimum and maximum Fully Indexed Gross Margins of the Initial HELOCs
as of the Cut-Off Date are 0.000% and 5.000%, respectively, and the weighted
average is approximately 1.732%.
CREDIT UTILIZATION RATES
PERCENT OF
RANGE OF CREDIT NUMBER OF INITIAL HELOCS BY
UTILIZATION RATES (%) INITIAL HELOCS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
- --------------------- -------------- -------------------- --------------------
0.01 to 5.00%............. 165 $ 404,240.09 0.33%
5.01 to 10.00%.............. 330 1,383,735.98 1.13
10.01 to 15.00%.............. 320 2,000,354.72 1.64
15.01 to 20.00%.............. 336 2,655,324.99 2.17
20.01 to 25.00%.............. 250 2,338,566.55 1.91
25.01 to 30.00%.............. 242 2,695,831.83 2.21
30.01 to 35.00%.............. 240 2,730,720.67 2.23
35.01 to 40.00%.............. 240 3,529,692.75 2.89
40.01 to 45.00%.............. 198 3,190,344.85 2.61
45.01 to 50.00%.............. 241 3,740,973.86 3.06
50.01 to 55.00%.............. 175 3,133,592.89 2.56
55.01 to 60.00%.............. 207 3,589,886.37 2.94
60.01 to 65.00%.............. 189 3,352,223.74 2.74
65.01 to 70.00%.............. 194 4,075,959.37 3.34
70.01 to 75.00%.............. 197 4,543,416.62 3.72
75.01 to 80.00%.............. 221 5,555,240.29 4.55
80.01 to 85.00%.............. 173 4,863,232.89 3.98
85.01 to 90.00%.............. 221 6,095,732.91 4.99
90.01 to 95.00%.............. 270 7,125,893.27 5.83
95.01 to 100.00%............... 1,726 54,644,667.73 44.72
100.01 to 105.00%............... 9 540,616.19 0.44
----- --------------- ------
Total................. 6,144 $122,190,248.56 100.00%
===== =============== ======
The minimum and maximum Credit Utilization Rates of the Initial HELOCs as
of the Cut-Off Date are 1.04% and 100.82%, respectively, and the weighted
average is approximately 77.11%.
CREDIT LIMITS
PERCENT OF
NUMBER OF INITIAL HELOCS BY
RANGE OF CREDIT LIMITS ($) INITIAL HELOCS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
- -------------------------- -------------- -------------------- --------------------
$0.01 to $ 25,000.00...... 2,934 $ 34,790,326.20 28.47%
$25,000.01 to $ 50,000.00...... 2,160 44,598,649.07 36.50
$50,000.01 to $ 75,000.00...... 442 12,464,797.09 10.20
$75,000.01 to $100,000.00....... 461 16,371,072.23 13.40
$100,000.01 to $125,000.00....... 30 2,010,608.94 1.65
$125,000.01 to $150,000.00....... 49 3,539,746.93 2.90
$150,000.01 to $175,000.00....... 14 1,229,816.67 1.01
$175,000.01 to $200,000.00....... 23 1,735,573.01 1.42
$200,000.01 to $225,000.00....... 4 437,760.86 0.36
$225,000.01 to $250,000.00....... 12 1,552,032.28 1.27
$250,000.01 to $275,000.00....... 3 286,402.00 0.23
$275,000.01 to $300,000.00....... 1 217,948.67 0.18
$300,000.01 to $325,000.00....... 1 106,880.05 0.09
$350,000.01 to $375,000.00....... 2 672,000.00 0.55
$375,000.01 to $400,000.00....... 2 316,301.10 0.26
$450,000.01 to $475,000.00....... 1 10,200.00 0.01
$475,000.01 to $500,000.00....... 3 1,175,136.52 0.96
$550,000.01 to $575,000.00....... 1 20,000.00 0.02
$650,000.01 to $675,000.00....... 1 654,996.94 0.54
----- ------- ------- -------
Total.......... 6,144 $122,190,248.56 100.00%
===== =============== =======
The minimum and maximum Credit Limits of the Initial HELOCs as of the
Cut-Off Date are $6,800 and $655,000, respectively, and the weighted average
is approximately $65,624.95.
MAXIMUM LOAN RATES
PERCENT OF
NUMBER OF INITIAL HELOCS BY
MAXIMUM LOAN RATES (%) INITIAL HELOCS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
- ---------------------- -------------- -------------------- --------------------
14.001% to 15.000%................ 124 $ 1,844,729.95 1.51%
15.001% to 16.000%................ 94 1,512,498.60 1.24
17.001% to 18.000%................ 5,926 118,833,020.01 97.25
----- --------------- ------
Total.................. 6,144 $122,190,248.56 100.00%
===== =============== ======
The minimum and maximum Loan Rates of the Initial HELOCs as of the
Cut-Off Date are 15.000% and 17.750%, respectively, and the weighted average
is approximately 17.687%.
MONTHS REMAINING TO SCHEDULED MATURITY
PERCENT OF
NUMBER OF INITIAL HELOCS BY
RANGE OF MONTHS INITIAL HELOCS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
- --------------- -------------- -------------------- --------------------
0 to 60 ........................ 5 $ 97,207.85 0.08%
61 to 120 ........................ 4,584 80,429,463.15 65.82
121 to 180 ........................ 234 7,494,860.18 6.13
181 to 240 ........................ 2 51,328.47 0.04
241 to 300 ........................ 1,319 34,117,388.91 27.92
----- --------------- ------
Total.................... 6,144 $122,190,248.56 100.00%
===== =============== ======
The weighted average Months Remaining to Scheduled Maturity of the
Initial HELOCs as of the Cut-Off Date is approximately 168 months.
ORIGINATION YEAR
PERCENT OF
NUMBER OF INITIAL HELOCS BY
ORIGINATION YEAR INITIAL HELOCS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
- ---------------- -------------- -------------------- --------------------
1989........................................ 3 $ 96,110.11 0.08%
1990........................................ 3 26,451.23 0.02
1992........................................ 5 209,276.35 0.17
1993........................................ 12 163,718.06 0.13
1994........................................ 18 638,347.17 0.52
1995........................................ 32 640,380.19 0.52
1996........................................ 49 798,376.16 0.65
1997........................................ 124 1,958,923.61 1.60
1998........................................ 2,235 36,579,251.97 29.94
1999........................................ 3,663 81,079,413.71 66.36
----- --------------- ------
Total......................... 6,144 $122,190,248.56 100.00%
===== =============== ======
LIEN PRIORITY
PERCENT OF
NUMBER OF INITIAL HELOCS BY
LIEN POSITION INITIAL HELOCS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
- ------------- -------------- -------------------- --------------------
First........................................ 124 $ 5,213,470.34 4.27%
Second....................................... 6,020 116,976,778.22 95.73
----- --------------- ------
Total............................. 6,144 $122,190,248.56 100.00%
===== =============== ======
DEBT-TO-INCOME RATIOS
PERCENT OF
NUMBER OF INITIAL HELOCS BY
RANGE OF DEBT-TO-INCOME RATIOS (%) INITIAL HELOCS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
- ---------------------------------- -------------- -------------------- --------------------
0.00% to 9.99%....................... 34 $ 1,524,245.35 1.25%
10.00% to 19.99%........................ 333 7,209,536.27 5.90
20.00% to 29.99%........................ 1,346 22,727,413.90 18.60
30.00% to 39.99%........................ 2,087 38,817,272.22 31.77
40.00% to 49.99%........................ 1,985 43,132,892.28 35.30
50.00% to 59.99%........................ 289 6,384,028.30 5.22
60.00% to 69.99%........................ 42 1,654,658.24 1.35
70.00% to 79.99%........................ 28 740,202.00 0.61
----- --------------- ------
Total....................................... 6,144 $122,190,248.56 100.00%
===== =============== ======
TEASER EXPIRATION MONTH
PERCENT OF
NUMBER OF INITIAL HELOCS BY
TEASER EXPIRATION MONTH INITIAL HELOCS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
No Teaser.............................. 2,532 $ 47,640,568.34 38.99%
June 1999.............................. 797 15,915,122.62 13.02
July 1999.............................. 566 11,376,367.08 9.31
August 1999............................ 548 9,782,376.73 8.01
September 1999......................... 783 17,283,702.13 14.14
October 1999........................... 608 13,055,685.88 10.68
November 1999.......................... 308 7,121,225.78 5.83
December 1999.......................... 2 15,200.00 0.01
----- --------------- ------
Total................... 6,144 $122,190,248.56 100.00%
===== =============== ======
The weighted average months to first gross rate adjustment expiration
date of the Initial HELOCs as of the Cut-Off Date is approximately 3 months.
DOCUMENTATION TYPE
PERCENT OF
NUMBER OF INITIAL HELOCS BY
DOCUMENTATION INITIAL HELOCS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
- ------------- -------------- -------------------- --------------------
Alternative............................... 155 $ 2,764,445.08 2.26%
Expanded No Income No Appraisal........... 1 1,836.82 0.00
Express................................... 47 621,223.06 0.51
Family First Division..................... 604 10,340,547.67 8.46
Full...................................... 4 110,298.67 0.09
No Income No Appraisal ("NINA")........... 271 3,839,075.16 3.14
No Income Verification ("NIV")............ 108 2,463,402.90 2.02
Quick..................................... 4 68,645.68 0.06
Relocation................................ 1 3,426.53 0.00
Select.................................... 173 6,655,206.27 5.45
Standard.................................. 4,545 90,573,639.86 74.13
Streamline................................ 39 1,269,051.91 1.04
Super Express 192 3,479,448.95 2.85
----- --------------- ------
Total............................... 6,144 $122,190,248.56 100.00%
===== =============== ======
INITIAL HELS
The Initial HELs were originated by the Seller generally in accordance
with the underwriting standards of the Seller. The Initial HELs are fixed
rate, closed-end home equity loans evidenced by the related promissory notes
(the "MORTGAGE NOTES") and secured by the related mortgages or deeds of trusts
(with respect to HELOCs and HELs, the "MORTGAGES") on the related residential
properties (with respect to HELOCs and HELs, the "MORTGAGED PROPERTIES").
Approximately 98.44% of the Initial HELs (by aggregate Cut-Off Date Balance)
are secured by second mortgages or deeds of trust and the remainder are
secured by first mortgages or deeds of trust. The Mortgaged Properties
securing the Initial HELs consist primarily of residential properties. As to
100.00% of the Initial HELs, the borrower represented at the time of
origination that the related Mortgaged Property would be owner occupied as a
primary or second home.
All percentages of the Initial HELs described herein are approximate
percentages determined (except as otherwise indicated) by the aggregate
Cut-Off Date Balance of the Initial HELs.
The Cut-Off Date Balance of the Initial HELs is $59,185,591.24. As of the
Cut-Off Date, no Initial HEL is 30 days or more delinquent. With respect to
the Initial HELs, the average Cut-Off Date Balance is approximately
$25,196.08, the minimum Cut-Off Date Balance is $1,344.94, the maximum Cut-Off
Date Balance is $198,817.44, the lowest Loan Rate and the highest Loan Rate on
the Cut-Off Date are 5.875% and 13.950% per annum, respectively, and the
weighted average Loan Rate on the Cut-Off Date is approximately 9.712% per
annum. The minimum and maximum Combined Loan-to-Value Ratios as of the Cut-Off
Date are 2.00% and 100.00% respectively, and the weighted average Combined
Loan-to-Value Ratio based on the Cut-Off Date Balance of the Initial HELs is
approximately 80.65 % as of the Cut-Off Date. The latest scheduled maturity of
any Initial HEL is May 28, 2024. With respect to 37.53% and 4.70% of the
Initial HELs, the related Mortgaged Properties are located in the States of
California and Michigan, respectively.
LOAN TERMS OF THE HELS
The Loan Rate of each Initial HEL is the per annum interest rate required
to be paid by the Mortgagor under the terms of the related Mortgage Note. The
Loan Rate borne by each Initial HEL is fixed as of the date of origination of
such Initial HEL.
Interest on each HEL is charged on that part of the principal which has
not been paid. Interest is charged from the date the loan is advanced until
the full amount of the principal has been paid. Interest on each HEL is
calculated on a daily basis. The amount of the daily interest is equal to the
annual interest rate divided by the number of days in the year times the
outstanding principal balance.
Each Initial HEL had a term to maturity from the date of origination of
not more than 301 months. The initial HELs provide for substantially equal
payments in an amount sufficient to amortize the HELs over their terms.
INITIAL HEL CHARACTERISTICS
Set forth below is a description of certain additional characteristics of
the Initial HELs as of the Cut-Off Date. Unless otherwise specified, all
principal balances of the Initial HELs are as of the Cut-Off Date and are
rounded to the nearest dollar. All percentages are approximate percentages by
the aggregate Cut-Off Date Balance of the Initial HELs (except as indicated
otherwise).
PROPERTY TYPE
PERCENT OF
NUMBER OF INITIAL HELS BY
PROPERTY TYPE INITIAL HELS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
Two to Four Family...................... 16 $ 386,094.28 0.65%
Two to Four Unit (Duplex-Fourplex)...... 2 19,659.89 0.03
Condominium............................. 134 2,489,818.99 4.21
Manufactured............................ 4 54,585.38 0.09
PUD..................................... 134 3,534,778.05 5.97
Single-Family Dwelling.................. 2,059 52,700,654.65 89.04
------ ------------------ --------
Total............ 2,349 $59,185,591.24 100.00%
====== ================== ========
OCCUPANCY TYPES
PERCENT OF
OCCUPANCY NUMBER OF INITIAL HELS BY
(AS INDICATED BY BORROWER) INITIAL HELS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
Owner Occupied - Primary Home........... 2,338 $ 58,836,692.91 99.41%
Owner Occupied - Secondary Home......... 11 348,898.33 0.59
------- --------- ----------- -------
TOTAL............ 2,349 $59,185,591.24 100.00%
======= ===================== =======
PRINCIPAL BALANCES
PERCENT OF
NUMBER OF INITIAL HELS BY
RANGE OF PRINCIPAL BALANCES ($) INITIAL HELS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
$0.00 to $ 25,000.00..... 1,503 $ 23,481,479.66 39.67%
$25,000.01 to $ 50,000.00..... 680 23,690,362.03 40.03
$50,000.01 to $ 75,000.00..... 119 7,335,615.54 12.39
$75,000.01 to $100,000.00...... 36 3,125,356.10 5.28
$100,000.01 to $125,000.00...... 5 562,263.57 0.95
$125,000.01 to $150,000.00...... 3 432,498.70 0.73
$150,000.01 to $175,000.00...... 1 162,132.28 0.27
$175,000.01 to $200,000.00...... 2 395,883.36 0.67
--------- -------------------- -------
Total............. 2,349 $59,185,591.24 100.00%
========= ==================== =======
The minimum and maximum Principal Balances of the Initial HELs as of the
Cut-Off Date are $1,344.94 and $198,817.44, respectively, and the average is
approximately $25,196.08.
COMBINED LOAN-TO-VALUE RATIOS
PERCENT OF
RANGE OF COMBINED NUMBER OF INITIAL HELS BY
LOAN-TO-VALUE RATIOS(%) INITIAL HELS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
0.001% to 5.000%.................. 2 $ 54,031.04 0.09%
5.001% to 10.000%.................. 6 93,629.24 0.16
10.001% to 15.000%.................. 9 161,929.78 0.27
15.001% to 20.000%.................. 13 244,277.81 0.41
20.001% to 25.000%.................. 14 257,722.03 0.44
25.001% to 30.000%.................. 24 541,712.91 0.92
30.001% to 35.000%.................. 19 461,517.17 0.78
35.001% to 40.000%.................. 16 522,474.64 0.88
40.001% to 45.000%.................. 19 450,311.22 0.76
45.001% to 50.000%.................. 29 665,166.36 1.12
50.001% to 55.000%.................. 35 987,698.59 1.67
55.001% to 60.000%.................. 32 903,226.62 1.53
60.001% to 65.000%.................. 63 2,002,200.02 3.38
65.001% to 70.000%.................. 77 2,101,012.54 3.55
70.001% to 75.000%.................. 138 4,268,739.83 7.21
75.001% to 80.000%.................. 342 8,516,328.76 14.39
80.001% to 85.000%.................. 255 5,651,461.16 9.55
85.001% to 90.000%.................. 989 24,157,385.75 40.82
90.001% to 95.000%.................. 119 3,016,915.34 5.10
95.001% to 100.000%.................. 148 4,127,850.43 6.97
----- -------------- ------
Total................... 2,349 $59,185,591.24 100.00%
===== ============== ======
The minimum and maximum Combined Loan-to-Value Ratios of the Initial HELs
as of the Cut-Off Date are 2.00% and 100.00%, respectively, and the weighted
average is approximately 80.65%.
GEOGRAPHICAL DISTRIBUTIONS
PERCENT OF
NUMBER OF INITIAL HELS BY
STATE INITIAL HELS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
California............................ 783 $ 22,210,996.23 37.53%
Michigan.............................. 129 2,781,200.85 4.70
Massachusetts......................... 89 2,431,016.20 4.11
New Jersey............................ 86 2,343,680.83 3.96
Pennsylvania.......................... 111 2,280,223.28 3.85
Washington............................ 93 2,160,144.06 3.65
Arizona............................... 99 2,043,202.47 3.45
New York.............................. 60 1,814,858.69 3.07
Florida............................... 83 1,714,741.94 2.90
Illinois.............................. 71 1,601,997.04 2.71
Georgia............................... 63 1,517,381.77 2.56
Virginia.............................. 56 1,509,042.04 2.55
Other(1).............................. 626 14,777,105.84 24.97
----- -------------- -------
Total.............. 2,349 $59,185,591.24 100.00%
===== ============== =======
(1) Other includes states and the District of Columbia with under 2.5% concentrations individually.
JUNIOR RATIOS(1)(2)
PERCENT OF
NUMBER OF INITIAL HELS BY
RANGE OF JUNIOR RATIOS (%) INITIAL HELS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
0.000%................................... 53 $ 1,604,353.54 2.71%
0.001% to 9.999%................... 359 4,221,328.91 7.13
10.000% to 19.999%................... 1,152 25,301,114.27 42.75
20.000% to 29.999%.................... 479 15,033,029.62 25.40
30.000% to 39.999%................... 168 7,152,734.69 12.09
40.000% to 49.999%................... 68 2,930,852.14 4.95
50.000% to 59.999%................... 32 1,482,306.46 2.50
60.000% to 69.999%................... 19 682,592.46 1.15
70.000% to 79.999%................... 9 352,590.38 0.60
80.000% to 89.999%................... 4 152,711.02 0.26
90.000% to 99.999%................... 6 271,977.75 0.46
-------- -------------- -------
Total..................... 2,349 $59,185,591.24 100.00%
======== ============== =======s
(1) The Junior Ratio of a HEL is the ratio (expressed as a percentage) of
the original principal balance of such HEL to the sum of such original
principal balance and the outstanding balance of any senior mortgage computed
as of the date such HEL is underwritten.
(2) The weighted average Junior Ratio of the Initial HELs as of the
Cut-Off Date is approximately 22.43%.
LOAN RATES
PERCENT OF
NUMBER OF INITIAL HELS BY
RANGE OF LOAN RATES(%) INITIAL HELS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
5.001% to 6.000%.................... 1 $ 6,929.40 0.01%
6.001% to 7.000%.................... 72 559,452.30 0.95
7.001% to 8.000%................... 9 228,264.54 0.39
8.001% to 9.000%................... 472 14,186,415.33 23.97
9.001% to 10.000%................... 886 23,116,573.51 39.06
10.001% to 11.000%................... 762 17,256,502.95 29.16
11.001% to 12.000%................... 138 3,606,652.10 6.09
12.001% to 13.000%................... 8 213,168.88 0.36
13.001% to 14.000%................... 1 11,632.23 0.02
----- -------------- ------
Total............... 2,349 $59,185,591.24 100.00%
===== ============== ======
The minimum and maximum Loan Rates of the Initial HELs as of the Cut-Off
Date are 5.875% and 13.950%, respectively, and the weighted average is
approximately 9.712%.
MONTHS REMAINING TO SCHEDULED MATURITY
PERCENT OF
NUMBER OF INITIAL HELS BY
RANGE OF MONTHS INITIAL HELS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
0 to 60............................. 317 $ 4,980,085.46 8.41%
61 to 120............................ 690 15,008,530.55 25.36
121 to 180............................ 1,244 35,926,936.07 60.70
181 to 240............................ 59 1,913,781.72 3.23
241 to 300............................ 39 1,356,257.44 2.29
Total..................... 2,349 $59,185,591.24 100.00%
The weighted average months remaining to scheduled maturity as of the
Cut-Off Date is approximately 155 months.
LIEN PRIORITY
PERCENT OF
NUMBER OF INITIAL HELS BY
LIEN POSITION INITIAL HELS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
First..................................... 34 $ 924,111.48 1.56%
Second.................................... 2,315 58,261,479.76 98.44
----- -------------- -------
Total............ 2,349 $59,185,591.24 100.00%
===== ============== ======
DEBT-TO-INCOME RATIOS
PERCENT OF
NUMBER OF INITIAL HELS BY
RANGE OF DEBT-TO-INCOME RATIOS (%) INITIAL HELS CUT-OFF DATE BALANCE CUT-OFF DATE BALANCE
0.00% to 9.99%...................... 16 $ 406,237.07 0.69%
10.00% to 19.99%...................... 120 2,422,981.77 4.09
20.00% to 29.99%...................... 446 10,144,697.93 17.14
30.00% to 39.99%...................... 864 21,835,066.79 36.89
40.00% to 49.99%...................... 827 21,955,566.71 37.10
50.00% to 59.99%...................... 65 2,165,195.50 3.66
60.00% to 69.99%...................... 11 255,845.47 0.43
----- -------------- ------
Total............................... 2,349 $59,185,591.24 100.00%
===== ============== ======
DOCUMENTATION TYPE
PERCENT OF
NUMBER OF CUT-OFF INITIAL HELS BY
DOCUMENTATION INITIAL HELS DATE BALANCE CUT-OFF DATE BALANCE
Alternative.............................. 3 $ 37,058.28 0.06%
Express.................................. 17 448,853.96 0.76
Family First Division.................... 132 3,016,344.06 5.10
Full..................................... 1 20,914.48 0.04
NINA..................................... 348 7,151,614.46 12.08
NIV...................................... 188 5,144,450.06 8.69
Select................................... 18 681,291.64 1.15
Standard................................. 1,503 39,434,126.88 66.63
Streamline............................... 5 265,505.44 0.45
Super Express............................ 134 2,985,431.98 5.04
---- --------------- -------
Total............. 2,349 $59,185,591.24 100.00%
===== ============== =======
The information set forth in the preceding sections is based upon
information provided by the Seller and tabulated by the Depositor. The
Depositor makes no representation as to the accuracy or completeness of such
information.
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS, THE PRE-FUNDING ACCOUNT
AND THE FUNDING ACCOUNT
The Purchase Agreement permits the Issuer to acquire Subsequent Mortgage
Loans. Accordingly, the statistical characteristics of the Mortgage Loans upon
the acquisition of the Subsequent Mortgage Loans may vary somewhat from the
statistical characteristics of the Initial Mortgage Loans as of the Cut-Off
Date as presented in this Prospectus Supplement. During the Revolving Period,
it is expected that Subsequent Mortgage Loans acquired with amounts withdrawn
from the Pre-Funding Account or the Funding Account will consist primarily of
HELOCs.
Each Subsequent Mortgage Loan will have been underwritten substantially
in accordance with the criteria set forth herein under "Description of the
Mortgage Loans--Underwriting Standards." Subsequent Mortgage Loans will be
transferred to the Issuer pursuant to subsequent transfer instruments (the
"SUBSEQUENT TRANSFER AGREEMENTS") between the Seller and the Issuer. In
connection with the purchase of Subsequent Mortgage Loans on such dates of
transfer (the "SUBSEQUENT TRANSFER DATES"), the Issuer will be required to pay
to the Seller from amounts on deposit in the Pre-Funding Account or the
Funding Account a cash purchase price of 100% of the Principal Balance
thereof. In each instance in which Subsequent Mortgage Loans are transferred
to the Trust Estate pursuant to a Subsequent Transfer Agreement, the Issuer
will designate a cut-off date (such cut-off date, the "SUBSEQUENT CUT-OFF
DATE") with respect to the Subsequent Mortgage Loans acquired on such date.
The amount paid from the Pre-Funding Account or Funding Account, as
applicable, on each Subsequent Transfer Date will not include accrued interest
on the Subsequent Mortgage Loans. Following each Subsequent Transfer Date, the
aggregate Principal Balance of the Mortgage Loans will increase by an amount
equal to the aggregate Principal Balance of the Subsequent Mortgage Loans so
acquired and the amount in the Pre-Funding Account or Funding Account, as
applicable, will decrease accordingly.
Any conveyance of Subsequent Mortgage Loans on a Subsequent Transfer Date
is subject to certain conditions including, but not limited to: (a) each such
Subsequent Mortgage Loan must satisfy the representations and warranties
specified in the related Subsequent Transfer Agreement and the Purchase
Agreement; (b) the Seller will select such Subsequent Mortgage Loans in a
manner that it reasonably believes is not adverse to the interests of the
holders of the Term Notes (the "TERM NOTEHOLDERS") or the holders of the
Variable Funding Notes (together with the Term Noteholders, the "NOTEHOLDERS")
or the Enhancer; (c) the Seller will deliver certain opinions of counsel
acceptable to the Enhancer and the Indenture Trustee with respect to the
validity of the conveyance of such Subsequent Mortgage Loans; and (d) as of
each Subsequent Cut-Off Date, each Subsequent Mortgage Loan will satisfy the
following criteria: (i) such Subsequent Mortgage Loan may not be 30 or more
days contractually delinquent as of the related Subsequent Cut-Off Date; (ii)
the original stated term to maturity of such Subsequent Mortgage Loan will not
exceed 360 months; (iii) the lien securing any such Subsequent Mortgage Loan
must be a first or second lien priority; (iv) such Subsequent Mortgage Loan
must have an outstanding Principal Balance of at least $1,000 and no more than
$511,000 as of the Subsequent Cut-Off Date; (v) such Subsequent Mortgage Loan
will be underwritten substantially in accordance with the criteria set forth
under "Description of the Mortgage Loans--Underwriting Standards" herein; (vi)
such Subsequent Mortgage Loan must have a Combined-Loan-to-Value Ratio at
origination of no more than 100%; (vii) such Subsequent Mortgage Loan shall
not provide for negative amortization; and (viii) following the purchase of
such Subsequent Mortgage Loan by the Issuer, the Mortgage Loans included in
the assets of the Issuer (the "TRUST ESTATE") must have a weighted average
Loan Rate, a weighted average remaining term to maturity and a weighted
average Combined Loan-to-Value Ratio at origination, as of each respective
Subsequent Cut-Off Date, which would not vary materially from the Initial
Mortgage Loans included initially in the Trust Estate. In addition, the
Indenture Trustee will not agree to any transfer of Subsequent Mortgage Loans
without the approval of the Enhancer, which approval shall not be unreasonably
withheld; provided, however that the Enhancer will provide notice of approval
or disapproval within 5 Business Days or such Subsequent Mortgage Loans will
be deemed approved by the Enhancer. Subsequent Mortgage Loans with
characteristics materially varying from those set forth above may be purchased
by the Issuer and included in the Trust Estate with the approval of the
Enhancer; provided, however, that the addition of such Subsequent Mortgage
Loans will not materially affect the aggregate characteristics of the entire
pool of Mortgage Loans.
THE PRE-FUNDING ACCOUNT. The Indenture Trustee will establish an account
in its name designated the "pre-funding account" (the "PRE-FUNDING ACCOUNT"),
and approximately $68,624,160.20 (the "ORIGINAL PRE-FUNDED AMOUNT") will be
deposited therein on the Closing Date from the net proceeds of the sale of the
Securities. Monies in the Pre-Funding Account will be applied during the
period from the Closing Date to the earliest of: (i) the date on which the
amount on deposit in the Pre-Funding Account is less than $100,000; (ii)
December 31, 1999 or (iii) the occurrence of a Managed Amortization Event or a
Rapid Amortization Event (the "PRE-FUNDING PERIOD") to purchase Subsequent
Mortgage Loans from the Seller. The Pre-Funding Account will be part of the
Trust Estate, but monies on deposit therein will not be available to cover
losses on or in respect of the Mortgage Loans. Any portion of the Original
Pre-Funded Amount remaining on deposit in the Pre-Funding Account at the end
of the Pre-Funding Period will be applied first to acquire any additional
draws under the HELOCs during the period from the Closing Date to but
excluding the beginning of the Rapid Amortization Period (the "ADDITIONAL
BALANCES") and thereafter will be deposited into the Funding Account. Monies
on deposit in the Pre-Funding Account may be invested in Permitted Investments
as provided in the Servicing Agreement. Net income on investment of funds in
the Pre-Funding Account will be deposited into or credited to an account held
by the Indenture Trustee designated the "capitalized interest account" (the
"CAPITALIZED INTEREST ACCOUNT"). There can be no assurance that a sufficient
number of Subsequent Mortgage Loans will be available for application of the
entire Original Pre-Funded Amount.
THE FUNDING ACCOUNT. The Notes will be subject to redemption in part on
the Payment Date immediately succeeding the date on which the Revolving Period
ends, in the event that any amounts remain on deposit in the Funding Account,
exclusive of any investment earnings thereon, after giving effect to the
purchase by the Issuer of all Subsequent Mortgage Loans and Additional
Balances, including any such purchase on the date on which the Revolving
Period ends.
NON-RECORDATION OF ASSIGNMENTS
Subject to the consent of the Enhancer, the Seller will not be required
to record assignments of the Mortgages to the Indenture Trustee in the real
property records of the states in which the related Mortgaged Properties are
located. The Seller will retain record title to such Mortgages on behalf of
the Indenture Trustee and the Securityholders. Although the recordation of the
assignments of the Mortgages in favor of the Indenture Trustee is not
necessary to effect a transfer of the Mortgage Loans to the Indenture Trustee,
if the Seller were to sell, assign, satisfy or discharge any Mortgage Loan
prior to recording the related assignment in favor of the Indenture Trustee,
the other parties to such sale, assignment, satisfaction or discharge may have
rights superior to those of the Indenture Trustee. In some states, in the
absence of such recordation of the assignments of the Mortgages, the transfer
to the Indenture Trustee of the Mortgage Loans may not be effective against
certain creditors or purchasers from the Seller or a trustee in bankruptcy
thereof. If such other parties, creditors or purchasers have rights to the
Mortgage Loans that are superior to those of the Indenture Trustee,
Securityholders could lose the right to future payments of principal and
interest to the extent that such rights are not otherwise enforceable in favor
of the Indenture Trustee under the applicable Mortgage Documents.
AMENDMENTS TO MORTGAGE DOCUMENTS
Subject to applicable law, the Servicer may change the terms of the
Mortgage Documents at any time, provided that such changes (i) do not
adversely affect the interests of the Securityholders or the Enhancer and (ii)
are consistent with prudent business practice. In addition, the Servicing
Agreement will permit the Servicer, with certain limitations described
therein, to increase the credit limit or reduce the margin of a HELOC and to
reduce the Loan Rate on a HEL.
OPTIONAL REMOVAL OF MORTGAGE LOANS
In certain instances in which a Mortgagor either (i) requests an increase
in the credit limit on the related HELOC above the limit stated on the Credit
Line Agreement, (ii) requests to place a lien on the related Mortgaged
Property senior to the lien of the related Mortgage Loan, or (iii) refinances
the senior lien resulting in a Combined Loan-to-Value Ratio above the previous
Combined Loan-to-Value Ratio for such loan, the Servicer will have the option
to purchase from the Trust Estate the related HELOC at a price equal to the
Repurchase Price (as defined herein).
UNDERWRITING STANDARDS
All of the Mortgage Loans will be acquired by the Depositor from the
Seller. The following is a brief description of the various underwriting
standards and procedures applicable to the Mortgage Loans.
The Seller's underwriting standards with respect to the Mortgage Loans
generally will conform to those published in the GMACM Underwriting Guidelines
(as modified from time to time, the "GMACM UNDERWRITING GUIDE"), including the
provisions of the GMACM Underwriting Guide applicable to the GMAC Mortgage
Home Equity Program. The underwriting standards as set forth in the GMACM
Underwriting Guide are continually revised based on prevailing conditions in
the residential mortgage market and the market for mortgage securities.
The underwriting standards set forth in the GMACM Underwriting Guide with
respect to Mortgage Loans originated or acquired under the GMAC Mortgage Home
Equity Program provide for varying levels of documentation. For standard
documented loans, a prospective borrower is required to fill out a detailed
application providing pertinent credit information, including tax returns if
they are self-employed or received income from dividends and interest, rental
properties or other income which can be verified via tax returns, and a credit
report is obtained. In addition, a borrower may demonstrate income and
employment directly by providing alternative documentation in the form of a
pay stub and a W-2. These loans require drive-by appraisals for property
values of $500,000 or less, and full appraisals for property values of more
than $500,000 and for all three and four unit properties.
Under the GMACM Underwriting Guide, loans may also be originated under
the "Quick Program," a no income verification program for self-employed
borrowers. For such loans, only a credit check and an appraisal are required.
Such loans are generally limited to a loan amount of $50,000 or less, and are
limited to primary residences. In addition, the borrower may be qualified
under a "No Income/No Appraisal" program. Under such a program, a credit check
is required, and the Combined Loan-to-Value Ratio is limited to 80%, or 90% in
the case of GM and GM subsidiary employees under the "Family First Direct"
program. The borrower is qualified on his or her stated income in the
application, the Combined Loan-to-Value Ratio is based on the borrower's
stated value of the property and no appraisal is made, except that with
respect to Combined Loan-to-Value Ratios over 80% under the "Family First
Direct" program, the borrower must supply evidence of value. The maximum loan
under such program is generally limited to $40,000 ($250,000 under the "Family
First Direct" program). In addition, the borrower may be qualified under a "No
Income Verification" program. Under such program, a credit check is required,
and the Combined Loan-to-Value Ratio is limited to 90%. The borrower is
qualified based on the income stated on the application. Such loans are
generally limited to an amount of $100,000 or less, and are limited to primary
residences. These loans require drive-by appraisals for property values of
$500,000 or less, and full appraisals for property values of more than
$500,000.
In addition, the GMACM Underwriting Guide provides for loans under its
"Select" program to employees and retirees of GM. Such loans are made to
executives of GM or affiliates of GM, dealer principals and general managers
with a minimum annual base salary of $75,000 or to GM or GM affiliate retirees
with a minimum base retirement annual income of $60,000. Underwriting is
subject to a maximum Combined Loan-to-Value Ratio of 100% for primary
residences and a maximum Combined Loan-to-Value Ratio of 80% for second homes,
and a maximum loan amount of $250,000. The Combined Loan-to-Value Ratio is
based on the borrower's stated value and no appraisal is made for Combined
Loan-to-Value Ratios of 80% or less. The borrower must supply evidence of
value when the property value is under $500,000 and the Combined Loan-to-Value
Ratio is between 80% and 90%. A drive-by appraisal is required for a Combined
Loan-to-Value of Ratio greater than 90% and a property value under $500,000. A
full appraisal is required for a Combined Loan-to-Value Ratio greater than 90%
with property values of $500,000 and above.
The HELOCs included in the Mortgage Pool generally were originated
subject to a maximum Combined Loan-to-Value Ratio of 100.00%, and the HELs
included in the Mortgage Pool generally were originated subject to a maximum
Combined Loan-to-Value Ratio of 100.00%. Additionally, loans were generally
originated with a maximum total monthly debt to income ratio of 45%, although
variances are permitted based on compensating factors. There can be no
assurance that the Combined Loan-to-Value Ratio or the debt to income ratio
for any Mortgage Loans will not increase from the levels established at
origination.
The underwriting standards set forth in the GMACM Underwriting Guide with
respect to Mortgage Loans originated under the GMACM Home Equity Program may
be varied in appropriate cases. There can be no assurance that every Mortgage
Loan was originated in conformity with the applicable underwriting standards
in all material respects, or that the quality or performance of the Mortgage
Loans will be equivalent under all circumstances.
GMAC Mortgage's underwriting standards include a set of specific criteria
pursuant to which the underwriting evaluation is made. However, the
application of such underwriting standards does not imply that each specific
criterion was satisfied individually. Rather, a Mortgage Loan will be
considered to be originated in accordance with a given set of underwriting
standards if, based on an overall qualitative evaluation, the loan is in
substantial compliance with such underwriting standards. For example, a
Mortgage Loan may be considered to comply with a set of underwriting
standards, even if one or more specific criteria included in such underwriting
standards were not satisfied, if other factors compensated for the criteria
that were not satisfied or if the Mortgage Loan is considered to be in
substantial compliance with the underwriting standards.
Conformity with the applicable underwriting standards will vary depending
on a number of factors relating to the specific Mortgage Loan, including the
principal amount or Credit Limit, the Combined Loan-to-Value Ratio, the loan
type or loan program, and the applicable credit score of the related borrower
used in connection with the origination of the Mortgage Loan (as determined
based on a credit scoring model acceptable to GMAC Mortgage). Credit scores
are not used to deny loans. However, credit scores are used as a "tool" to
analyze a borrower's credit. Generally, such credit scoring models provide a
means for evaluating the information about a prospective borrower that is
available from a credit reporting agency. The underwriting criteria applicable
to any program under which the Mortgage Loans may be originated may provide
that qualification for the loan, the level of review of the loan's
documentation, or the availability of certain loan features (such as maximum
loan amount, maximum Combined Loan-to-Value Ratio, property type and use, and
documentation level) may depend on the borrower's credit score.
The following is a brief description of the underwriting standards under
the GMACM Home Equity Program for standard documentation loan programs.
Initially, a prospective borrower (other than a trust if the trust is the
borrower) is required to fill out a detailed application providing pertinent
credit information. As part of the application, the borrower is required to
provide a statement of income and expenses, as well as an authorization to
apply for a credit report which summarizes the borrower's credit history with
merchants and lenders and any record of bankruptcy. The borrower generally
must show, among other things, a minimum of one year credit history reported
on the credit report and that no mortgage delinquencies (thirty days or
greater) in the past 12 months existed. Borrowers who have less than a 12
month first mortgage payment history may be subject to certain additional
lending restrictions. In addition, under the GMACM Home Equity Program,
generally borrowers with a previous foreclosure or bankruptcy within the past
five years may not be allowed and a borrower generally must satisfy all
judgments, liens and other legal actions with an original amount of $1,000 or
greater prior to closing. Borrowers with a previous foreclosure or bankruptcy
generally do not qualify for a loan unless extenuating credit circumstances
beyond their control are documented. In addition, an income verification is
obtained. If a prospective borrower is self-employed, the borrower may be
required to submit copies of signed tax returns. The borrower may also be
required to authorize verification of deposits at financial institutions where
the borrower has accounts. In the case of a Mortgage Loan secured by a
property owned by a trust, the foregoing procedures may be waived where the
Credit Line Agreement is executed on behalf of the trust.
An appraisal may be made of the Mortgaged Property securing each Mortgage
Loan. Such appraisals may be performed by appraisers independent from or
affiliated with the GMAC Mortgage or their affiliates. Such appraisals,
however, will not establish that the Mortgaged Properties provide assurance of
repayment of the Mortgage Loans. See "Risk Factors-Adequacy of the Mortgaged
Properties as Security for the Mortgage Loans" herein. The appraiser may be
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. In certain circumstances, the
appraiser is only required to perform an exterior inspection of the property.
The appraisal is based on various factors, including the market value of
comparable homes and the cost of replacing the improvements. Each appraisal is
required to be dated no more than 180 days prior to the date of approval of
the Mortgage Loan; provided, that depending on the Credit Limit an earlier
appraisal may be utilized if such appraisal was made not earlier than one year
prior to the date of origination of the mortgage loan and the related
appraiser certifies that the value of the related mortgaged property has not
declined since the date of the original appraisal or if a field review or
statistical property valuation is obtained. Title searches are undertaken in
most cases, and title insurance is required on all Mortgage Loans with Credit
Limits in excess of $100,000.
Under the GMACM Home Equity Program, the Combined Loan-to-Value Ratio is
generally calculated by reference to the lower of the appraised value as so
determined or the sales price, if the Mortgage Loan is originated concurrently
with the origination of a first mortgage loan. In all other cases, the value
used is generally the appraised value as so determined.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home (such as
property taxes and hazard insurance) and other financial obligations
(including debt service on any related mortgage loan secured by a senior lien
on the related Mortgaged Property). For qualification purposes the monthly
payment is based solely on the payment of interest only on the loan. The Loan
Rate in effect from the origination date of a Mortgage Loan to the first
adjustment date generally will be lower, and may be significantly lower, than
the sum of the then applicable Index and Gross Margin. The Mortgage Loans will
not provide for negative amortization. Payment of the full outstanding
principal balance at maturity may depend on the borrower's ability to obtain
refinancing or to sell the Mortgaged Property prior to the maturity of the
mortgage loan, and there can be no assurance that such refinancing will be
available to the borrower or that such a sale will be possible.
The underwriting standards set forth in the GMACM Underwriting Guide may
be varied in appropriate cases, including in "limited" or "reduced loan
documentation" mortgage loan programs. Limited documentation programs
generally permit fewer supporting documents to be obtained or waive income,
appraisals, asset and employment documentation requirements, and limited
documentation programs generally compensate for increased credit risk by
placing greater emphasis on either the review of the property to be financed
or the borrower's ability to repay the Mortgage Loan. Generally, in order to
be eligible for a reduced loan documentation program, a borrower must have a
good credit history, and other compensating factors (such as a relatively low
Combined Loan-to-Value Ratio, or other favorable underwriting factors) must be
present and the borrower's eligibility for such program may be determined by
use of a credit scoring model.
THE SELLER AND SERVICER
GENERAL
GMAC Mortgage Corporation is the Seller and Servicer for all of the
Mortgage Loans. The Seller is an indirect wholly-owned subsidiary of General
Motors Acceptance Corporation and is one of the nation's largest mortgage
bankers. The Seller is engaged in the mortgage banking business, including the
origination, purchase, sale and servicing of residential loans.
The Notes do not represent an interest in or an obligation of the Seller
or the Servicer. The Seller's only obligations with respect to the Notes will
be pursuant to certain limited representations and warranties made by the
Seller or as otherwise provided herein.
The Seller maintains its executive and principal offices at 100 Witmer
Road, Horsham, Pennsylvania 19044. Its telephone number is (215) 682-1000.
The Servicer will be responsible for servicing the Mortgage Loans in
accordance with the its program guide and the terms of the Servicing
Agreement. The Custodian will be The Bank of Maryland.
Billing statements for HELOCs are mailed monthly by the Servicer. The
statement details the monthly activity on the related HELOC and specifies the
minimum payment due to the Servicer and the available credit line. Notice of
changes in the applicable Loan Rate are provided by the Servicer to the
Mortgagor with such statements. All payments are due by the applicable due
date.
For information regarding foreclosure procedures, see "--Realization Upon
Defaulted Loans" below. Servicing and charge-off policies and collection
practices may change over time in accordance with the Servicer's business
judgment, changes in the Servicer's portfolio of real estate secured revolving
credit line loans that it services for its clients and applicable laws and
regulations, and other considerations.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will make reasonable efforts to collect all payments called
for under the Mortgage Loans and will, consistent with the Servicing
Agreement, follow such collection procedures which shall be normal and usual
in its general mortgage servicing activities with respect to mortgage loans
comparable to the Mortgage Loans. Consistent with the foregoing, the Servicer
may in its discretion waive any prepayment charge in connection with the
prepayment of a Mortgage Loan or extend the due dates for payments due on a
Mortgage Loan, provided that the insurance coverage for such Mortgage Loan or
any coverage provided by any alternative credit enhancement will not be
adversely affected thereby.
In certain instances in which a Mortgage Loan is in default (or if
default is reasonably foreseeable), and if determined by the Servicer to be in
the best interests of the Enhancer and the Noteholders, the Servicer may
permit certain modifications of the Mortgage Loan or make forbearances on the
Mortgage Loan rather than proceeding with foreclosure or repossession (if
applicable). In making such determination, the loss that might result if such
Mortgage Loan were liquidated would be taken into account. Such modifications
may have the effect of reducing the Loan Rate or extending the final maturity
date of the Mortgage Loan. Any such modified Mortgage Loan may remain in the
Trust Estate, and the reduction in collections resulting from such
modification may result in reduced distributions of interest (or other
amounts) on, or may extend the final maturity of, the Notes.
In addition, in certain instances in which a Mortgagor either (i)
requests an increase in the credit limit on the related HELOC above the limit
stated on the Credit Line Agreement, (ii) requests to place a lien on the
related Mortgaged Property senior to the lien of the related Mortgage Loan, or
(iii) refinances the senior lien resulting in a Combined Loan-to-Value Ratio
above the previous Combined Loan-to-Value Ratio for such loan, the Servicer
will have the option to purchase from the Issuer the related Mortgage Loan at
a price equal to the Repurchase Price.
In any case in which Mortgaged Property subject to a Mortgage Loan is
being conveyed by the Mortgagor, the Servicer shall in general be obligated,
to the extent it has knowledge of such conveyance, to exercise its rights to
accelerate the maturity of such Mortgage Loan under any due-on-sale clause
applicable thereto, but only if the exercise of such rights is permitted by
applicable law and only to the extent it would not adversely affect or
jeopardize coverage under any applicable credit enhancement arrangements. If
the Servicer is prevented from enforcing such due-on-sale clause under
applicable law or if the Servicer determines that it is reasonably likely that
a legal action would be instituted by the related Mortgagor to avoid
enforcement of such due-on-sale clause, the Servicer will enter into an
assumption and modification agreement with the person to whom such property
has been or is about to be conveyed, pursuant to which such person will become
liable under the Credit Line Agreement subject to certain specified
conditions. The original Mortgagor may be released from liability on a
Mortgage Loan if the Servicer shall have determined in good faith that such
release will not adversely affect the ability to make full and timely
collections on the related Mortgage Loan. Any fee collected by the Servicer
for entering into an assumption or substitution of liability agreement will be
retained by the Servicer as additional servicing compensation. In connection
with any such assumption, the Loan Rate borne by the related Credit Line
Agreement may not be altered.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and
other similar matters. The Servicer may approve such a request if it has
determined, exercising its good faith business judgment in the same manner as
it would if it were the owner of the related Mortgage Loan, that such approval
will not adversely affect the security for, and the timely and full
collectability of, the related Mortgage Loan. Any fee collected by the
Servicer for processing such request will be retained by the Servicer as
additional servicing compensation.
The Servicer is required to maintain a fidelity bond and errors and
omissions policy with respect to its officers and employees and other persons
acting on behalf of the Servicer in connection with its activities under the
Servicing Agreement. The Servicer may be subject to certain restrictions under
the Servicing Agreement with respect to the refinancing of a lien senior to a
Mortgage Loan secured by a lien on the related Mortgaged Property.
REALIZATION UPON DEFAULTED LOANS
With respect to a Mortgage Loan secured by a lien on a Mortgaged Property
in default, the Servicer will decide whether to foreclose upon the Mortgaged
Property or with respect to any such Mortgage Loan, write off the principal
balance of the Mortgage Loan as a bad debt or take an unsecured note. In
connection with such decision, the Servicer will, following usual practices in
connection with senior and junior mortgage servicing activities or
repossession and resale activities, estimate the proceeds expected to be
received and the expenses expected to be incurred in connection with such
foreclosure or repossession and resale to determine whether a foreclosure
proceeding or a repossession and resale is appropriate. To the extent that a
Mortgage Loan secured by a lien on a Mortgaged Property is junior to another
lien on the related Mortgaged Property, following any default thereon, unless
foreclosure proceeds for such Mortgage Loan are expected to at least satisfy
the related senior mortgage loan in full and to pay foreclosure costs, it is
likely that such Mortgage Loan will be written off as bad debt with no
foreclosure proceeding. See "Risk Factors--Special Features of the Mortgage
Loans" herein. In the event that title to any Mortgaged Property is acquired
in foreclosure or by deed in lieu of foreclosure, the deed or certificate of
sale will be issued to the Indenture Trustee or to its nominee on behalf of
Noteholders. Notwithstanding any such acquisition of title and cancellation of
the related Mortgage Loan, such Mortgage Loan secured by a lien on a Mortgaged
Property (an "REO LOAN") will be considered for most purposes to be an
outstanding Mortgage Loan held in the Trust Estate until such time as the
Mortgaged Property is sold and all recoverable Liquidation Proceeds and
Insurance Proceeds have been received with respect to such defaulted Mortgage
Loan (a "LIQUIDATED LOAN"). Any income (net of expenses and fees and other
than gains described below) received by the Servicer on such Mortgaged
Property, prior to its disposition will be deposited in the Custodial Account
upon receipt and will be available at such time for making payments to
Noteholders.
With respect to a Mortgage Loan secured by a lien on a Mortgaged Property
in default, the Servicer may pursue foreclosure (or similar remedies) subject
to any senior lien positions and certain other restrictions pertaining to
junior loans concurrently with pursuing any remedy for a breach of a
representation and warranty made by the Seller. However, the Servicer is not
required to continue to pursue both such remedies if it determines that one
such remedy is more likely to result in a greater recovery. Upon the first to
occur of final liquidation and a repurchase or substitution pursuant to a
breach of a representation and warranty, such Mortgage Loan will be removed
from the Trust Estate. The Servicer may elect to treat a defaulted Mortgage
Loan as having been finally liquidated if substantially all amounts expected
to be received in connection therewith have been received. Any additional
liquidation expenses relating to such Mortgage Loan thereafter incurred will
be reimbursable to the Servicer from any amounts otherwise payable to the
Noteholders, or may be offset by any subsequent recovery related to such
Mortgage Loan. Alternatively, for purposes of determining the amount of
related Liquidation Proceeds to be paid to Noteholders, the amount of any loss
or the amount required to be drawn under any applicable form of credit
enhancement, the Servicer may take into account minimal amounts of additional
receipts expected to be received, as well as estimated additional liquidation
expenses expected to be incurred in connection with such defaulted Mortgage
Loan.
The Servicer has the option to purchase from the Trust Estate any
defaulted Mortgage Loan after 60 days at the Repurchase Price. If a defaulted
Mortgage Loan or REO Loan is not so removed from the Trust Estate, then, upon
the final liquidation thereof, if a loss is realized which is not covered by
any applicable form of credit enhancement or other insurance, the Noteholders
will bear such loss. However, if a gain results from the final liquidation of
an REO Loan which is not required by law to be remitted to the related
Mortgagor, the Servicer will be entitled to retain such gain as additional
servicing compensation.
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables summarize the delinquency and loss experience for
all home equity lines of credit loans originated by the Seller. The data
presented in the following tables is for illustrative purposes only, and there
is no assurance that the delinquency and loss experience of the Mortgage Loans
will be similar to that set forth below.
The information in the tables below has not been adjusted to eliminate
the effect of the significant growth in the size of the Servicer's HELOC loan
portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of such HELOC loans serviced for
each period would be higher than those shown if certain of such home equity
loans were artificially isolated at a point in time and the information showed
the activity only with respect to such HELOC loans.
DELINQUENCY AND LOSS EXPERIENCE
HOME EQUITY LOAN PORTFOLIO DELINQUENCY EXPERIENCE (1)
================================================================================================================================
AT MARCH 31, 1999 AT DECEMBER 31, 1998 AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
$ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $
------- ------ ------- ------ ------- ------ ------- ------
Number of Loans 28,132 25,494 20,159 17,344
Total Portfolio $713,185,696 100.00% $656,651,283 100.00% $568,400,751 100.00% $496,073,600 100.00%
Period of Delinquency
30-59 Days 5,736,190 0.80% 9,139,302 1.39% 8,475,141 1.49% 7,472,812 1.51%
60-89 Days 1,614,991 0.23% 2,196,765 0.33% 1,169,433 0.21% 1,052,747 0.21%
90+ Days 1,939,887 0.27% 1,701,815 0.26% 2,008,257 0.35% 2,018,333 0.41%
Total Loans 9,291,067 1.30% 13,037,882 1.99% 11,652,831 2.05% 10,543,892 2.13%
Foreclosure 4,635,840 0.65% 5,714,492 0.87% 3,533,381 0.62% 2,808,028 0.57%
Foreclosed 578,836 0.08% 511,752 0.08% 1,730,913 0.30% 1,749,156 0.35%
Total Loans in 5,214,677 0.73% 6,226,244 0.95% 5,264,294 0.93% 4,557,184 0.92%
Foreclosure
Total Delinquent Loans $14,505,743 2.03% $19,264,126 2.93% $16,917,125 2.98% $15,101,076 3.04%
============= ========== ============= ========== ============== =========== ============= ==========
================================================================================================================================
HOME EQUITY LOAN PORTFOLIO LOSS AND FORECLOSURE EXPERIENCE (1)
================================================================================================================================
AT MARCH 31, 1999 AT DECEMBER 31, 1998 AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
$ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $
------- ------ ------- ------ ------- ------ ------- ------
Number of Loans 28,132 25,494 20,159 17,344
Total Portfolio $713,185,696 100.00% $656,651,283 100.00% $568,400,751 100.00% $496,073,600 100.00%
Total Loans in 5,214,677 0.73% 6,226,244 0.95% 5,264,294 0.93% 4,557,184 0.92%
Foreclosure
Net Chargeoffs for Period $57,115 0.01% $1,873,593 0.29% $1,332,166 0.23% $1,553,129 0.31%
============= ========== ============= ========== ============== =========== ============= ==========
(1) Performing loans in bankruptcy are not included in delinquency statistics.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicing fee for each Mortgage Loan (the "SERVICING FEE") is payable
out of the interest payments on such Mortgage Loan. The weighted average
Servicing Fee as of the Cut-Off Date is approximately 0.50% per annum. The
Servicing Fee consists of (a) servicing compensation payable to the Servicer
in respect of its servicing activities and (b) other related compensation. The
Servicer is obligated to pay certain ongoing expenses associated with its
servicing activities and incurred by the Servicer in connection with its
responsibilities under the Servicing Agreement.
THE ISSUER
The GMACM Revolving Home Equity Loan Trust 1999-1 is a business trust
established under the laws of the State of Delaware, and will be created and
governed by a trust agreement dated as of June 17, 1999 (the "TRUST
AGREEMENT"), between Bear Stearns Asset Backed Securities, Inc. (the
"DEPOSITOR") and the Owner Trustee, for the purposes described in this
Prospectus Supplement. The Trust Agreement will constitute the "governing
instrument" of the Issuer under the laws of the State of Delaware relating to
business trusts. The Issuer will not engage in any activity other than (i)
acquiring and holding the Mortgage Loans and the other assets comprising the
Trust Estate and proceeds therefrom, (ii) issuing the Notes and the
Certificates, (iii) making payments on the Notes and the Certificates and (iv)
engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected therewith.
The Issuer's principal offices are at Rodney Square North, 1100 North
Market Street, Wilmington, Delaware 19890, in care of Wilmington Trust
Company, as Owner Trustee.
THE OWNER TRUSTEE
Wilmington Trust Company (the "Owner Trustee") will be the Owner Trustee
under the Trust Agreement. The Owner Trustee is a Delaware banking
corporation, and its principal offices are located in Wilmington, Delaware.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Securityholders
for taking any action or for refraining from the taking of any action in good
faith pursuant to the Trust Agreement, or for errors in judgment; provided,
that none of the Owner Trustee or any director, officer or employee thereof
will be protected against any liability that would otherwise be imposed upon
them by reason of their willful malfeasance, bad faith or negligence in the
performance of their duties, or by reason of their reckless disregard of their
obligations and duties under the Trust Agreement. All persons into which the
Owner Trustee may be merged or with which it may be consolidated, or any
entity resulting from such merger or consolidation, will be the successor
Owner Trustee under the Trust Agreement.
The commercial bank or trust company serving as Owner Trustee may have
normal banking relationships with the Depositor, the Seller and/or their
respective affiliates.
The Owner Trustee may resign at any time, in which event the Indenture
Trustee will be obligated to appoint a successor owner trustee as set forth in
the Trust Agreement and the Indenture. The Indenture Trustee may also remove
the Owner Trustee if the Owner Trustee ceases to be eligible to continue as
such under the Trust Agreement or if the Owner Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Indenture Trustee will be obligated
to appoint a successor Owner Trustee after consultation with the Servicer. Any
resignation or removal of the Owner Trustee and appointment of a successor
Owner Trustee will not become effective until acceptance of the appointment by
the successor Owner Trustee.
THE INDENTURE TRUSTEE
Norwest Bank Minnesota, National Association (the "INDENTURE TRUSTEE"),
will be the Indenture Trustee under the indenture to be dated as of June 17,
1999 between the Issuer and the Indenture Trustee (the "Indenture"). The
principal offices of the Indenture Trustee are located at Norwest Center,
Sixth and Marquette, Minneapolis, Minnesota 55479-0070, with administrative
offices located at 11000 Broken Land Parkway, Columbia, Maryland 21044.
The Indenture Trustee may have normal banking relationships with the
Depositor, the Seller and/or their respective affiliates.
The Indenture Trustee may resign at any time, in which event the Owner
Trustee will be obligated to appoint a successor indenture trustee as set
forth in the Indenture. The Owner Trustee as set forth in the Indenture may
also remove the Indenture Trustee if the Indenture Trustee ceases to be
eligible to continue as such under the Indenture or if the Indenture Trustee
becomes insolvent. Upon becoming aware of such circumstances, the Owner
Trustee will be obligated to appoint a successor Indenture Trustee after
consultation with the Servicer. If so specified in the Indenture, the
Indenture Trustee may also be removed at any time by the Enhancer or by the
holders of a majority principal balance of the Notes. Any resignation or
removal of the Indenture Trustee and appointment of a successor Indenture
Trustee will not become effective until acceptance of the appointment by the
successor Indenture Trustee.
The Indenture Trustee has undertaken a firmwide initiative to address the
year 2000 issue. The Indenture Trustee does not believe that the year 2000
issue will materially affect its ability to perform its functions with respect
to the Issuer or have a material financial impact on the Issuer. However,
there can be no assurance of this. Further, there can be no guarantee that the
systems of third parties, on which the Indenture Trustee's systems rely, will
be timely converted or that a failure to convert by such third parties or a
conversion that is incompatible with the Indenture Trustee's systems will not
have a material adverse effect on the Issuer.
THE ENHANCER
The following information has been supplied by Enhancer for inclusion in
this Prospectus Supplement. No representation is made by the Seller, the
Depositor, the Servicer, the Owner Trustee, the Indenture Trustee, the
Underwriters or any of their respective affiliates as to the accuracy or
completeness of such information.
The Enhancer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and the Territory of Guam. The Enhancer
primarily insures newly-issued municipal and structured finance obligations.
The Enhancer is a wholly-owned subsidiary of Ambac Financial Group, Inc.
(formerly, AMBAC, Inc.), a 100% publicly-held company. Moody's, Standard &
Poor's and Fitch IBCA, Inc. have each assigned a triple-A financial strength
rating to the Enhancer.
The consolidated financial statements of the Enhancer and subsidiaries as
of December 31, 1998 and December 31, 1997 and for each of the years in the
three year period ended December 31, 1998, prepared in accordance with
generally accepted accounting principles, included in the Annual Report on
Form 10-K of Ambac Financial Group, Inc. (which was filed with the Securities
and Exchange Commission (the "Commission") on March 30, 1999; Commission File
No. 1-10777) and the unaudited consolidated financial statements of the
Enhancer and its subsidiaries as of March 31, 1999 and for the periods ending
March 31, 1999 and March 31, 1998, included in the Quarterly Report on Form
10-Q of Ambac Financial Group, Inc. for the Period ended March 31, 1999 (which
was filed with the Commission on May 12, 1999) are hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated herein by reference
shall be modified or superseded for the purposes of this Prospectus Supplement
to the extent that a statement contained herein by reference herein also
modified or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus Supplement.
All financial statements of the Enhancer and its subsidiaries included in
documents filed by Ambac Financial Group, Inc. with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Term Notes shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The following table sets forth the capitalization of the Enhancer as of
December 31, 1996, December 31, 1997, December 31, 1998 and March 31, 1999
respectively, in conformity with generally accepted accounting principles.
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, 1999
1996 1997 1998 (UNAUDITED)
------------ ----------- ------------ --------------
Unearned premiums............................ $ 995 $1,184 $1,303 $1,324
Other liabilities............................ 259 562 548 544
----- ------ ------ ------
$1,254 $1,746 $1,851 $1,868
------ ------ ------ ------
Stockholder's equity(1)
Common stock............................. $ 82 $ 82 $ 82 $ 82
Additional paid-in capital............... 515 521 541 541
Accumulated other comprehensive income... 66 118 138 112
Retained earnings........................ 992 1,180 1,405 1,467
----- ------ ------ ------
Total stockholder's equity................... $1,655 $1,901 $2,166 $2,202
------ ------ ------ =-----
Total liabilities and stockholder's equity... $2,909 $3,647 $4,017 $4,070
====== ====== ====== ======
- ----------
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "Accumulated other comprehensive income" in
accordance with the Statement of Financial accounting Standards No.
130 "Reporting Comprehensive Income" adopted by the Enhancer
effective January 1, 1998. As this new standard only requires
additional information in the financial statements, it does not
affect the Enhancer's financial position or results of operations.
For additional financial information concerning the Enhancer, see the
audited and unaudited financial statements of the Enhancer incorporated by
reference herein. Copies of the financial statements of the Enhancer
incorporated by reference and copies of the Enhancer's annual statement for
the year ended December 31, 1998 prepared in accordance with statutory
accounting standards are available, without charge, from the Enhancer. The
address of the Enhancer's administrative offices and its telephone number are
One State Street Plaza, 17th Floor, New York, New York 10004 and (212)
668-0340.
The Enhancer makes no representation regarding the Term Notes or the
advisability of investing in the Term Notes and makes no representation
regarding, nor has it participated in the preparation of, this Prospectus
Supplement other than the information supplied by the Enhancer and presented
under the headings "Description of the Policy" and "The Enhancer" and in the
financial statements incorporated herein by reference.
Each rating of the Enhancer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Enhancer and its ability to pay claims on its policies
of insurance. Any further explanation as to the significance of the above
ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Term
Notes, and such ratings may be subject to revision or withdrawal at any time
by the assigning rating agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the
Term Notes. The Enhancer does not guaranty the market price of the Term Notes
nor does it guaranty that the ratings on the Term Notes will not be revised or
withdrawn.
DESCRIPTION OF THE SECURITIES
GENERAL
The Home Equity Loan-Backed Term Notes, Series 1999-1 (the "TERM NOTES"),
and the Home Equity Loan-Backed Variable Funding Notes, Series 1999-1 (the
"VARIABLE FUNDING NOTES" and, together with the Term Notes, the "NOTES"), will
be issued pursuant to the Indenture. The Home Equity Loan-Backed Certificates,
Series 1999-1 (the "CERTIFICATES" and, together with the Notes, the
"SECURITIES"), will be issued pursuant to the Trust Agreement. The following
summaries describe certain provisions of the Securities, the Indenture and the
Trust Agreement. Such summaries do not purport to be complete and are subject
to, and qualified in their entirety by reference to, the provisions of the
applicable agreements. Only the Term Notes are being offered hereby.
The Notes will be secured by the Trust Estate, which will be pledged by
the Issuer to the Indenture Trustee pursuant to the Indenture. The Trust
Estate will consist of, without limitation, (i) the Mortgage Loans (including
all Additional Balances and any Subsequent Mortgage Loans), (ii) all amounts
on deposit in the Custodial Account, the Note Payment Account, the
Distribution Account, the Capitalized Interest Account, the Pre-Funding
Account and the Funding Account, (iii) the Policy and (iv) all proceeds of the
foregoing.
The Variable Funding Notes will be issued to the Seller. The Variable
Funding Balance will be increased from time to time until the commencement of
the Rapid Amortization Period in consideration for Additional Balances and, in
some cases, Subsequent Mortgage Loans sold to the Issuer, if Principal
Collections in respect of the related Collection Period (and, during the
Revolving Period, funds on deposit in the Funding Account) are insufficient or
unavailable to cover the full consideration therefor. In addition, the Seller
may, at its option, sell Subsequent Mortgage Loans to the Issuer from time to
time until the commencement of the Managed Amortization Period. The
consideration for any such sale will be, after the application of amounts, if
any, on deposit in the Funding Account, an increase in the Variable Funding
Balance. Notwithstanding any of the foregoing, the Variable Funding Balance
may not exceed $50,000,000 (the "MAXIMUM VARIABLE FUNDING BALANCE").
Initially, the Variable Funding Balance will be zero.
BOOK-ENTRY NOTES
The Term Notes will initially be issued as Book-Entry Notes. Persons
acquiring beneficial ownership interests in the Term Notes (the "TERM NOTE
OWNERS") may elect to hold their Term Notes through the Depository Trust
Company ("DTC") in the United States, or Cedelbank or the Euroclear System
("EUROCLEAR") in Europe, if they are participants of such systems
("PARTICIPANTS"), or indirectly through organizations that are Participants in
such systems. The Book-Entry Notes will be issued in one or more securities
that equal the aggregate Term Note Balance of the Term Notes, and will
initially be registered in the name of Cede & Co., the nominee of DTC.
Cedelbank and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in the names of Cedelbank
and Euroclear on the books of their respective depositaries, which in turn
will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Investors may hold such beneficial
interests in the Book-Entry Notes in minimum denominations representing Term
Note Balances of $25,000 and in integral multiples of $1,000 in excess
thereof. Except as described below, no Term Note Owner will be entitled to
receive a physical certificate representing such security (each, a "DEFINITIVE
NOTE"). Unless and until Definitive Notes are issued, it is anticipated that
the only "Holder" of the Term Notes will be Cede & Co., as nominee of DTC.
Term Note Owners will not be "Holders" or "Noteholders" as such terms are used
in the Indenture.
A Term Note Owner's ownership of a Book-Entry Note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains such Term Note
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Notes will be recorded on the records of DTC (or
of a Participating firm that acts as agent for the Financial Intermediary, the
interest of which will in turn be recorded on the records of DTC, if such Term
Note Owner's Financial Intermediary is not a DTC Participant, and on the
records of Cedelbank or Euroclear, as appropriate).
Term Note Owners will receive all payments of principal of and interest
on the Term Notes from the Indenture Trustee through DTC and DTC Participants.
While the Term Notes are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "DTC RULES"), DTC is required to make book-entry
transfers among Participants on whose behalf it acts with respect to the Term
Notes and is required to receive and transmit payments of principal of and
interest on the Term Notes. Participants and Indirect Participants with which
Term Note Owners have accounts with respect to Term Notes are similarly
required to make book-entry transfers and receive and transmit such payments
on behalf of their respective Term Note Owners. Accordingly, although Term
Note Owners will not possess physical certificates, the DTC Rules provide a
mechanism by which Term Note Owners will receive payments and will be able to
transfer their interests.
Term Note Owners will not receive or be entitled to receive Definitive
Notes representing their respective interests in the Term Notes, except under
the limited circumstances described below. Unless and until Definitive Notes
are issued, Term Note Owners that are not Participants may transfer ownership
of their Term Notes only through Participants and Indirect Participants by
instructing such Participants and Indirect Participants to transfer the Term
Notes, by book-entry transfer, through DTC for the account of the purchasers
of such Term Notes, which account is maintained with the related Participants.
Under the DTC Rules and in accordance with DTC's normal procedures, transfers
of ownership of the Term Notes will be executed through DTC, and the accounts
of the respective Participants at DTC will be debited and credited. Similarly,
the Participants and Indirect Participants will make debits or credits, as the
case may be, on their records on behalf of the selling and purchasing Term
Note Owners.
Under a book-entry format, Term Note Owners of the Book-Entry Notes may
experience some delay in their receipt of payments, since such payments will
be forwarded by the Indenture Trustee to Cede & Co. Payments with respect to
Term Notes held through Cedelbank or Euroclear will be credited to the cash
accounts of Cedelbank Participants or Euroclear Participants in accordance
with the relevant system's rules and procedures, to the extent received by the
related Depositary. Such payments will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a Term Note
Owner to pledge Book-Entry Notes to persons or entities that do not
participate in the Depositary system, or otherwise take actions in respect of
such Book-Entry Notes, may be limited due to the lack of physical certificates
for such Book-Entry Notes. In addition, the issuance of the Term Notes in
book-entry form may reduce the liquidity thereof in the secondary market,
since certain potential investors may be unwilling to purchase securities for
which they cannot obtain physical certificates.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Notes under the Indenture only at the direction of
one or more Financial Intermediaries to the DTC accounts of which the
Book-Entry Notes are credited, to the extent that such actions are taken on
behalf of Financial Intermediaries the holdings of which include such
Book-Entry Notes. Cedelbank or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by Term Note Owners under the
Indenture on behalf of a Cedelbank Participant or Euroclear Participant only
in accordance with its relevant rules and procedures and subject to the
ability of the related Depositary to effect such actions on its behalf through
DTC.
Definitive Notes will be issued to Term Note Owners or their nominees,
rather than to DTC, if (a) the Indenture Trustee determines that the DTC is no
longer willing, qualified or able to properly discharge its responsibilities
as nominee and depository with respect to the Book-Entry Notes and the
Indenture Trustee is unable to locate a qualified successor, (b) the Indenture
Trustee elects to terminate the book-entry system through DTC or (c) after the
occurrence of an Event of Default, Term Note Owners representing Percentage
Interests aggregating at least a majority of the Term Note Balances of the
Term Notes advise DTC through the Financial Intermediaries and the DTC
Participants in writing that the continuation of the book-entry system through
DTC (or a successor thereto) is no longer in the best interests of Term Note
Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all Term
Note Owners of the occurrence of such event and the availability through DTC
of Definitive Notes. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue and authenticate Definitive
Notes, and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as "Holders" and "Noteholders" under the Indenture.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Term Notes between and among
Participants of DTC, Cedelbank and Euroclear, they will be under no obligation
to perform or continue to perform such procedures, and such procedures may be
discontinued at any time. See "Risk Factors--Book-Entry Registration" and "The
Agreements--Book-Entry Securities" in the Prospectus.
PAYMENTS ON THE NOTES
Payments on the Notes will be made by the Indenture Trustee or the Paying
Agent on the 18th day of each month or, if such day is not a Business Day,
then the next succeeding Business Day (each, a "PAYMENT DATE"), commencing in
July 1999. Payments on the Notes will be made to the persons in the names of
which such Notes are registered at the close of business on the day prior to
each Payment Date (or, in the case of the Term Notes, if the Term Notes are no
longer Book-Entry Notes, at the related Record Date). See "The
Agreements--Book-Entry Securities" in the Prospectus. Payments will be made by
wire transfer, check or money order mailed to the address of the person
entitled thereto (which, in the case of Book-Entry Notes, will be DTC or its
nominee) as it appears on the Note Register, in the amounts calculated as
described herein on the related Determination Date. However, the final payment
in respect of the Notes will be made only upon presentation and surrender
thereof at the office or the agency of the Indenture Trustee specified in the
notice to Noteholders of such final payment. A "BUSINESS DAY" is any day other
than (i) a Saturday or Sunday or (ii) a day on which banking institutions in
the States of Minnesota, Pennsylvania, New York, Maryland or Delaware are
required or authorized by law or government decree to be closed. The "PAYING
AGENT" will initially be the Indenture Trustee.
INTEREST PAYMENTS ON THE NOTES
Interest payments will be made on the Notes on each Payment Date at the
Note Rate for the related Interest Period, subject to the limitations set
forth below, which may result in Interest Shortfalls. The "INTEREST PERIOD"
for any Payment Date will be the period from the preceding Payment Date (or,
in the case of the first Payment Date, from the Closing Date) through the day
preceding such Payment Date. The "NOTE RATE" for each Interest Period will be
a floating rate equal to the least of: (i) LIBOR plus 0.29% per annum, or on
any Payment Date on which the aggregate Term Note Balance is less than 10% of
the initial aggregate Term Note Balance, LIBOR plus 0.58% per annum; (ii) the
Net Loan Rate, as described below and (iii) 14.5% per annum.
However, on any Payment Date for which the related Note Rate has been
determined pursuant to clause (ii) of the definition of Note Rate, the excess
of (a) the amount of interest that would have accrued on the Notes during the
related Interest Period had such amount been determined pursuant to clause (i)
of the definition of Note Rate (but not at a rate in excess of 14.5% per
annum) over (b) the interest actually accrued on the Notes during such
Interest Period (such excess, an "INTEREST SHORTFALL") will accrue interest at
the Note Rate (as adjusted from time to time) and will be paid on subsequent
Payment Dates to the extent funds are available therefor. Interest Shortfalls
will not be covered by the Policy and may remain unpaid on the Payment Date in
June 2027 (the "FINAL PAYMENT DATE").
The "NET LOAN RATE" will be, with respect to any Payment Date, the
weighted average of (i) the Loan Rates on the HELOCs and (ii) the Loan Rates
on the HELs, in each case as of the first day of the calendar month in which
the related Interest Period begins, net of the premium rate on the Policy, the
rate of the fee of each of the Servicer, the Owner Trustee and the Indenture
Trustee, and, beginning on the thirteenth Payment Date, 50 basis points,
adjusted to an effective rate reflecting interest calculated on the basis of a
360-day year assumed to consist of twelve 30-day months.
Interest on the Notes in respect of any Payment Date will accrue during
the related Interest Period on the basis of the actual number of days in such
Interest Period and a 360-day year. Interest payments on the Notes will be
funded from Interest Collections on the Mortgage Loans and, if necessary, from
draws on the Policy.
All interest payments on the Notes in respect of any Payment Date will be
allocated to the Term Notes and the Variable Funding Notes pro rata based on
their respective interest accruals. The interest rate on the Variable Funding
Notes for any Payment Date will not significantly exceed the Note Rate for the
related Interest Period.
On each Payment Date, LIBOR will be established by the Indenture Trustee.
As to any Interest Period, "LIBOR" will equal, for any Interest Period other
than the first Interest Period, the rate for United States dollar deposits for
one month that appears on the Telerate Screen Page 3750 as of 11:00 a.m.,
London, England time, on the second LIBOR Business Day prior to the first day
of such Interest Period. With respect to the first Interest Period, LIBOR will
equal the rate for United States dollar deposits for one month that appears on
the Telerate Screen Page 3750 as of 11:00 a.m., London, England time, two
LIBOR Business Days prior to the Closing Date. If such rate does not appear on
such page (or such other page as may replace such page on such service, or if
such service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be reasonably selected by the Indenture Trustee after
consultation with the Servicer and the Enhancer), the rate will be the
Reference Bank Rate. If no such quotations can be obtained and no Reference
Bank Rate is available, LIBOR will be LIBOR applicable to the preceding
Payment Date.
"TELERATE PAGE 3750" means the display page so designated on the Telerate
Service (or such other page as may replace page 3750 on such service for the
purpose of displaying London interbank offered rates of major banks). If such
rate does not appear on such page (or such other page as may replace such page
on such service, or if such service is no longer offered, such other service
for displaying LIBOR or comparable rates as may be selected by the Indenture
Trustee after consultation with the Servicer), the rate will be the Reference
Bank Rate.
The "REFERENCE BANK RATE" will be, with respect to any Interest Period,
as follows: the arithmetic mean (rounded upwards, if necessary, to the nearest
one sixteenth of one percent) of the offered rates for United States dollar
deposits for one month which are offered by the Reference Banks as of 11:00
a.m., London, England time, on the second LIBOR Business Day prior to the
first day of such Interest Period to prime banks in the London interbank
market for a period of one month in amounts approximately equal to the sum of
the outstanding Note Balance of the Notes; provided, that at least two such
Reference Banks provide such rate. If fewer than two offered rates appear, the
Reference Bank Rate will be the arithmetic mean of the rates quoted by one or
more major banks in New York City, selected by the Indenture Trustee after
consultation with the Servicer and the Enhancer, as of 11:00 a.m., New York
time, on such date for loans in U.S. Dollars to leading European Banks for a
period of one month in amounts approximately equal to the aggregate Note
Balance of the Notes. If no such quotations can be obtained, the Reference
Bank Rate will be the Reference Bank Rate applicable to the preceding Interest
Period. The "REFERENCE BANKS" are Barclays Bank plc, National Westminster Bank
and Bankers Trust Company.
"LIBOR BUSINESS DAY" means any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the city of London, England are
required or authorized by law to be closed.
The establishment of LIBOR as to each Interest Period by the Indenture
Trustee and the Indenture Trustee's calculation of the rate of interest
applicable to the Notes for the related Interest Period will, in the absence
of manifest error, be final and binding.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, if required by the Enhancer, a cash deposit will be
made into the Capitalized Interest Account from the proceeds of the sale of
the Term Notes. On each Payment Date during the Pre-Funding Period, the
Indenture Trustee will transfer from the Capitalized Interest Account to the
Note Payment Account an amount equal to the Capitalized Interest Requirement,
if any, for such Payment Date.
The "CAPITALIZED INTEREST REQUIREMENT" will be, with respect to each
Payment Date during the Pre-Funding Period, the excess, if any of (i) the sum
of (A) the amount of interest accrued at the Note Rate on the amount on
deposit in the Pre-Funding Account as of the preceding Payment Date (or as of
the Closing Date, in the case of the first Payment Date) and (B) the amount of
fees paid to the Enhancer, the Owner Trustee and the Indenture Trustee over
(ii) the amount of reinvestment earnings on funds on deposit in the
Pre-Funding Account.
On the Payment Date following the end of the Pre-Funding Period, the
Indenture Trustee will distribute to the Seller any amounts remaining in the
Capitalized Interest Account after taking into account withdrawals therefrom
on such Payment Date. The Capitalized Interest Account will be closed
following such payment.
PRINCIPAL PAYMENTS ON THE NOTES
No principal will be payable on the Notes during the period beginning on
the Closing Date and ending on the earlier of (i) December 31, 2000 and (ii)
the occurrence of a Managed Amortization Event or a Rapid Amortization Event,
as defined below (the "REVOLVING PERIOD"). On each Payment Date during the
period beginning on the first Payment Date following the end of the Revolving
Period and ending on the earlier of (i) December 31, 2004 and (ii) the
occurrence of a Rapid Amortization Event (the "MANAGED AMORTIZATION PERIOD"),
principal will be payable on the Notes in an amount equal to Net Principal
Collections for the related Collection Period. On each Payment Date during the
period beginning on the earlier of (i) the first Payment Date following the
end of the Managed Amortization Period and (ii) the occurrence of a Rapid
Amortization Event, and ending upon the termination of the Issuer (the "RAPID
AMORTIZATION PERIOD" and, together with the Managed Amortization Period, the
"AMORTIZATION PERIODS"), principal will be payable on the Notes in an amount
equal to Principal Collections for the related Collection Period. In addition,
on each Payment Date following the end of the Revolving Period, to the extent
of funds available therefor, Noteholders will be entitled to receive certain
additional amounts to be applied in reduction of the related Note Balances
equal to Liquidation Loss Amounts, as described herein. A "MANAGED
AMORTIZATION EVENT" will be deemed to occur on any date on which the amount on
deposit in the Funding Account equals or exceeds $10,000,000.
All principal payments due and payable on the Notes will be allocated to
the Term Notes and the Variable Funding Notes pro rata based on the
outstanding principal balances thereof until paid in full. In no event will
principal payments on the Notes on any Payment Date exceed the related Note
Balance thereof on such Payment Date. On the Final Payment Date, principal
will be due and payable on the Notes in an amount equal to the related Note
Balance remaining outstanding on such Payment Date.
PRIORITY OF DISTRIBUTIONS
On each Payment Date, from amounts withdrawn from the Custodial Account,
the following payments will be made in the following order of priority:
(i) to the Note Payment Account, for payment to the Holders of the Term
Notes and the Variable Funding Notes, pro rata, interest for the related
Interest Period at the Note Rate on the related Note Balance immediately prior
to such Payment Date, other than any Interest Shortfalls;
(ii) during the Amortization Periods, to the Note Payment Account, for
payment to the Holders of the Term Notes and the Variable Funding Notes, pro
rata, the Principal Distribution Amount for such Payment Date;
(iii) to the Enhancer, the amount of the premium for the Policy, with
interest thereon, as provided in the insurance agreement, dated as of the
Closing Date, among the Enhancer, the Seller, the Depositor, the Servicer, the
Indenture Trustee and the Issuer (the "INSURANCE AGREEMENT");
(iv) to the Enhancer, to reimburse it for prior draws made on the Policy,
with interest thereon, as provided in the Insurance Agreement;
(v) during the Revolving Period, to the Funding Account, the amount (but
not in excess of the amount, if any, of Excess Spread) necessary to be applied
on such Payment Date so that the amount, if any, by which the outstanding
Principal Balance of the Mortgage Loans and related property of the Issuer
(including the Pre-Funded Amount and amounts on deposit in the Funding
Account) exceeds the aggregate outstanding principal balance of the Securities
(the "OUTSTANDING OVERCOLLATERALIZATION AMOUNT") for such Payment Date is not
less than the Overcollateralization Target Amount;
(vi) during the Amortization Periods, to the Note Payment Account, the
amount (but not in excess of the amount, if any, of Excess Spread) necessary
to be applied on such Payment Date for payment to the Holders of the Term
Notes and the Variable Funding Notes, pro rata, so that the Outstanding
Overcollateralization Amount for such Payment Date is not less than the
Overcollateralization Target Amount;
(vii) to the Enhancer, any other amounts owed the Enhancer pursuant to
the Insurance Agreement;
(viii) to the Note Payment Account, for payment to the Holders of the
Term Notes and the Variable Funding Notes, pro rata, any Interest Shortfalls
not previously paid, together with interest thereon at the Note Rate (as
adjusted from time to time), based on the amount remaining unpaid with respect
thereto;
(ix) during the Amortization Periods, to the Indenture Trustee, certain
other amounts owing to the Indenture Trustee pursuant to the Indenture to the
extent remaining unpaid; and
(x) any remaining amount, to the Distribution Account, for distribution
to the Certificateholders (or, under certain circumstances during the
Revolving Period, to the Funding Account in connection with the optional
removal of certain Mortgage Loans);
PROVIDED, that on the Final Payment Date, the amount to be paid pursuant
to clause (ii) above will be equal to the sum of the Term Note Balance and the
Variable Funding Balance immediately prior to such Payment Date. For purposes
of the foregoing, the Note Balance of the Notes on each Payment Date during
the Amortization Periods will be reduced by the pro rata portion allocable to
the related Notes of all Liquidation Loss Amounts for such Payment Date, but
only to the extent that such Liquidation Loss Amounts are not otherwise
covered by payments made pursuant to clause (ii) above or by a draw on the
Policy and the Outstanding Overcollateralization Amount for such Payment Date
is zero. In the event of any such reduction of the Note Balance of the Notes,
the amount of the principal reductions allocated to the Notes will be payable
to the Noteholders on later Payment Dates only to the extent of any excess
cashflow remaining on such later Payment Dates.
"AGGREGATE BALANCE DIFFERENTIAL" means, with respect to any Payment Date
and any Variable Funding Note, the sum of the Balance Differentials that have
been added to the Variable Funding Balance of such Variable Funding Note prior
to such Payment Date. "BALANCE DIFFERENTIAL" means, with respect to any
Payment Date, the amount, if any, by which the sum of the aggregate Principal
Balance of all Subsequent Mortgage Loans and the amount of any Additional
Balances transferred to the Trust Estate during the related Collection Period
exceeds the Principal Collections for the previous Collection Period.
"EXCESS SPREAD" means, with respect to any Payment Date, the excess, if
any, of (i) Interest Collections for the related Collection Period over (ii)
the sum of the related Servicing Fee and the amounts specified in clauses (i)
and (iii) above for such Payment Date.
"LIQUIDATION LOSS AMOUNT" means, with respect to any Liquidated Mortgage
Loan, the unrecovered Principal Balance thereof at the end of the related
Collection Period in which such Mortgage Loan became a Liquidated Mortgage
Loan, after giving effect to the Net Liquidation Proceeds in connection
therewith.
"LIQUIDATED MORTGAGE LOAN" means, with respect to any Payment Date, any
Mortgage Loan in respect of which the Servicer has determined, in accordance
with the servicing procedures specified in the Servicing Agreement, as of the
end of the related Collection Period that substantially all Liquidation
Proceeds it reasonably expects to recover, if any, with respect to the
disposition of the related Mortgaged Property have been recovered.
"NOTE BALANCE" means the Term Note Balance and/or the Variable Funding
Balance, as the context requires.
"OVERCOLLATERALIZATION TARGET AMOUNT" will be, as to any Payment Date
prior to the thirtieth (30th) Payment Date, an amount equal to at least 1.7%
of the Note Balance, and thereafter will be adjusted from time to time
pursuant to the terms of the Indenture.
"PRINCIPAL DISTRIBUTION AMOUNT" means, for any Payment Date (i) during
the Revolving Period, zero, (ii) during the Managed Amortization Period, Net
Principal Collections, and (iii) during the Rapid Amortization Period,
Principal Collections; provided, that on any Payment Date during the
Amortization Periods, the Principal Distribution Amount shall also include an
amount equal to the Liquidation Loss Amounts for such Payment Date.
A "RAPID AMORTIZATION EVENT" will be deemed to occur upon the occurrence
of any one of the following events:
(a) the failure on the part of the Seller (i) to make any payment or
deposit required to be made under the Purchase Agreement within five Business
Days after the date such payment or deposit is required to be made; or (ii) to
observe or perform in any material respect any other covenants or agreements
of the Seller set forth in the Purchase Agreement, which failure continues
unremedied for a period of 60 days after written notice thereof to the Seller,
and such failure materially and adversely affects the interests of the
Enhancer or the Securityholders; provided, that a Rapid Amortization Event
will not be deemed to occur if the Seller has repurchased or caused to be
repurchased or substituted for the related Mortgage Loans or all Mortgage
Loans, as applicable, during such period in accordance with the provisions of
the Indenture;
(b) any representation or warranty made by the Seller in the Purchase
Agreement shall prove to have been incorrect in any material respect when made
and shall continue to be incorrect in any material respect for the related
cure period specified in the Servicing Agreement after written notice and as a
result of which the interests of the Enhancer or the Securityholders are
materially and adversely affected ; provided, that a Rapid Amortization Event
will not be deemed to occur if the Seller has repurchased or caused to be
repurchased or substituted for the related Mortgage Loans or all Mortgage
Loans, as applicable, during such period in accordance with the provisions of
the Indenture;
(c) the entry against the Seller of a decree or order by a court or
agency or supervisory authority having jurisdiction in the premises for the
appointment of a trustee, conservator, receiver or liquidator in any
insolvency, conservatorship, receivership, readjustment of debt, marshalling
of assets and liabilities or similar proceedings, or for the winding up or
liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days;
(d) the Seller shall voluntarily go into liquidation, consent to the
appointment of a conservator, receiver, liquidator or similar person in any
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings of or relating to the Seller or the Issuer or of or
relating to all or substantially all of its property, or a decree or order of
a court, agency or supervisory authority having jurisdiction in the premises
for the appointment of a conservator, receiver, liquidator or similar person
in any insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings, or for the winding-up or liquidation of its affairs,
shall have been entered against the Seller or the Issuer and such decree or
order shall remain in force undischarged, unbonded or unstayed for a period of
60 days or the Seller or the Issuer shall admit in writing its inability to
pay its debts generally as they become due, file a petition to take advantage
of any applicable insolvency or reorganization statute, make an assignment for
the benefit of its creditors or voluntarily suspend payment of its
obligations;
(e) the Issuer becomes subject to regulation by the Commission as an
investment company within the meaning of the Investment Company Act of 1940,
as amended;
(f) a Servicing Default occurs and is unremedied under the Servicing
Agreement and a qualified successor Servicer has not been appointed;
(g) the aggregate of all draws under the Policy exceeds 1% of the initial
Note Balance;
(h) the Issuer is determined to be an association (or a publicly traded
partnership) taxable as a corporation for federal income tax purposes; or
(i) an event of default under the Insurance Agreement (except for a
default by the Enhancer, unless such Enhancer cannot be replaced without
additional expense).
In the case of any event described in (a), (b), (f), (g) or (i), a Rapid
Amortization Event will be deemed to have occurred only if, after any
applicable grace period described in such clauses, either the Indenture
Trustee, the Enhancer or Securityholders evidencing not less than 51% of the
aggregate Securities Balance, by written notice to the Depositor, the Servicer
and the Owner Trustee (and to the Indenture Trustee, if given by the
Securityholders), declare that a Rapid Amortization Event has occurred as of
the date of such notice. In the case of any event described in clauses (c),
(d), (e) or (h), a Rapid Amortization Event will be deemed to have occurred
without any notice or other action on the part of the Indenture Trustee, the
Enhancer or the Securityholders immediately upon the occurrence of such event;
provided, that any Rapid Amortization Event may be waived and deemed of no
effect with the written consent of the Enhancer and each Rating Agency,
subject to the satisfaction of any conditions to such waiver.
"TERM NOTE BALANCE" means, with respect to any Payment Date and any Term
Note, the initial Term Note Balance thereof reduced by all payments of
principal of such Term Note prior to such Payment Date.
"VARIABLE FUNDING BALANCE" means, with respect to any Payment Date and
any Variable Funding Note, the initial Variable Funding Balance thereof (i)
increased by the Aggregate Balance Differential for such Variable Funding Note
immediately prior to such Payment Date and (ii) reduced by all distributions
of principal thereon prior to such Payment Date.
OVERCOLLATERALIZATION
The cashflow mechanics of the Trust Estate are intended to create
overcollateralization by depositing the Excess Spread in the Funding Account
and applying it to acquire Additional Balances and/or Subsequent Mortgage
Loans and by using a portion or all of the Excess Spread to make principal
payments on the Notes during the Amortization Periods. Such application of
Excess Spread will continue until the Outstanding Overcollateralization Amount
equals the Overcollateralization Target Amount at which point such application
will cease unless necessary on a later Payment Date to increase the amount of
overcollateralization to the target level. In addition, the
Overcollateralization Target Amount may be permitted to step down in the
future in which case a portion of the Excess Spread will not be used to
acquire Additional Balances and/or Subsequent Mortgage Loans or paid to the
holders of the Notes but will instead be distributed to the holders of the
Certificates. As a result of these mechanics, the weighted average lives of
the Notes will be different than they would have been in the absence of such
mechanics.
To the extent that the protection provided by the application of Excess
Spread and the availability of overcollateralization are exhausted and if
payments are not made under the Policy as required, Noteholders may incur a
loss on their investments.
THE PAYING AGENT
The Paying Agent will initially be the Indenture Trustee. The Paying
Agent will have the revocable power to withdraw funds from the Note Payment
Account for the purpose of making payments to the Noteholders.
MATURITY AND OPTIONAL REDEMPTION
The Notes will be payable in full on the Final Payment Date, to the
extent of the aggregate outstanding Note Balance on such date, if any. In
addition, a principal payment may be made in redemption of the Notes upon the
exercise by the Servicer of its option to purchase the Mortgage Loans and
related assets of the Trust Estate after the aggregate Term Note Balance is
reduced to an amount less than or equal to 10% of the initial Term Note
Balance. The purchase price of such Mortgage Loans will be the sum of the
outstanding Pool Balance and accrued and unpaid interest thereon (including
Interest Shortfalls and interest thereon) at the weighted average of the Loan
Rates of such Mortgage Loans through the day preceding the Payment Date on
which such purchase occurs, together with all amounts due and owing the
Enhancer.
DESCRIPTION OF THE POLICY
On the Closing Date, the Enhancer will issue an irrevocable and
unconditional financial guaranty insurance policy (the "POLICY" ) in favor of
the Owner Trustee on behalf of the Issuer. The Policy will unconditionally and
irrevocably guarantee certain payments on the Notes. On each Payment Date, a
draw will be made on the Policy in an amount (the "INSURED AMOUNT"), if any,
equal to the sum of (i) the amount by which interest accrued on the Note
Balances, at the Note Rate during the related Interest Period (exclusive of
any Interest Shortfalls) exceeds the amount on deposit in the Note Payment
Account available for interest payments in respect of the Notes on such
Payment Date and (ii) any Liquidation Loss Amount not currently covered by
Excess Spread or the availability of overcollateralization. Interest
Shortfalls will not be covered by the Policy. Pursuant to the terms of the
Indenture, draws on the Policy will be paid to the Noteholders by the Paying
Agent pro rata between the Term Notes and the Variable Funding Notes based on
the respective Note Balances thereof; provided, however, that to the extent
any such draw represents amounts specified in clause (ii) above during the
Revolving Period, such amount will be deposited into the Funding Account
rather than being paid to the Noteholders. In the absence of payments under
the Policy, to the extent not covered by Excess Spread or the availability of
overcollateralization, Noteholders could incur a loss on their investment.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a Note will depend on the price paid by the
related Noteholder for such Note, the Note Rate, the rate and timing of
principal payments (including payments in excess of the Monthly Payment,
prepayments in full or terminations, liquidations and repurchases) on the
Mortgage Loans and, in the case of the HELOCs, the rate and timing of draws
and the allocations thereof.
In general, if a Term Note is purchased at a premium over its face amount
and payments of principal of such Term Note occur at a rate faster than that
assumed at the time of purchase, the purchaser's actual yield to maturity will
be lower than that anticipated at the time of purchase. Conversely, if a Term
Note is purchased at a discount from its face amount and payments of principal
of such Term Note occur at a rate that is slower than that assumed at the time
of purchase, the purchaser's actual yield to maturity will be lower than
originally anticipated.
With respect to certain HELOCs, the Loan Rate at origination may be below
the rate that would result from the sum of the then-applicable Index and Gross
Margin. Under the GMACM Underwriting Guide, Mortgagors are generally qualified
based on an assumed payment which reflects a rate significantly lower than the
maximum rate. The repayment of any such HELOC may thus be dependent on the
ability of the borrower to make larger interest payments following the
adjustment of the Loan Rate.
As discussed under "Risk Factors--Interest-Only Feature for HELOCs"
herein, a significant portion of the HELOCs are not expected to significantly
amortize prior to maturity. As a result, a borrower will generally be required
to pay a substantial principal amount at the maturity of such a HELOC. Such
HELOCs pose a greater risk of default than fully-amortizing Mortgage Loans,
such as the HELs, because the Mortgagor's ability to make such a substantial
payment at maturity will generally depend on the Mortgagor's ability to obtain
refinancing of such HELOCs or to sell the Mortgaged Property prior to the
maturity of the HELOC. The ability to obtain refinancing will depend on a
number of factors prevailing at the time refinancing or sale is required,
including, without limitation, the Mortgagor's personal economic
circumstances, the Mortgagor's equity in the related Mortgaged Property, real
estate values, prevailing market interest rates, tax laws and national and
regional economic conditions. For a general discussion of factors that may
affect a Mortgagor's personal economic circumstances, see "Risk
Factors--Dependency on Mortgagor Credit" herein. Neither the Depositor nor the
Seller nor any of their affiliates will be obligated to refinance or
repurchase any Mortgage Loan or to sell any Mortgaged Property.
For any Mortgage Loans secured by junior mortgages, any inability of the
Mortgagor to pay off the balance thereof may also affect the ability of the
Mortgagor to obtain refinancing at any time of any related senior mortgage
loan, thereby preventing a potential improvement in the Mortgagor's
circumstances. Under the Servicing Agreement the Servicer may be restricted or
prohibited from consenting to any refinancing of any related senior mortgage
loan, which in turn could adversely affect the Mortgagor's circumstances or
result in a prepayment or default under the corresponding junior Mortgage
Loan.
In addition to the Mortgagor's personal economic circumstances, a number
of factors, including homeowner mobility, job transfers, changes in the
Mortgagor's housing needs, the Mortgagor's net equity in the Mortgaged
Property, changes in the value of the Mortgaged Property, national and
regional economic conditions, enforceability of due-on-sale clauses,
prevailing market interest rates, servicing decisions, solicitations and the
availability of mortgage funds, seasonal purchasing and payment habits of
borrowers or changes in the deductibility for federal income tax purposes of
interest payments on home equity loans, may affect the rate and timing of
principal payments on the Mortgage Loans or draws on the HELOCs. There can be
no assurance as to the rate of principal payments on the Mortgage Loans or
draws on the HELOCs. The Mortgage Loans may be prepaid in full or in part
without penalty. The rate of principal payments and the rate of draws may
fluctuate substantially from time to time. Generally, home equity loans are
not viewed by borrowers as permanent financing. Due to the unpredictable
nature of both principal payments and draws on the HELOCs, the rates of
principal payments net of draws on the HELOCs may be much more volatile than
for typical first lien mortgage loans.
The yield to maturity of the Term Notes, and the rate and timing of
principal payments on the Mortgage Loans or draws on the HELOCs, may also be
affected by a wide variety of specific terms and conditions applicable to the
respective programs under which the Mortgage Loans were originated. For
example, the HELOCs may provide for future draws to be made only in specified
minimum amounts, or alternatively may permit draws to be made by check in any
amount. A pool of Mortgage Loans including HELOCs subject to the latter
provisions may be likely to remain outstanding longer with a higher aggregate
principal balance than a pool of Mortgage Loans including HELOCs with the
former provisions, because of the relative ease of making new draws.
Furthermore, the HELOCs may provide for interest rate changes on a daily or
monthly basis, or may have Gross Margins that may vary under certain
circumstances over the term of the loan. In extremely high market interest
rate scenarios, Term Notes backed by Mortgage Loans including HELOCs with
adjustable rates subject to substantially higher maximum rates than typically
apply to adjustable rate first mortgage loans may experience rates of default
and liquidation substantially higher than those that have been experienced on
other adjustable rate mortgage loan pools.
As a result of the payment terms of the HELOCs, there may be no principal
payments on the Term Notes in any given month. In addition, it is possible
that the aggregate draws on HELOCs may exceed the aggregate payments with
respect to principal on the Mortgage Loans for the related period. The Term
Notes provide for a period during which all or a portion of the principal
collections on the Mortgage Loans are reinvested in Additional Balances and/or
Subsequent Mortgage Loans or are accumulated in a trust account pending
commencement of an amortization period with respect to the Term Notes.
The Mortgage Loans generally will contain due-on-sale provisions
permitting the mortgagee to accelerate the maturity of such Mortgage Loan upon
sale or certain transfers by the Mortgagor of the underlying Mortgaged
Property. The Servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable
law. The extent to which Mortgage Loans are assumed by purchasers of the
Mortgaged Properties rather than prepaid by the related Mortgagors in
connection with the sales of the Mortgaged Properties will affect the weighted
average life of the Term Notes. See "The Seller and Servicer--Collection and
Other Servicing Procedures" herein for a description of certain provisions of
the Servicing Agreement that may affect the prepayment experience on the
Mortgage Loans.
The Servicer may allow the refinancing of a Mortgage Loan in the Trust
Estate by accepting prepayments thereon and permitting a new loan to the same
borrower secured by a mortgage on the same property, which may be originated
by the Servicer or by an unrelated entity. In the event of such a refinancing,
the new loan would not be included in the Trust Estate and, therefore, such
refinancing would have the same effect as a prepayment in full of the related
Mortgage Loan. The Servicer may, from time to time, implement programs
designed to encourage refinancing. Such programs may include, without
limitation, modifications of existing loans, general or targeted
solicitations, the offering of pre-approved applications, reduced origination
fees or closing costs, or other financial incentives. Targeted solicitations
may be based on a variety of factors, including the credit of the borrower or
the location of the Mortgaged Property. In addition, the Servicer may
encourage refinancing of Mortgage Loans, including defaulted Mortgage Loans,
under which creditworthy borrowers assume the outstanding indebtedness of such
Mortgage Loans which may be removed from the Trust Estate. As a result of such
programs, (i) the rate of principal prepayments of the Mortgage Loans may be
higher than would otherwise be the case, and (ii) in some cases, the average
credit or collateral quality of the Mortgage Loans remaining in the Trust
Estate may decline.
Investors in the Term Notes should note that in certain instances in
which a Mortgagor either (i) requests an increase in the credit limit on the
related HELOC above the limit stated on the Credit Line Agreement, (ii)
requests to place a lien on the related Mortgaged Property senior to the lien
of the related Mortgage Loan, or (iii) refinances the senior lien resulting in
a Combined Loan-to-Value Ratio above the previous Combined Loan-to-Value Ratio
for such loan, the Servicer will have the option to purchase from the Trust
Estate the related Mortgage Loan at the Repurchase Price. There are no
limitations on the frequency of such repurchases or the characteristics of the
Mortgage Loans so repurchased. In addition, on any Payment Date the Seller, in
its capacity as the holder of the Certificates, may designate certain Mortgage
Loans for removal from the Trust Estate. Such repurchases may lead to an
increase in prepayments on the Mortgage Loans in the Trust Estate, which may
reduce the yield on the Term Notes. In addition, such repurchases may affect
the characteristics of the Mortgage Loans in the Trust Estate in the aggregate
with respect to Loan Rates and credit quality.
Although the Loan Rates on the HELOCs are subject to periodic
adjustments, such adjustments generally (i) will not increase the Loan Rates
over a fixed maximum rate during the life of any HELOC and (ii) will be based
on an Index (which may not rise and fall consistently with prevailing market
interest rates) plus the related Gross Margin (which may vary under certain
circumstances, and which may be different from margins being used at the time
for newly originated adjustable rate mortgage loans). As a result, the Loan
Rates on the HELOCs at any time may not equal the prevailing rates for
similar, newly originated adjustable rate home equity mortgage loans and
accordingly the rate of principal payments, if any, and draws on the HELOCs
may be lower or higher than would otherwise be anticipated. There can be no
certainty as to the rate of principal payments on the Mortgage Loans or draws
on the HELOCs during any period or over the life of the Term Notes.
The yield to investors on the Term Notes will be sensitive to
fluctuations in the level of LIBOR and the Note Rate will be capped. See "Risk
Factors--Risk of Loan Rates Reducing the Note Rate on the Term Notes" herein.
With respect to the indices used in determining the Note Rate for the
Term Notes or the Loan Rates of the underlying Mortgage Loans, a number of
factors affect the performance of each such index and may cause such index to
move in a manner different from other indices. To the extent that such index
may reflect changes in the general level of interest rates less quickly than
other indices, in a period of rising interest rates, increases in the yield to
the Term Noteholders due to such rising interest rates may occur later than
that which would be produced by other indices, and in a period of declining
rates, such index may remain higher than other market interest rates which may
result in a higher level of prepayments of the Mortgage Loans, which, in the
case of HELOCs, adjust in accordance with such index, than of mortgage loans
which adjust in accordance with other indices.
The timing of changes in the rate of principal payments on a Term Note
may significantly affect an investor's actual yield to maturity, even if the
average rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a payment of principal on a
Term Note, the greater will be the effect on an investor's yield to maturity.
As a result, the effect on an investor's yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during
the period immediately following the issuance of the Term Notes would not be
fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
The rate and timing of defaults on the Mortgage Loans will also affect
the rate and timing of principal payments on the Mortgage Loans and thus the
yield on the Term Notes. There can be no assurance as to the rate of losses or
delinquencies on any of the Mortgage Loans, however, the rate of such losses
and delinquencies are likely to be higher than those of traditional first lien
mortgage loans, particularly in the case of Mortgage Loans with high Combined
Loan-to-Value Ratios or low Junior Ratios. To the extent that any losses are
incurred on any of the Mortgage Loans that are not covered by the applicable
credit enhancements, holders of the Term Notes will bear all risk of such
losses resulting from default by Mortgagors. Even where the Policy covers all
losses incurred on the Mortgage Loans, the effect of losses may be to increase
prepayment rates on the Mortgage Loans, thus reducing the weighted average
life and affecting the yield to maturity.
Amounts on deposit in the Funding Account may be used during the
Revolving Period to acquire Additional Balances and Subsequent Mortgage Loans.
In the event that, at the end of the Revolving Period, any amounts on deposit
in the Funding Account have not been used to acquire Subsequent Mortgage Loans
or Additional Balances, then the Notes will be prepaid in part on the
following Payment Date.
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor thereof of each dollar distributed in reduction of principal of
such security (assuming no losses). The weighted average life of the Term
Notes will be influenced by, among other factors, the rate of principal
payments (and, with respect to the HELOCs, the rate of draws) on the Mortgage
Loans.
The primary source of information available to investors concerning the
Term Notes will be the monthly statements discussed herein under "The
Agreements--The Trust Agreement and the Indenture--Reports to Noteholders",
which will include information as to the outstanding Term Note Balance. There
can be no assurance that any additional information regarding the Term Notes
will be available through any other source. In addition, the Depositor is not
aware of any source through which price information about the Term Notes will
be generally available on an ongoing basis. The limited nature of such
information regarding the Term Notes may adversely affect the liquidity of the
Term Notes, even if a secondary market for the Term Notes becomes available.
The Constant Prepayment Rate ("CPR") model is used herein. The CPR model
assumes that the outstanding principal balance of a pool of mortgage loans
prepays at a specified constant annual rate of CPR. In generating monthly cash
flows, this rate is converted to an equivalent constant monthly rate. To
assume 35% CPR or any other CPR percentage is to assume that the stated
percentage of the Pool Balance is prepaid over the course of a year. No
representation is made that the Mortgage Loans will prepay at that or any
other rate.
The tables set forth below are based on a CPR, constant draw rate (in the
case of the HELOCs, and which, for purposes of the assumptions, is the amount
of Additional Balances drawn each month as an annualized percentage of the
Pool Balance outstanding at the beginning of such month) and optional
termination assumptions as indicated in the tables below. The Mortgage Loans
are assumed to consist of one sub-pool of Mortgage Loans with the
characteristics set forth below in the table captioned "Assumed Mortgage Loan
Characteristics".
In addition, it was assumed that (i) payments are made in accordance with
the description set forth under "Description of the Securities--Priority of
Distributions", (ii) payments on the Notes will be made on the 18th day of
each calendar month regardless of the day on which the Payment Date actually
occurs commencing in July 1999, (iii) no extension past the scheduled maturity
date of a Mortgage Loan is made, (iv) no delinquencies or defaults occur, (v)
in the case of the HELOCs, monthly draws are calculated under each of the
assumptions as set forth in the tables below before giving effect to
prepayments, (vi) the Mortgage Loans pay on the basis of a 30-day month and a
360-day year, (vii) there is no restriction on the Maximum Variable Funding
Balance, (viii) no Rapid Amortization Event or Managed Amortization Event
occurs, (ix) each Mortgage Loan is payable monthly, (x) the closing date is
June 17, 1999 (the "CLOSING DATE"), (xi) for each Payment Date, LIBOR is equal
to 5% per annum and (xii) the initial Term Note Balance is as set forth on the
cover page hereof.
The actual characteristics and performance of the Mortgage Loans will
likely differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a
general sense of how the principal cash flows might behave under varying
prepayment and (in the case of the HELOCs) draw scenarios. For example, it is
very unlikely that the Mortgage Loans will prepay and/or experience draws at a
constant rate until maturity or that all Mortgage Loans will prepay and/or
experience draws at the same rate. Moreover, the diverse remaining terms to
stated maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the tables at the various assumptions
specified, even if the weighted average remaining term to stated maturity of
the Mortgage Loans is as assumed. Any difference between such assumptions and
the actual characteristics and performance of the Mortgage Loans, or actual
prepayment experience, will affect the percentages of initial Term Note
Balances outstanding over time and the weighted average life of the Term
Notes. Neither the CPR model nor any other prepayment model or assumption
purports to be an historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Mortgage Loans. Variations in the actual prepayment
experience and the Principal Balances of the Mortgage Loans that prepay may
increase or decrease each weighted average life shown in the following tables.
Such variations may occur even if the average prepayment experience of all
Mortgage Loans equals the CPR.
ASSUMED MORTGAGE LOAN CHARACTERISTICS(1)
HELOC INITIAL BALANCE LOAN RATE REMAINING MATURITY CREDIT LIMIT
1 $250,000,000 9.510% 173 $252,500,000
- --------------------
(1) Assumes (i) an 18 month Revolving Period and a 48 month Managed
Amortization Period, and (ii) during the Revolving Period, all principal
collections are reinvested in HELOCs.
PERCENTAGE OF INITIAL TERM NOTE BALANCE (1)(2)
Payment Date Percentage of Balance
CPR 12% 20% 25% 30% 35% 40% 45%
- --- --- --- --- --- --- --- ---
Initial........................................ 100 100 100 100 100 100 100
June 2000...................................... 100 100 100 100 100 100 100
June 2001...................................... 100 95 92 89 86 82 79
June 2002...................................... 100 87 79 71 63 56 49
June 2003...................................... 100 79 67 56 46 38 31
June 2004...................................... 100 71 57 44 34 26 19
June 2005...................................... 94 61 45 33 24 17 11
June 2006...................................... 82 48 34 23 15 10 0
June 2007...................................... 72 38 25 16 10 0 0
June 2008...................................... 63 30 19 11 0 0 0
June 2009...................................... 56 24 14 0 0 0 0
June 2010...................................... 49 19 10 0 0 0 0
June 2011...................................... 43 15 0 0 0 0 0
June 2012...................................... 38 12 0 0 0 0 0
June 2013...................................... 33 0 0 0 0 0 0
June 2014...................................... 0 0 0 0 0 0 0
Weighted Average Life to 10% call (years)...... 10.81 7.41 5.94 4.98 4.31 3.81 3.44
Weighted Average Life to maturity (years)...... 10.81 7.45 6.14 5.21 4.51 3.98 3.58
- ----------------------
(1) Assumes (i) except where indicated, that an optional termination is
exercised on the first Payment Date on which the Term Note Balance as
of the last date of the related Collection Period is less than or
equal to 10% of the Initial Term Note Balance, (ii) in the case of
the HELOCs, a Gross CPR as disclosed above less a constant draw rate
of 12.0%, and (iii) in the case of the HELs, such collateral is
modeled as if it is HELOCs with the same Gross and Net CPR
assumptions.
(2) All percentages are rounded to the nearest 1%.
THE AGREEMENTS
THE PURCHASE AGREEMENT
The Initial Mortgage Loans to be transferred to the Issuer by the
Depositor were or will be purchased by the Depositor from the Seller pursuant
to a Mortgage Loan Purchase Agreement dated as of the Cut-Off Date (the
"PURCHASE AGREEMENT") among the Seller, the Depositor, as purchaser, the
Issuer and the Indenture Trustee. The following summary describes certain
terms of the Purchase Agreement among the Seller, the Depositor, the Issuer
and the Indenture Trustee. The summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of
the Purchase Agreement. See "The Agreements" in the Prospectus.
Under the Purchase Agreement, the Seller has agreed to transfer to the
Depositor the Initial Mortgage Loans and related Additional Balances. Pursuant
to an assignment by the Depositor executed on the Closing Date, upon such
transfer to the Depositor, the Initial Mortgage Loans will be transferred by
the Depositor to the Issuer, as well as the Depositor's rights in, to and
under the Purchase Agreement, which will include the right to purchase
Additional Balances relating to the Initial Mortgage Loans. Subsequent
Mortgage Loans are intended to be purchased by the Issuer from the Seller on
or before December 31, 1999, as set forth in the Purchase Agreement, from
funds on deposit in the Pre-Funding Account. Subsequent Mortgage Loans are
also intended to be purchased, under certain circumstances, by the Issuer from
the Seller from funds on deposit in the Funding Account. The Purchase
Agreement will provide that the Subsequent Mortgage Loans must conform to
certain specified characteristics described above under "Description of the
Mortgage Loans-Conveyance of Subsequent Mortgage Loans, the Pre-Funding
Account and the Funding Account." For a general description of the Seller, see
"The Seller and Servicer" herein.
TRANSFER OF MORTGAGE LOANS. Pursuant to the Purchase Agreement, the
Seller will transfer and assign to the Depositor all of its right, title and
interest in and to the Initial Mortgage Loans, the related loan agreements
evidencing the HELOCs (the "CREDIT LINE AGREEMENTS"), the related Mortgage
Notes, the Mortgages and other related documents (collectively, the "RELATED
DOCUMENTS") and all of the Additional Balances thereafter created prior to the
commencement of the Rapid Amortization Period. The purchase price of the
Initial Mortgage Loans is a specified percentage of the face amount thereof as
of the time of transfer and is payable by the Depositor, as provided in the
Purchase Agreement. The Purchase Price paid for any Subsequent Mortgage Loans
by the Indenture Trustee, at the direction of the Issuer, from amounts on
deposit in the Pre-Funding Account shall be one-hundred percent (100%) of the
aggregate Principal Balances of the Subsequent Mortgage Loans as of the date
so transferred (as identified on the Mortgage Loan Schedule attached to the
related Subsequent Transfer Agreement provided by the Seller). The purchase
price of each Additional Balance is the amount of the related new advance and
is payable by the Issuer, either in cash or in the form of an increase in the
Variable Funding Balance of the Variable Funding Notes (and, in certain
circumstances, the issuance of additional Certificates), as provided in the
Purchase Agreement and the Indenture.
The Purchase Agreement will require that, within the time period
specified therein, the Seller deliver to the Indenture Trustee (as the
Issuer's agent for such purpose) the Mortgage Loans and the Related Documents.
In lieu of delivery of original mortgages, the Seller may deliver true and
correct copies thereof that have been certified as to authenticity by the
appropriate county recording office where such mortgage is recorded.
REPRESENTATIONS AND WARRANTIES. The Seller will represent and warrant to
the Depositor, and to the Issuer with respect to any Subsequent Mortgage
Loans, that, among other things, (a) the information with respect to the
Mortgage Loans set forth in the schedule attached to the Purchase Agreement is
true and correct in all material respects and (b) immediately prior to the
sale of the Initial Mortgage Loans to the Depositor and the Subsequent
Mortgage Loans to the Issuer, the Seller was the sole owner and holder of the
Mortgage Loans free and clear of any and all liens and security interests. The
Seller will also represent and warrant to the Depositor, and to the Issuer
with respect to any Subsequent Mortgage Loans, that, among other things, as of
the Closing Date and the related Subsequent Transfer Date with respect to any
Subsequent Mortgage Loans, (i) the Purchase Agreement constitutes a legal,
valid and binding obligation of the Seller and (ii) the Purchase Agreement
constitutes a valid transfer and assignment of all right, title and interest
of the Seller in and to the Initial Mortgage Loans or the Subsequent Mortgage
Loans, as applicable, and the proceeds thereof.
Within 90 days of the Closing Date and one Business Day prior to the
related Subsequent Transfer Date with respect to any Subsequent Mortgage
Loans, the Custodian will review or cause to be reviewed the Mortgage Loans
and the Related Documents and if any Mortgage Loan or Related Document is
found to be defective in any material respect which may materially and
adversely affect the value of the related Mortgage Loan or the interests of
the Indenture Trustee (as pledgee of the Trust Estate), the Securityholders or
the Enhancer in such Mortgage Loan and such defect is not cured within 90 days
following notification thereof to the Seller and the Issuer by the Custodian,
the Seller will be obligated under the Purchase Agreement to deposit the
Repurchase Price into the Custodial Account. In lieu of any such deposit, the
Seller may substitute an Eligible Substitute Loan. Any such purchase or
substitution will result in the removal of the defective Mortgage Loan from
the Trust Estate (each such Mortgage Loan, a "DELETED LOAN"). The obligation
of the Seller to remove a Deleted Loan from the Trust Estate is the sole
remedy regarding any defects in the Mortgage Loans and Related Documents
available to the Issuer, the Certificateholders (or the Owner Trustee on
behalf of the Certificateholders) and the Noteholders (or the Indenture
Trustee on behalf of the Noteholders) against the Seller.
With respect to any Mortgage Loan, the "REPURCHASE PRICE" is equal to the
Principal Balance of such Mortgage Loan at the time of any removal plus
accrued and unpaid interest thereon to the date of removal. In connection with
the substitution of an Eligible Substitute Loan, the Seller will be required
to deposit in the Custodial Account an amount (the "SUBSTITUTION ADJUSTMENT
AMOUNT") equal to the excess of the Principal Balance of the related Deleted
Loan over the Principal Balance of such Eligible Substitute Loan.
An "ELIGIBLE SUBSTITUTE LOAN" is a mortgage loan substituted by the
Seller for a Deleted Loan, which mortgage loan must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Deleted Loan, an aggregate
outstanding Principal Balance) not in excess of the Principal Balance of such
Deleted Loan; (ii) have a Loan Rate, Net Loan Rate and Gross Margin no lower
than and not more than 1% in excess of the Loan Rate, Net Loan Rate and Gross
Margin, respectively, of such Deleted Loan; (iii) have a Combined
Loan-to-Value Ratio at the time of substitution no higher than that of the
Deleted Loan at the time of substitution; (iv) have a remaining term to
maturity not more than one year earlier and not later than the remaining term
to maturity of the Deleted Loan; (v) comply with each representation and
warranty as to the Mortgage Loans set forth in the Purchase Agreement (deemed
to be made as of the date of substitution); and (vi) satisfy certain other
conditions specified in the Indenture.
In addition, the Seller will be obligated to deposit the Repurchase Price
or substitute an Eligible Substitute Loan with respect to a Mortgage Loan as
to which there is a material breach of a representation or warranty in the
Purchase Agreement and such breach is not cured by the Seller within the time
provided in the Purchase Agreement.
In addition, the Seller has made representations and warranties to the
Depositor with respect to the Initial Mortgage Loans and will make certain
representations and warranties to the Issuer with respect to any Subsequent
Mortgage Loans. The representations and warranties of the Seller will be
assigned to the Indenture Trustee for the benefit of the Noteholders, and
therefore a breach of the representations and warranties of the Seller will be
enforceable on behalf of the Trust Estate.
The representations and warranties will generally include, among other
things, that: (i) as of the Cut-Off Date (or related Subsequent Transfer Date,
with respect to any Subsequent Mortgage Loans), the information set forth in a
schedule of the related Mortgage Loans is true and correct in all material
respects as of the date or dates respecting which such information is
furnished; (ii) the Seller was the sole holder and owner of the Mortgage Loans
free and clear of any and all liens and security interests; (iii) to the best
of Seller's knowledge, each Mortgage Loan complied in all material respects
with all applicable local, state and federal laws; (iv) no Mortgage Loan is
one month or more delinquent in payment of principal and interest; and (v) to
the best of Seller's knowledge, there is no delinquent recording or other tax
or fee or assessment lien against any related Mortgaged Property.
The Depositor will assign to the Owner Trustee all of its right, title
and interest in the Purchase Agreement, insofar as the Purchase Agreement
relates to the representations and warranties made by the Seller in respect of
the Initial Mortgage Loans and any remedies provided for with respect to any
breach of such representations and warranties. If the Seller cannot cure a
breach of any representation or warranty made by it in respect of a Mortgage
Loan which materially and adversely affects the interests of the Noteholders
or the Enhancer in such Mortgage Loan, within 90 days after notice from the
Servicer, the Seller will be obligated to repurchase such Mortgage Loan at the
Repurchase Price.
As to any such Mortgage Loan required to be purchased by the Seller as
provided above, rather than purchase the Mortgage Loan, the Seller may, at its
sole option, remove such Deleted Loan from the Trust Estate and substitute in
its place an Eligible Substitute Loan.
ASSIGNMENT OF THE MORTGAGE LOANS. On the Closing Date, the Depositor will
cause the Initial Mortgage Loans to be assigned without recourse to the Trust
Estate and on any Subsequent Transfer Date the Seller will cause the related
Subsequent Mortgage Loans to be assigned without recourse to the Indenture
Trustee, as assignee of the Owner Trustee, on behalf of the Trust Estate,
together with all principal and interest received on or with respect to such
Mortgage Loans after the Cut-Off Date or related Subsequent Cut-Off Date with
respect to any Subsequent Mortgage Loans (other than principal and interest
due on or before the Cut-Off Date or related Subsequent Cut-Off Date). The
Owner Trustee will, concurrently with such assignment, grant a security
interest in the Trust Estate to the Indenture Trustee to secure the Notes.
Each Initial Mortgage Loan will be identified in a schedule appearing as an
exhibit to the Purchase Agreement and each Subsequent Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related Subsequent
Transfer Agreement. Such schedules will include, among other things,
information as to the Principal Balance of each Initial Mortgage Loan as of
the Cut-Off Date or of any Subsequent Mortgage Loans as of the Subsequent
Cut-Off Date, as well as information respecting the Loan Rate, the currently
scheduled monthly payment of principal and interest, the maturity of the
Credit Line Agreement or Mortgage Note, as applicable, and the Combined
Loan-to-Value Ratio at origination or modification.
The Seller will, as to each Mortgage Loan, deliver to the Custodian the
legal documents relating to such Mortgage Loan that are in possession of the
Seller, which will include the following: (i) the Credit Line Agreement or
Mortgage Note, as applicable (and any modification or amendment thereto),
endorsed without recourse in blank; (ii) the Mortgage (except for any Mortgage
not returned from the public recording office) with evidence of recording
indicated thereon; (iii) an assignment in recordable form of the Mortgage; and
(iv) if applicable, any riders or modifications to such Credit Line Agreement
or Mortgage Note, as applicable, and Mortgage, together with certain other
documents at such times as set forth in the related Agreement. Such
assignments may be blanket assignments covering Mortgages secured by Mortgaged
Properties located in the same county, if permitted by law. The Seller may not
be required to deliver one or more of such documents if such documents are
missing from the files of the party from whom such Mortgage Loans were
purchased.
REVIEW OF MORTGAGE LOANS. The Bank of Maryland will be the custodian (the
"CUSTODIAN") with respect to the Mortgage Loans pursuant to a custodial
agreement (the "CUSTODIAL AGREEMENT"), and will maintain possession of and
review documents relating to the Mortgage Loans as the agent of the Indenture
Trustee or, following payment in full of the Notes and discharge of the
Indenture, the Owner Trustee.
The Custodian will hold such documents in trust for the benefit of the
holders of the Securities and will review such documents within 90 days. If
any such document is found to be defective in any material respect, the
Custodian will be required to notify the Indenture Trustee, as pledgee of the
Issuer. The Indenture Trustee will be required to then notify the Seller. If
the Seller cannot cure such defect 90 days after notice of the defect is given
to the Seller, the Seller will be required to, within 90 days, either
repurchase the related Mortgage Loan or any property acquired in respect
thereof from the Indenture Trustee, or substitute for such Mortgage Loan a new
Mortgage Loan in accordance with the standards set forth herein. The Depositor
will not be obligated to purchase or substitute for such Mortgage Loan if the
Seller defaults on its obligation to do so. The obligation to repurchase or
substitute for a Mortgage Loan constitutes the sole remedy available to the
Noteholders or the Indenture Trustee for a material defect in a constituent
document. Any Mortgage Loan not so purchased or substituted for shall remain
in the Trust Estate.
THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing Agreement
among the Issuer, the Indenture Trustee and the Servicer. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of the Servicing Agreement. See "The Agreements"
in the Prospectus.
All of the Mortgage Loans will initially be serviced by the Servicer, but
may be subserviced by one or more subservicers designated by the Servicer
pursuant to subservicing agreements between the Servicer and any future
subservicers. For a general description of the Servicer and its activities,
and certain information concerning the Servicer's delinquency experience on
residential mortgage loans, see "The Seller and Servicer--Delinquency and Loss
Experience of the Servicer's Portfolio" herein.
P&I COLLECTIONS. The Servicer will be required to establish and maintain
an account (the "CUSTODIAL ACCOUNT") in which the Servicer will be required to
deposit or cause to be deposited any amounts representing payments on and any
collections received in respect of the Mortgage Loans received by it
subsequent to the Cut-Off Date or related Subsequent Cut-Off Date with respect
to any Subsequent Mortgage Loans. The Custodial Account must be an Eligible
Account. An "ELIGIBLE ACCOUNT" is either (i) maintained with a depository
institution whose debt obligations at the time of any deposit therein are
rated by the Rating Agencies in their highest rating category, (ii) an account
or accounts the deposits in which are fully insured to the limits established
by the FDIC, provided that any deposits not so insured shall be otherwise
maintained such that, as evidenced by an opinion of counsel, the Noteholders
have a claim with respect to the funds in such accounts or a perfected first
priority security interest in any collateral securing such funds that is
superior to the claims of any other depositors or creditors of the depository
institution with which such accounts are maintained, (iii) in the case of the
Custodial Account, a trust account or accounts maintained in either the
corporate trust department or the corporate asset services department of a
financial institution which has debt obligations that meet certain rating
criteria, (iv) in the case of the Note Payment Account, a trust account or
accounts maintained with the Indenture Trustee, or (v) such other account or
accounts acceptable to the Rating Agencies. On the 13th day of each month, or
if such day is not a Business Day, the next succeeding Business Day (the
"DETERMINATION DATE"), the Servicer will determine the aggregate amounts
required to be withdrawn from the Custodial Account and deposited into the
Note Payment Account and the Distribution Account prior to the close of
business on the Business Day next succeeding each Determination Date.
"PERMITTED INVESTMENTS" are specified in the Indenture and are limited to
investments which meet the criteria of the Rating Agencies from time to time
as being consistent with their then-current ratings of the Notes.
The Servicer will make withdrawals from the Custodial Account, including
but not limited to the following, and deposit such amounts as follows:
(i) to the Note Payment Account and the Distribution Account, an amount
equal to the P&I Collections on the Business Day prior to each Payment Date;
and
(ii) to pay to itself or the Seller various reimbursement amounts and
other amounts as provided in the Servicing Agreement.
As to any Payment Date, "P&I COLLECTIONS" will equal the sum of (a)
Interest Collections for such Payment Date and (b) prior to the commencement
of the Rapid Amortization Period, "NET PRINCIPAL COLLECTIONS" for such Payment
Date, which are the excess, if any, of Principal Collections for such Payment
Date over the aggregate amount of Additional Balances created during the
related Collection Period and conveyed to the Issuer, or, during the Rapid
Amortization Period, Principal Collections for such date. After the
commencement of the Rapid Amortization Period, Principal Collections for a
Collection Period will no longer be applied to acquire Additional Balances
during such Collection Period.
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements or Mortgage Notes, as applicable,
between amounts collected in respect of interest and amounts collected in
respect of principal. As to any Payment Date, "INTEREST COLLECTIONS" will be
equal to the sum of (i) the amounts collected during the related Collection
Period, including Net Liquidation Proceeds (as defined below), allocated to
interest pursuant to the terms of the Credit Line Agreements or Mortgage
Notes, as applicable (exclusive of the pro rata portion thereof attributable
to Additional Balances not conveyed to the Trust Estate during the Rapid
Amortization Period), reduced by the Servicing Fees for such Collection Period
and (ii) the interest portion of (A) the Repurchase Price for any Deleted
Loans and (B) the cash purchase price paid in connection with any optional
purchase of the Mortgage Loans by the Servicer. As to any Payment Date,
"PRINCIPAL COLLECTIONS" will be equal to the sum of (i) the amount collected
during the related Collection Period, including Net Liquidation Proceeds
allocated to principal pursuant to the terms of the Credit Line Agreements or
Mortgage Notes, as applicable (exclusive of the pro rata portion thereof
attributable to Additional Balances not conveyed to the Trust Estate during
the Rapid Amortization Period) and (ii) the principal portion of the
Repurchase Price for any Deleted Loans, any Substitution Adjustment Amounts
and the cash purchase price paid in connection with any optional purchase of
the Mortgage Loans by the Servicer.
As to any Payment Date, the "COLLECTION PERIOD" is the calendar month
preceding the month of such Payment Date.
"NET LIQUIDATION PROCEEDS" with respect to any Mortgage Loan are the
proceeds (excluding amounts drawn on the Policy) received in connection with
the liquidation of such Mortgage Loan, whether through trustee's sale,
foreclosure sale or otherwise, reduced by related expenses, but not including
the portion, if any, of such amount that exceeds the Principal Balance of the
Mortgage Loan at the end of the Collection Period immediately preceding the
Collection Period in which such Mortgage Loan became a Liquidated Mortgage
Loan.
With respect to any date, the "POOL BALANCE" will be equal to the
aggregate of the sum of the Principal Balances of all Mortgage Loans as of
such date and the Pre-Funded Amount, if any, on deposit in the Pre-Funding
Account. The "PRINCIPAL BALANCE" of a Mortgage Loan (other than a Liquidated
Mortgage Loan) on any day is equal to the related Cut-Off Date Balance, plus
(i) any Additional Balances in respect of such Mortgage Loan conveyed to the
Trust Estate minus (ii) all collections credited against the Principal Balance
of such Mortgage Loan in accordance with the related Credit Line Agreement or
Mortgage Note, as applicable, prior to such day (exclusive of the pro rata
portion thereof attributable to Additional Balances not conveyed to the Trust
Estate during the Rapid Amortization Period). The Principal Balance of a
Liquidated Mortgage Loan after final recovery of substantially all of the
related Liquidation Proceeds which the Servicer reasonably expects to receive
will be zero.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. A "SERVICING DEFAULT"
under the Servicing Agreement generally will include: (i) any failure by the
Servicer to deposit to the Custodial Account or the Note Payment Account any
required payment which continues unremedied for five (5) business days after
the date upon which written notice of such failure shall have been given to
the Servicer by the Issuer or the Indenture Trustee, or to the Servicer, the
Issuer and the Indenture Trustee by the Enhancer; (ii) any failure by the
Servicer duly to observe or perform in any material respect any other of its
covenants or agreements in the Servicing Agreement which continues unremedied
for 45 days after the date upon which written notice of such failure shall
have been given to the Servicer by the Issuer or the Indenture Trustee, or to
the Servicer, the Issuer and the Indenture Trustee by the Enhancer; and (iii)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Servicer and certain actions
by the Servicer indicating its insolvency or inability to pay its obligations.
So long as a Servicing Default remains unremedied, either the Depositor,
the Enhancer or the Indenture Trustee may, by written notification to the
Servicer and to the Issuer or the Indenture Trustee, as applicable, terminate
all of the rights and obligations of the Servicer under the Servicing
Agreement (other than any right of the Servicer as Securityholder and other
than the right to receive servicing compensation and expenses for servicing
the Mortgage Loans during any period prior to the date of such termination,
and such other reimbursement of amounts the Servicer is entitled to withdraw
from the Custodial Account) whereupon the Indenture Trustee, within 90 days of
such termination, will succeed to all responsibilities, duties and liabilities
of the Servicer under the Servicing Agreement (other than the obligation to
purchase Mortgage Loans under certain circumstances) and will be entitled to
similar compensation arrangements. In the event that the Indenture Trustee
would be obligated to succeed the Servicer but is unwilling so to act, it may
appoint (or if it is unable so to act, it shall appoint) or petition a court
of competent jurisdiction for the appointment of an approved mortgage
servicing institution with a net worth of at least $10,000,000 to act as
successor to the Servicer under the Servicing Agreement; provided that any
such successor Servicer shall be acceptable to the Enhancer, as evidenced by
the Enhancer's prior written consent (which consent shall not be unreasonably
withheld) and provided further that the appointment of any such successor
Servicer will not result in the qualification, reduction or withdrawal of the
ratings assigned to the Notes by the Rating Agencies, if determined without
regard to the Policy. Pending such appointment, the Indenture Trustee is
obligated to act in such capacity. The Indenture Trustee and such successor
may agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the initial Servicer under the Servicing
Agreement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES. The principal servicing
compensation to be paid to the Servicer in respect of its servicing activities
will be equal to 0.50% per annum, based on the aggregate Principal Balance of
the Mortgage Loans. The Servicer will retain all assumption fees and late
payment charges, to the extent collected from Mortgagors, and any benefit
which may accrue as a result of the investment of funds in the Custodial
Account, the Note Payment Account or the Distribution Account.
The Servicer (or, if specified in the Servicing Agreement, the Indenture
Trustee on behalf of the Trust Estate) will pay or cause to be paid certain
ongoing expenses associated with the Trust Estate and incurred by it in
connection with its responsibilities under the Servicing Agreement, including,
without limitation, payment of the fees of the Enhancer, payment of the fees
and disbursements of the Indenture Trustee, the Owner Trustee, the Custodian,
the Note Registrar and any Paying Agent, and payment of expenses incurred in
enforcing the obligations of the Seller. The Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of the Seller
under certain limited circumstances. In addition, as indicated in the
preceding section, the Servicer will be entitled to reimbursements for certain
expenses incurred by it in connection with Liquidated Loans and in connection
with the restoration of Mortgaged Properties, such right of reimbursement
being prior to the rights of Noteholders to receive any related Liquidation
Proceeds (including Insurance Proceeds).
EVIDENCE AS TO COMPLIANCE. The Servicing Agreement provides for delivery
(on or before a specified date in each year) to the Depositor and the
Indenture Trustee of an annual statement signed by an officer of the Servicer
to the effect that the Servicer has fulfilled in all material respects the
minimum servicing standards set forth in the Uniform Single Attestation
Program for Mortgage Bankers (the "AUDIT GUIDE") throughout the preceding year
or, if there has been a material default in the fulfillment of any such
obligation, such statement shall specify each such known default and the
nature and status thereof. Such statement may be provided as a single form
making the required statements as to the Servicing Agreement along with other
similar agreements.
The Servicing Agreement also provides that on or before a specified date
in each year, beginning the first such date that is at least a specified
number of months after the Cut-Off Date, a firm of independent public
accountants will furnish a statement to the Depositor and the Indenture
Trustee to the effect that, on the basis of an examination by such firm
conducted substantially in compliance with the standards established by the
American Institute of Certified Public Accountants, the servicing of mortgage
loans under agreements (including the Servicing Agreement) was conducted
substantially in compliance with the minimum servicing standards set forth in
the Audit Guide (to the extent that procedures in the Audit Guide are
applicable to the servicing obligations set forth in such agreements) except
for such significant exceptions or errors in records that shall be reported in
such statement.
Copies of the annual statement of an officer of the Servicer may be
obtained by Noteholders without charge upon written request to the Servicer,
at the address indicated in the monthly statement to Noteholders.
CERTAIN MATTERS REGARDING THE SERVICER. The Servicing Agreement provides
that the Servicer may not resign from its obligations and duties thereunder
except upon a determination that performance of such duties is no longer
permissible under applicable law or except in connection with a permitted
transfer of servicing. No such resignation will become effective until the
Indenture Trustee or a successor servicer has assumed the Servicer's
obligations and duties under the Servicing Agreement.
The Servicing Agreement also provides that, except as set forth below,
neither the Servicer nor any director, officer, employee or agent of the
Servicer will be under any liability to the Trust Estate or the Noteholders
for any action taken or for refraining from the taking of any action in good
faith pursuant to the Servicing Agreement, or for errors in judgment;
PROVIDED, however, that neither the Servicer nor any such person will be
protected against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of
duties or by reason of reckless disregard of obligations and duties
thereunder. The Servicing Agreement further provides that the Servicer and any
director, officer, employee or agent of the Servicer is entitled to
indemnification by the Trust Estate and will be held harmless against any
loss, liability or expense incurred in connection with any legal action
relating to the Servicing Agreement, other than any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or gross negligence in
the performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, the Servicing Agreement
provides that the Servicer will not be under any obligation to appear in,
prosecute or defend any legal or administrative action that is not incidental
to its respective duties under the Servicing Agreement and which in its
opinion may involve it in any expense or liability. The Servicer may, however,
in its discretion undertake any such action which it may deem necessary or
desirable with respect to the Servicing Agreement and the rights and duties of
the parties thereto and the interests of the Noteholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Estate and the
Servicer will be entitled to be reimbursed therefor out of funds otherwise
payable to Noteholders.
Any person into which the Servicer may be merged or consolidated, any
person resulting from any merger or consolidation to which the Servicer is a
party or any person succeeding to the business of the Servicer will be the
successor of the Servicer under the Servicing Agreement, provided that such
person meets the requirements set forth in the Servicing Agreement. In
addition, notwithstanding the prohibition on its resignation, the Servicer may
assign its rights and delegate its duties and obligations under the Servicing
Agreement to any person reasonably satisfactory to the Enhancer and meeting
the requirements set forth in the Servicing Agreement; provided, that such
consent to assignment may not be unreasonably withheld. In the case of any
such assignment, the Servicer will be released from its obligations under the
Servicing Agreement, exclusive of liabilities and obligations incurred by it
prior to the time of such assignment.
AMENDMENT. The Servicing Agreement may be amended by the parties thereto,
provided that any amendment be accompanied by a letter from each Rating Agency
that such amendment will not result in the qualification, reduction or
withdrawal of the rating then assigned to the Notes, if determined without
regard to the Policy, and provided further, that the consent of the Enhancer
and the Indenture Trustee shall be obtained.
THE TRUST AGREEMENT AND THE INDENTURE
The following summary describes certain terms of the Trust Agreement and
the Indenture. Such summary does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the respective provisions of
the Trust Agreement and the Indenture. See "The Agreements" in the Prospectus.
THE TRUST ESTATE. Simultaneously with the issuance of the Notes, the
Issuer will pledge the Trust Estate to the Indenture Trustee as collateral for
the Notes. As pledgee of the Mortgage Loans, the Indenture Trustee will be
entitled to direct the Issuer in the exercise of all rights and remedies of
the Trust Estate against the Seller under the Purchase Agreement and against
the Servicer under the Servicing Agreement.
REPORTS TO NOTEHOLDERS. The Indenture Trustee will, to the extent such
information is provided to it by the Servicer pursuant to the terms of the
Servicing Agreement, mail to each Term Noteholder, at its address listed on
the Note Register maintained with the Indenture Trustee, and each Rating
Agency, the Enhancer and the Depositor, a report setting forth certain amounts
relating to the Term Notes for each Payment Date, including, among other
things:
(i) the amount of principal, if any, payable on such Payment Date to the
Term Noteholders;
(ii) the amount of interest payable on such Payment Date to the Term
Noteholders and the amount, if any, of Interest Shortfalls;
(iii) the Term Note Balance after giving effect to any payment of
principal on such Payment Date;
(iv) the P & I Collections for the related Collection Period;
(v) the aggregate Principal Balance of the Mortgage Loans as of the end
of the preceding Collection Period;
(vi) the balance of the Pre-Funding Account as of the end of the
preceding Collection Period;
(vii) the balance of the Funding Account as of the end of the preceding
Collection Period;
(viii) the balance of the Capitalized Interest Account as of the end of the
preceding Collection Period;
(ix) the aggregate Principal Balance of all Subsequent Mortgage Loans
transferred pursuant to a Subsequent Transfer Agreement since the Closing
Date; (x) the Outstanding Overcollateralization Amount as of the end of the
preceding Collection Period; and
(xi) the amount paid, if any, under the Policy for such Payment Date.
In the case of information furnished pursuant to clauses (i) and (ii)
above, the amounts will be expressed as a dollar amount per $1,000 in face
amount of Term Notes.
CERTAIN COVENANTS. The Indenture will provide that the Issuer may not
consolidate or merge with or into any other entity, unless
(i) the entity formed by or surviving such consolidation or merger is
organized under the laws of the United States, any state or the District of
Columbia;
(ii) such entity expressly assumes, by an indenture supplemental to the
Indenture, the Issuer's obligation to make due and punctual payments upon the
Notes and the performance or observance of any agreement and covenant of the
Issuer under the Indenture;
(iii) no Event of Default (as defined herein) shall have occurred and be
continuing immediately after such merger or consolidation;
(iv) the Issuer has received consent of the Enhancer and has been advised
that the ratings of the Notes (without regard to the Policy) then in effect
would not be reduced or withdrawn by any Rating Agency as a result of such
merger or consolidation;
(v) any action that is necessary to maintain the lien and security
interest created by the Indenture has been taken;
(vi) the Issuer has received an Opinion of Counsel to the effect that
such consolidation or merger would have no material adverse tax consequence to
the Issuer or to any Noteholder or Certificateholder; and
(vii) the Issuer has delivered to the Indenture Trustee an officer's
certificate and an Opinion of Counsel each stating that such consolidation or
merger and such supplemental indenture comply with the Indenture and that all
conditions precedent, as provided in the Indenture, relating to such
transaction have been complied with.
The Issuer will not, among other things, (i) except as expressly
permitted by the Indenture, sell, transfer, exchange or otherwise dispose of
any of the assets of the Issuer, (ii) claim any credit on or make any
deduction from the principal and interest payable in respect of the Notes
(other than amounts withheld under the Code or applicable state law) or assert
any claim against any present or former holder of Notes because of the payment
of taxes levied or assessed upon the Issuer, (iii) permit the validity or
effectiveness of the Indenture to be impaired or permit any person to be
released from any covenants or obligations with respect to the Notes under the
Indenture except as may be expressly permitted thereby or (iv) permit any
lien, charge, excise, claim, security interest, mortgage or other encumbrance
to be created on or extend to or otherwise arise upon or burden the assets of
the Issuer or any part thereof, or any interest therein or the proceeds
thereof. The Issuer may not engage in any activity other than as specified
under "The Issuer" herein.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. An "EVENT OF DEFAULT"
under the Indenture includes:
(i) a default for five (5) days or more in the payment of any principal
of or interest on any Note;
(ii) there occurs a default in the observance or performance in any
material respect of any covenant or agreement of the Issuer made in the
Indenture, or any representation or warranty of the Issuer made in the
Indenture or in any certificate delivered pursuant hereto or in connection
herewith proving to have been incorrect in any material respect as of the time
when the same shall have been made that has a material adverse effect on the
Noteholders or the Enhancer, and such default shall continue or not be cured,
or the circumstance or condition in respect of which such representation or
warranty was incorrect shall not have been eliminated or otherwise cured, for
a period of 30 days after there shall have been given, by registered or
certified mail, to the Issuer by the Indenture Trustee or to the Issuer and
the Indenture Trustee by the Holders of at least 25% of the outstanding
principal balance of the Notes or the Enhancer, a written notice specifying
such default or incorrect representation or warranty and requiring it to be
remedied and stating that such notice is a notice of default hereunder;
(iii) there occurs the filing of a decree or order for relief by a court
having jurisdiction in the premises in respect of the Issuer or any
substantial part of the Trust Estate in an involuntary case under any
applicable federal or state bankruptcy, insolvency or other similar law now or
hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Issuer or for any
substantial part of the Trust Estate, or ordering the winding-up or
liquidation of the Issuer's affairs, and such decree or order shall remain
unstayed and in effect for a period of 60 consecutive days; or
(iv) there occurs the commencement by the Issuer of a voluntary case
under any applicable federal or state bankruptcy, insolvency or other similar
law now or hereafter in effect, or the consent by the Issuer to the entry of
an order for relief in an involuntary case under any such law, or the consent
by the Issuer to the appointment or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Issuer or for any substantial part of the assets of the Trust Estate, or
the making by the Issuer of any general assignment for the benefit of
creditors, or the failure by the Issuer generally to pay its debts as such
debts become due, or the taking of any action by the Issuer in furtherance of
any of the foregoing.
If an Event of Default with respect to the Notes at the time outstanding
occurs and is continuing, either the Indenture Trustee, the Enhancer or the
holders of Notes representing a majority of the aggregate Note Balance, with
the written consent of the Enhancer, may declare all Notes to be due and
payable immediately. Such declaration may, under certain circumstances, be
rescinded and annulled by the Enhancer or the holders of Notes representing a
majority of the aggregate Note Balance, with the written consent of the
Enhancer.
If, following an Event of Default with respect to the Notes, the Notes
have been declared to be due and payable, the Indenture Trustee, with the
consent of the Enhancer, may in its discretion, notwithstanding such
acceleration, elect to maintain possession of the collateral securing the
Notes and to continue to apply payments on such collateral as if there had
been no declaration of acceleration if such collateral continues to provide
sufficient funds for the payment of principal of and interest on the Notes as
they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes following an Event of Default, unless (i) all
Noteholders consent to such sale, (ii) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued
interest, due and unpaid, on the outstanding Notes and to reimburse the
Enhancer at the date of such sale or (iii) the Indenture Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes
had not been declared due and payable, and the Indenture Trustee obtains the
consent of the holders of Notes representing 66 2/3% of the then aggregate
Note Balance and the Enhancer.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default, the Indenture provides that the Indenture
Trustee will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for payments to the Noteholders would be less
than would otherwise be the case. However, the Indenture Trustee may not
institute a proceeding for the enforcement of its lien except in connection
with a proceeding for the enforcement of the lien of the Indenture for the
benefit of the Noteholders after the occurrence of such an Event of Default.
In the event the principal of the Notes is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount that is unamortized.
No Noteholder generally will have any right under the Indenture to
institute any proceeding with respect to the Indenture unless (a) such holder
previously has given to the Indenture Trustee written notice of default and
the continuance thereof, (b) the holders of any Note evidencing not less than
25% of the aggregate Percentage Interests constituting such Note (i) have made
written request upon the Indenture Trustee to institute such proceeding in its
own name as Indenture Trustee thereunder and (ii) have offered to the
Indenture Trustee reasonable indemnity, (c) the Indenture Trustee has
neglected or refused to institute any such proceeding for 60 days after
receipt of such request and indemnity and (d) no direction inconsistent with
such written request has been given to the Indenture Trustee during such 60
day period by the Holders of a majority of the outstanding principal balances
of such Note (except as otherwise provided for in the related Agreement with
respect to the Enhancer). However, the Indenture Trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the
Indenture or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
the Notes, unless such Noteholders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
AMENDMENT AND MODIFICATION OF TRUST AGREEMENT AND INDENTURE. The Trust
Agreement may be amended from time to time by the parties thereto provided
that any amendment be accompanied by an opinion of counsel addressed to the
Owner Trustee to the effect that such amendment (i) complies with the
provisions of the Trust Agreement and (ii) will not cause the Trust to be
subject to an entity level tax.
With the consent of the holders of a majority of each of the outstanding
Term Notes and Variable Funding Notes and the Enhancer, the Issuer and the
Indenture Trustee may execute a supplemental indenture to add provisions to,
change in any manner or eliminate any provisions of, the Indenture, or modify
(except as provided below) in any manner the rights of the Noteholders.
Without the consent of the holder of each outstanding Note affected thereby
and the Enhancer, however, no supplemental indenture will: (i) change the due
date of any installment of principal of or interest on any Note or reduce the
principal amount thereof, the interest rate specified thereon or change any
place of payment where or the coin or currency in which any Note or any
interest thereon is payable; (ii) impair the right to institute suit for the
enforcement of certain provisions of the Indenture regarding payment; (iii)
reduce the percentage of the aggregate Note Balance of the outstanding Notes,
the consent of the holders of which is required for any supplemental indenture
or the consent of the holders of which is required for any waiver of
compliance with certain provisions of the Indenture or of certain defaults
thereunder and their consequences as provided for in the Indenture; (iv)
modify or alter the provisions of the Indenture regarding the voting of Notes
held by the Issuer, the Depositor or an affiliate of any of them; (v) decrease
the percentage of the aggregate Note Balance required to amend the sections of
the Indenture which specify the applicable percentage of the Note Balance
necessary to amend the Indenture or certain other related agreements; (vi)
modify any of the provisions of the Indenture in such manner as to affect the
calculation of the amount of any payment of interest or principal due on any
Note (including the calculation of any of the individual components of such
calculation); or (vii) permit the creation of any lien ranking prior to or,
except as otherwise contemplated by the Indenture, on a parity with the lien
of the Indenture with respect to any of the collateral for the Notes or,
except as otherwise permitted or contemplated in the Indenture, terminate the
lien of the Indenture on any such collateral or deprive the holder of any Note
of the security afforded by the lien of the Indenture.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Enhancer and without obtaining the consent
of the Noteholders, for the purpose of, among other things, curing any
ambiguity or correcting or supplementing any provision in the Indenture that
may be inconsistent with any other provision therein.
TERMINATION; REDEMPTION OF TERM NOTES. The obligations created by the
Trust Agreement (other than certain limited payment and notice obligations of
the Owner Trustee and the Depositor, respectively) will terminate upon the
payment to the related Securityholders (including the Notes issued pursuant to
the Indenture) of all amounts held by the Servicer and required to be paid to
such Securityholders following the earliest of (i) the final distribution of
all moneys or other property or proceeds of the Trust Estate in accordance
with the terms of the Indenture and the Trust Agreement, (ii) the Final
Payment Date or (iii) the purchase by the Servicer of all Mortgage Loans
pursuant to the Servicing Agreement. See "Description of the
Securities--Maturity and Optional Redemption" herein.
The Indenture will be discharged (except with respect to certain
continuing rights specified in the Indenture) upon the distribution to
Noteholders of all amounts required to be distributed pursuant to the
Indenture.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER. Neither
the Indenture Trustee nor any director, officer or employee of the Indenture
Trustee will be under any liability to the Issuer or the Noteholders for any
action taken or for refraining from the taking of any action in good faith
pursuant to the Indenture or for errors in judgment; provided, however, that
none of the Indenture Trustee and any director, officer or employee thereof
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Indenture. Subject to certain limitations set forth in the Indenture, the
Indenture Trustee and any director, officer, employee or agent of the
Indenture Trustee will be indemnified by the Issuer and held harmless against
any loss, liability or expense incurred in connection with investigating,
preparing to defend or defending any legal action, commenced or threatened,
relating to the Indenture other than any loss, liability or expense incurred
by reason of willful malfeasance, bad faith or negligence in the performance
of its duties under such Indenture or by reason of reckless disregard of its
obligations and duties under the Indenture. All persons into which the
Indenture Trustee may be merged or with which it may be consolidated or any
person resulting from such merger or consolidation will be the successor of
the Indenture Trustee under the Indenture.
USE OF PROCEEDS
The proceeds from the sale of the Term Notes will be used, together
with the proceeds from the sale of the Variable Funding Notes and the
Certificates to the Seller, to purchase the Initial Mortgage Loans from the
Depositor and, subsequently, to purchase certain Subsequent Mortgage Loans as
described herein.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Brown & Wood LLP, special tax counsel to the Depositor,
for federal income tax purposes, the Term Notes will be characterized as
indebtedness, and the Issuer will not be characterized as an association (or a
publicly traded partnership) taxable as a corporation or as a taxable mortgage
pool within the meaning of Section 7701(i) of the Code.
For federal income tax purposes, the Term Notes will not be treated as
having been issued with "original issue discount" as defined in the
Prospectus.
Prospective investors in the Term Notes should see "Certain Federal
Income Tax Considerations" and "State Tax Considerations" in the Prospectus
for a discussion of the application of certain federal, state and local tax
laws to the Issuer and purchasers of the Term Notes.
ERISA CONSIDERATIONS
The Term Notes are eligible for purchase by pension, profit-sharing or
other employee benefit plans as well as individual retirement accounts and
certain types of Keogh Plans (each, a "PLAN"). Any fiduciary or other investor
of Plan assets that proposes to acquire or hold the Term Notes on behalf of or
with assets of any Plan should consult with its counsel with respect to the
potential applicability of the fiduciary responsibility provisions of ERISA
and the prohibited transaction provisions of ERISA and the Code to the
proposed investment. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
The Term Notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
Accordingly, many institutions with legal authority to invest in
mortgage-related securities may not be legally authorized to invest in the
Term Notes. No representation is made herein as to whether the Term Notes
constitute legal investments for any entity under any applicable statute, law,
rule, regulation or order. Prospective purchasers are urged to consult with
their counsel concerning the status of the Term Notes as legal investments for
such purchasers prior to investing in the Term Notes. See "Legal Investment"
in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement dated June 10, 1999 (the "UNDERWRITING AGREEMENT"), between Bear,
Stearns & Co. Inc., as representative (in such capacity, the "REPRESENTATIVE")
of the underwriters named below (the "UNDERWRITERS"), and the Depositor, the
Underwriters have agreed to purchase, and the Depositor has agreed to sell,
severally but not jointly, the following principal amounts of Term Notes set
forth opposite their names below.
UNDERWRITERS PRINCIPAL AMOUNT OF TERM NOTES
Bear, Stearns & Co. Inc.................... $225,000,000
Newman & Associates, Inc................... $ 25,000,000
-------------
Total.......................... $250,000,000
============
In the Underwriting Agreement, each of the Underwriters has agreed,
subject to the terms and conditions set forth therein, to purchase all of its
respective allocation of the Term Notes if any of the Term Notes are
purchased.
The distribution of the Term Notes by the Underwriters may be effected
from time to time in one or more negotiated transactions or otherwise, at
varying prices to be determined at the time of sale. Proceeds to the Depositor
from the sale of the Term Notes, before deducting expenses payable by the
Depositor, will be approximately 99.77% of the aggregate Term Note Balance as
of the Closing Date.
Until the distribution of the Term Notes is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Term Notes. As
an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Term Notes. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Term Notes.
In general, purchases of a security for the purpose of stabilization
could cause the price of the security to be higher than it might be in the
absence of such purchases.
Neither the Depositor, the Seller or any of their respective affiliates
nor any of the Underwriters makes any representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the Term Notes. In addition, neither the Depositor, the
Seller or any of their respective affiliates nor any of the Underwriters makes
any representation that the Underwriters will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Depositor has agreed to indemnify each Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended, or contribute to payments the Underwriters may be required to make in
respect thereof. The Depositor is an affiliate of Bear, Stearns & Co. Inc.,
the Representative of the Underwriters. Newman & Associates, Inc., one of the
Underwriters, is an affiliate of the Seller and the Servicer.
The Underwriters intend to make a secondary market in the Term Notes, but
have no obligation to do so. There can be no assurance that a secondary market
for the Term Notes will develop, or if it does develop, that it will provide
holders of the Term Notes with liquidity of investment at any particular time
or for the life of the Term Notes. The Term Notes will not be listed on any
securities exchange.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriters or a request by
such investor's representative within the period during which there is an
obligation to deliver a Prospectus Supplement and Prospectus, the Depositor or
the Underwriters will promptly deliver, or cause to be delivered, without
charge, a paper copy of the Prospectus Supplement and Prospectus.
Until 90 days from the date of this Prospectus Supplement, all dealers
effecting transactions in the Term Notes, whether or not participating in this
distribution, may be required to deliver a Prospectus Supplement and
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation and
subsidiaries, as of December 31, 1998 and 1997 and for each of the years in
the three-year period ended December 31, 1998, are incorporated by reference
herein and in the Registration Statement in reliance upon the report of KPMG
LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters with respect to the Servicer and the Seller will be
passed upon for the Servicer and the Seller by the General Counsel to GMAC
Mortgage Corporation. Certain legal matters with respect to the Term Notes
will be passed upon for the Depositor and the Underwriters by Brown & Wood
LLP, New York, New York.
RATINGS
It is a condition to issuance thereof that the Term Notes be rated "Aaa"
by Moody's Investors Service, Inc. ("MOODY'S"), and "AAA" by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("STANDARD & POOR'S"
and, together with Moody's, the "RATING AGENCIES"). The Depositor has not
requested a rating on the Term Notes by any Rating Agency other than Moody's
and Standard & Poor's. However, there can be no assurance as to whether any
other Rating Agency will rate the Term Notes or, if it does, what rating would
be assigned by any such other Rating Agency. Any rating on the Term Notes by
another Rating Agency could be lower than the ratings assigned to the Term
Notes by Moody's and Standard & Poor's. A securities rating addresses the
likelihood of the receipt by the Term Noteholders of distributions on the
Mortgage Loans. The rating takes into consideration the structural, legal and
tax aspects associated with the Certificates and the Term Notes, but does not
address Interest Shortfalls. The ratings on the Term Notes do not constitute
statements regarding the possibility that the Term Noteholders might realize a
lower than anticipated yield. A securities rating is not a recommendation to
buy, sell or hold securities and may be subject to revision or withdrawal at
any time by the assigning rating organization. Each securities rating should
be evaluated independently of similar ratings on different securities.
INDEX OF DEFINED TERMS
10-Year Loans........................................................S-19
15-Year Loans........................................................S-19
25-Year Loans........................................................S-19
5-Year Loans.........................................................S-19
Account Balance......................................................S-21
Additional Balances..................................................S-35
Additional Charges...................................................S-21
Adjustment Date......................................................S-19
Aggregate Balance Differential.......................................S-51
Amortization Periods.................................................S-50
Appraised Value......................................................S-18
Audit Guide..........................................................S-66
Balance Differential.................................................S-51
BalloonLoans.........................................................S-14
Billing Cycle........................................................S-19
Business Day.........................................................S-48
Capitalized Interest Account.........................................S-36
Capitalized Interest Requirement.....................................S-50
Cedelbank............................................................S-46
Certificates.........................................................S-46
Closing Date.........................................................S-57
CLTV.................................................................S-18
Collection Period....................................................S-65
Combined Loan-to-Value Ratio.........................................S-18
Commission...........................................................S-44
CPR..................................................................S-57
Credit Limit.........................................................S-18
Credit Line Agreements...............................................S-61
Credit Utilization Rate..............................................S-18
Custodial Account....................................................S-64
Custodial Agreement..................................................S-63
Custodian............................................................S-63
Cut-Off Date.........................................................S-5
Cut-Off Date Balance.................................................S-18
Definitive Note......................................................S-46
Deleted Loan.........................................................S-62
Depositor............................................................S-42
Determination Date...................................................S-64
Draw Period..........................................................S-19
DTC..................................................................S-46
DTC Rules............................................................S-47
Eligible Account.....................................................S-64
Eligible Substitute Loan.............................................S-62
Euroclear............................................................S-46
Event of Default.....................................................S-69
Excess Spread........................................................S-51
Final Payment Date...................................................S-48
Finance Charge.......................................................S-21
Financial Intermediary...............................................S-46
GM ..................................................................S-19
GMACM Home Equity Program............................................S-13
GMACM Underwriting Guide.............................................S-36
Gross Margin.........................................................S-19
HEL..................................................................S-18
HELOC................................................................S-18
Indenture............................................................S-43
IndentureTrustee.....................................................S-43
Index................................................................S-19
InitialHELOCs........................................................S-18
Initial HELs.........................................................S-18
Initial Mortgage Loans...............................................S-18
Insurance Agreement..................................................S-50
Insured Amount.......................................................S-54
Interest Collections.................................................S-65
Interest Period......................................................S-48
Interest Shortfall...................................................S-48
Junior Ratio.........................................................S-18
LIBOR................................................................S-49
LIBOR Business Day...................................................S-49
Liquidated Loan......................................................S-41
Liquidated Mortgage Loan.............................................S-51
Liquidation Loss Amount..............................................S-51
Loan Rate............................................................S-19
Managed Amortization Event...........................................S-50
Managed Amortization Period..........................................S-50
Maximum Loan Rate....................................................S-19
Maximum Variable Funding Balance.....................................S-46
Moody's..............................................................S-74
Mortgage Loans.......................................................S-18
Mortgage Notes.......................................................S-29
Mortgaged Properties.................................................S-29
Mortgages............................................................S-29
Mortgagor............................................................S-19
Net Liquidation Proceeds.............................................S-65
Net Loan Rate........................................................S-48
Net Principal Collections............................................S-64
Note Balance.........................................................S-52
Note Rate............................................................S-48
Noteholders..........................................................S-35
Notes................................................................S-46
Original Pre-Funded Amount...........................................S-35
Outstanding Overcollateralization Amount.............................S-51
Overcollateralization Target Amount..................................S-52
Owner Trustee........................................................S-43
P&I Collections......................................................S-64
Participants.........................................................S-46
Paying Agent.........................................................S-48
Payment Date.........................................................S-48
Permitted Investments................................................S-64
Plan.................................................................S-72
Policy...............................................................S-54
Pool Balance.........................................................S-65
Pre-Funding Account..................................................S-35
Pre-Funding Period...................................................S-35
Principal Balance....................................................S-65
Principal Collections................................................S-65
Principal Distribution Amount........................................S-52
Purchase Agreement...................................................S-61
Rapid Amortization Event.............................................S-52
Rapid Amortization Period............................................S-50
Rating Agencies......................................................S-74
Reference Bank Rate..................................................S-49
Reference Banks......................................................S-49
Related Documents....................................................S-61
REO Loan.............................................................S-41
Repayment Period.....................................................S-19
Representative.......................................................S-72
Repurchase Price.....................................................S-62
Revolving Period.....................................................S-50
Securities...........................................................S-46
Seller...............................................................S-18
Servicer.............................................................S-20
Servicing Agreement..................................................S-20
Servicing Default....................................................S-65
Servicing Fee........................................................S-42
Standard & Poor's....................................................S-74
Stated Value.........................................................S-18
Subsequent Cut-Off Date..............................................S-35
Subsequent Mortgage Loans............................................S-18
Subsequent Transfer Agreements.......................................S-34
Subsequent Transfer Dates............................................S-34
Substitution Adjustment Amount.......................................S-62
Teaser Rate..........................................................S-19
Telerate Page 3750...................................................S-49
Term Note Balance....................................................S-53
Term Note Owners.....................................................S-46
Term Noteholders.....................................................S-35
Term Notes...........................................................S-46
Trust Agreement......................................................S-42
TrustEstate..........................................................S-35
Underwriter..........................................................S-44
Underwriters.........................................................S-72
Underwriting Agreement...............................................S-72
Variable Funding Balance.............................................S-53
Variable Funding Notes...............................................S-46
$250,000,000
GMAC MORTGAGE CORPORATION
SELLER AND SERVICER
GMACM REVOLVING HOME EQUITY LOAN TRUST 1999-1
ISSUER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 1999-1
---------------------
PROSPECTUS SUPPLEMENT
---------------------
BEAR, STEARNS & CO. INC. NEWMAN & ASSOCIATES, INC.
JUNE 10, 1999
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus supplement or the
prospectus and, if given or made, such information or representation must not
be relied upon. This prospectus supplement and the prospectus do not
constitute an offer to sell or a solicitation of an offer to buy any
securities other than the term notes offered hereby, nor an offer of the term
notes in any state or jurisdiction in which, or to any person to whom, such
offer would be unlawful. The delivery of this prospectus supplement or the
prospectus at any time does not imply that information herein or therein is
correct as of any time subsequent to its date; however, if any material change
occurs while this prospectus supplement or the prospectus is required by law
to be delivered, this prospectus supplement or the prospectus will be amended
or supplemented accordingly.
Until September 8, 1999, all dealers selling the term notes, whether or
not participating in this distribution, will deliver a prospectus supplement
and the prospectus to which it relates. This delivery requirement is in
addition to the obligation of dealers to deliver a prospectus supplement and
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS
Asset-Backed Certificates
Asset-Backed Notes
(Issuable in Series)
Bear Stearns Asset Backed Securities, Inc.
(Depositor)
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") may offer
from time to time under this Prospectus and related Prospectus Supplements the
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").
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a "Trust Fund") by the Depositor pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as described herein. As specified in
the related Prospectus Supplement, the Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness of the
related Trust Fund. The Trust Fund for a Series of Securities will include
assets purchased from the seller or sellers specified in the related
Prospectus Supplement (collectively, the "Seller") composed of (a) Primary
Assets, which may include one or more pools of (i) closed-end and/or revolving
home equity loans (the "Mortgage Loans"), secured generally by subordinate
liens on one- to four-family residential or mixed-use properties, (ii) home
improvement installment sales contracts and installment loan agreements (the
"Home Improvement Contracts"), which are either unsecured or secured generally
by subordinate liens on one- to four-family residential or mixed-use
properties, or by purchase money security interests in the home improvements
financed thereby (the "Home Improvements") and (iii) securities backed or
secured by Mortgage Loans and/or Home Improvement Contracts, (b) all monies
due thereunder net, if and as provided in the related Prospectus Supplement,
of certain amounts payable to the servicer of the Mortgage Loans and/or Home
Improvement Contracts (collectively, the "Loans"), which servicer may also be
the Seller, specified in the related Prospectus Supplement (the "Servicer"),
(c) if specified in the related Prospectus Supplement, funds on deposit in one
or more pre-funding accounts and/or capitalized interest accounts and (d)
reserve funds, letters of credit, surety bonds, insurance policies or other
forms of credit support as described herein and in the related Prospectus
Supplement. (cover continued on next page)
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A GIVEN
SERIES EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE
NOT GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SELLER,
THE TRUSTEES,THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR,
UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY
ANY OTHER PERSON OR ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS WITH
RESPECT TO ANY SERIES OF SECURITIES WILL BE PURSUANT TO CERTAIN
REPRESENTATIONS AND WARRANTIES SET FORTH IN THE RELATED
AGREEMENT AS DESCRIBED HEREIN OR IN THE RELATED
PROSPECTUS SUPPLEMENT.
------------------------
See "Risk Factors" beginning on page 18 for certain factors to be considered in
purchasing the securities.
------------------------
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 PROSPECTUS SUPPLEMENT. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Bear, Stearns & Co. Inc. and the other underwriters
set forth in the related Prospectus Supplement, if any, subject to prior sale,
to withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by Bear, Stearns & Co. Inc. and the other
underwriters, if any, and certain further conditions. Retain this Prospectus
for future reference. This Prospectus may not be used to consummate sales of
the Securities offered hereby unless accompanied by a Prospectus Supplement.
------------------------
Bear, Stearns & Co. Inc.
December 4, 1998
(continued from previous page)
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect
to the amount, percentage and timing of distributions of principal, interest
or both and one or more Classes may be subordinated to other Classes with
respect to distributions of principal, interest or both as described herein
and in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, the Primary Assets and other assets comprising the
Trust Fund may be divided into one or more Asset Groups and each Class of the
related Series will evidence beneficial ownership of the corresponding Asset
Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of
a Series may depend upon the rate of payment (including prepayments) with
respect to the Loans or, in the case of Private Securities, Underlying Loans,
as applicable. In such a case, a rate of prepayment lower or higher than
anticipated will affect the yield on the Securities of a Series in the manner
described herein and in the related Prospectus Supplement. Under certain
limited circumstances described herein and in the related Prospectus
Supplement, a Series of Securities may be subject to termination or redemption
under the circumstances described herein and in the related Prospectus
Supplement.
If specified in the related Prospectus Supplement, an election may be
made to treat certain assets comprising the Trust Fund for a Series as a "real
estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. See "Certain Federal Income Tax Considerations" herein.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be
offered hereunder will, among other things, set forth with respect to such
Series of Securities: (i) the aggregate principal amount, interest rate and
authorized denominations of each Class of such Securities; (ii) certain
information concerning the Primary Assets, the Seller and any Servicer; (iii)
the terms of any Enhancement with respect to such Series; (iv) the terms of
any insurance related to the Primary Assets; (v) information concerning any
other assets in the related Trust Fund, including any Reserve Fund; (vi) the
Final Scheduled Distribution Date of each Class of such Securities; (vii) the
method to be used to calculate the amount of principal required to be applied
to the Securities of each Class of such Series on each Distribution Date, the
timing of the application of principal and the order of priority of the
application of such principal to the respective Classes and the allocation of
principal to be so applied; (viii) the Distribution Dates and any Assumed
Reinvestment Rate; (ix) additional information with respect to the plan of
distribution of such Securities; and (x) whether a REMIC election will be made
with respect to some or all of the assets included in the Trust Fund for such
Series.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a
Series of Securities are required under the related Agreement to be forwarded
to Holders. Unless otherwise specified in the related Prospectus Supplement,
such reports will not be examined and reported on by an independent public
accountant. If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued
in book-entry form. In such event, (i) owners of beneficial interests in such
Securities will not be considered "Holders" under the related Agreements and
will not receive such reports directly with respect to the related Trust Fund;
rather, such reports will be furnished to such owners through the participants
and indirect participants of the applicable book-entry system, and (ii)
references herein to the rights of "Holders" shall refer to the rights of such
owners as they may be exercised indirectly through such participants. See "The
Agreements--Reports to Holders" herein.
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 (the "Securities Act"), 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 Office located as follows: Midwest
Regional Office, Citicorp Center, 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. The Commission also maintains a
Web site at http://www.sec.gov from which such Registration Statement and
exhibits may be obtained.
Each Trust Fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Depositor intends to cause each
Trust Fund to suspend filing such reports if and when such reports are no
longer required under the Exchange Act.
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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund
referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Prospectus and prior to the termination of any offering of the
Securities issued by such Trust Fund shall be deemed to be incorporated by
reference in this Prospectus and to be a part of this Prospectus from the date
of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for all purposes of this Prospectus to the extent
that a statement contained herein or in the accompanying Prospectus Supplement
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to
above that have been or may be incorporated by reference in this Prospectus
(not including exhibits to the information that is incorporated by reference
unless such exhibits are specifically incorporated by reference into the
information that this Prospectus incorporates). Such requests should be
directed to the Depositor at 245 Park Avenue, New York, New York 10167.
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference
to the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not
otherwise defined herein or in the related Prospectus Supplement shall have
the meanings set forth in the "Glossary of Terms" herein.
Securities Offered........................ Asset-Backed Certificates (the
"Certificates") and/or
Asset-Backed Notes (the "Notes").
Certificates are issuable from
time to time in Series pursuant
to a Pooling and Servicing
Agreement or Trust Agreement, as
the case may be. Each Certificate
of a Series will evidence an
interest in the Trust Fund for
such Series, or in an Asset Group
specified in the related
Prospectus Supplement. Notes are
issuable from time to time in
Series pursuant to an Indenture.
Each Series of Securities will
consist of one or more Classes,
one or more of which may be
Classes of Compound Interest
Securities, Planned Amortization
Class ("PAC") Securities,
Variable Interest Securities,
Zero Coupon Securities, Principal
Only Securities, Interest Only
Securities, Participating
Securities, Senior Securities or
Subordinated Securities. Each
Class may differ in, among other
things, the amounts allocated to
and the priority of principal and
interest payments, Final
Scheduled Distribution Dates,
Distribution Dates and interest
rates. The Securities of each
Class will be issued in fully
registered form in the
denominations specified in the
related Prospectus Supplement. If
so specified in the related
Prospectus Supplement, the
Securities or certain Classes of
such Securities offered thereby
may be available in book-entry
form only.
Depositor................................ Bear Stearns Asset Backed
Securities, Inc. (the
"Depositor") was incorporated in
the State of Delaware in June
1995, and is a wholly-owned,
special purpose subsidiary of The
Bear Stearns Companies Inc. None
of The Bear Stearns Companies
Inc., the Depositor, the
Servicer, any Trustee, the Seller
or any affiliate of the foregoing
has guaranteed or is otherwise
obligated with respect to the
Securities of any Series. See
"The Depositor."
Interest Payments......................... Interest payments on the
Securities of a Series entitled
by their terms to receive
interest will be made on each
Distribution Date, to the extent
set forth in, and at the
applicable rate specified in (or
determined in the manner set
forth in), the related Prospectus
Supplement. The interest rate on
Securities of a Series may be
variable or change with changes
in the rates of interest on the
related Loans or Underlying Loans
relating to the Private
Securities, as applicable, and/or
as prepayments occur with respect
to such Loans or Underlying
Loans, as applicable. Interest
Only Securities may be assigned a
Notional Amount set forth in the
related Prospectus Supplement,
which is used solely for
convenience in expressing the
calculation of interest and for
certain other purposes and does
not represent the right to
receive any distributions
allocable to principal. Principal
Only Securities may not be
entitled to receive any interest
payments or may be entitled to
receive only nominal interest
payments. 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. See
"Description of the
Securities--Payments of
Interest."
Principal Payments........................ All payments of principal of a
Series of Securities will be made
in an aggregate amount determined
as set forth in the related
Prospectus Supplement, and will
be paid at the times, allocated
among the Classes of such Series
in the order and amounts and
applied either on a pro rata or a
random lot basis among all
Securities of any such Class, all
as specified in the related
Prospectus Supplement.
Final Scheduled
Distribution Date
of the Securities........................ The Final Scheduled Distribution
Date with respect to (i) each
Class of Notes is the date not
later than which principal of the
Notes will be fully paid and (ii)
each Class of Certificates is the
date after which no Certificates
of such Class are expected to
remain outstanding, in each case
calculated on the basis of the
assumptions applicable to such
Series described in the related
Prospectus Supplement. The Final
Scheduled Distribution Date of a
Class may equal the maturity date
of the Primary Asset in the
related Trust Fund that has the
latest stated maturity, or will
be determined as described herein
and in the related Prospectus
Supplement.
The actual final Distribution
Date of the Securities of a
Series will, to the extent
described in the related
Prospectus Supplement, depend
upon the rate of payment
(including prepayments,
liquidations due to default, the
receipt of proceeds from casualty
Insurance Policies and
repurchases) of the Loans or
Underlying Loans relating to the
Private Securities, as
applicable, in the related Trust
Fund. Unless otherwise specified
in the related Prospectus
Supplement, the actual final
Distribution Date of any Security
is likely to occur earlier and
may occur substantially earlier
or may occur later than its Final
Scheduled Distribution Date as a
result of the application of
prepayments to the reduction of
the principal balances of the
Securities and as a result of
defaults on the Primary Assets.
The rate of payments on the Loans
or Underlying Loans relating to
the Private Securities, as
applicable, in the Trust Fund for
a Series will depend on a variety
of factors, including certain
characteristics of such Loans or
Underlying Loans, as applicable,
and the prevailing level of
interest rates from time to time,
as well as on a variety of
economic, demographic, tax,
legal, social and other factors.
No assurance can be given as to
the actual prepayment experience
with respect to a Series. See
"Risk Factors--Yield May Vary"
and "Description of the
Securities--Weighted Average Life
of the Securities" herein.
Optional Termination...................... One or more Classes of Securities
of any Series may be redeemed or
repurchased in whole or in part,
at the Depositor's or the
Servicer's option, at such time
and under the circumstances
specified in the related
Prospectus Supplement, at the
price set forth therein. If so
specified in the related
Prospectus Supplement for a
Series of Securities, the
Depositor, the Servicer or such
other entity that is specified in
the related Prospectus Supplement
may, at its option, cause an
early termination of the related
Trust Fund by repurchasing all of
the Primary Assets remaining in
the Trust Fund on or after a
specified date, or on or after
such time as the aggregate
principal balance of the
Securities of the Series or the
Primary Assets relating to such
Series, as specified in the
related Prospectus Supplement, is
less than the amount or
percentage specified in the
related Prospectus Supplement.
See "Description of the
Securities--Optional Redemption,
Purchase or Termination."
In addition, the related
Prospectus Supplement may provide
other circumstances under which
Holders of Securities of a Series
could be fully paid significantly
earlier than would otherwise be
the case if payments or
distributions were solely based
on the activity of the related
Primary Assets.
The Trust Fund............................ The Trust Fund for a Series of
Securities will consist of one or
more of the assets described
below, as described in the
related Prospectus Supplement.
A. Primary Assets................... The Primary Assets for a Series
may consist of any combination of
the following assets, to the
extent and as specified in the
related Prospectus Supplement.
The Primary Assets will be
purchased from the Seller or may
be purchased by the Depositor in
the open market or in privately
negotiated transactions,
including transactions with
entities affiliated with the
Depositor.
(1) Loans...................... Primary Assets for a Series will
consist, in whole or in part, of
Loans. Some Loans may be
delinquent as specified in the
related Prospectus Supplement.
Loans may be originated by or
acquired from an affiliate of the
Depositor, and an affiliate of
the Depositor may be an obligor
with respect to any such Loan.
The Loans will be conventional
contracts or contracts insured by
the Federal Housing
Administration (the "FHA") or
partially guaranteed by the
Veterans Administration (the
"VA"). See "The Trust Funds--The
Loans" for a discussion of such
guarantees. To the extent
provided in the related
Prospectus Supplement, additional
Loans may be periodically added
to the Trust Fund, or may be
removed from time to time if
certain asset value tests are
met, as described in the related
Prospectus Supplement.
The "Loans" for a Series will
consist of (i) closed-end home
equity loans (the "Closed-End
Loans") and/or revolving home
equity loans or certain balances
therein (the "Revolving Credit
Line Loans" and, together with
the Closed-End Loans, the
"Mortgage Loans") and (ii) home
improvement installment sales
contracts and installment loan
agreements (the "Home Improvement
Contracts"). The Mortgage Loans
and the Home Improvement
Contracts are collectively
referred to herein as the
"Loans." The Loans may, as
specified in the related
Prospectus Supplement, have
various payment characteristics,
including balloon or other
irregular payment features, and
may accrue interest at a fixed
rate or an adjustable rate.
As specified in the related
Prospectus Supplement, the
Mortgage Loans will, and the Home
Improvement Contracts may, be
secured by mortgages and deeds of
trust or other similar security
instruments creating a lien on
the related 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."
The related Prospectus Supplement
will describe certain
characteristics of the Loans for
a Series including, without
limitation and to the extent
relevant: (i) the aggregate
unpaid Principal Balance of the
Loans (or the aggregate unpaid
Principal Balance included in the
Trust Fund for the related
Series); (ii) the range and
weighted average Loan Rate on the
Loans and in the case of
adjustable rate Loans, the range
and weighted average of the
Current Loan Rates and the
Lifetime Rate Caps, if any; (iii)
the range and the average
outstanding Principal Balance of
the Loans; (iv) the weighted
average original and remaining
term-to-stated maturity of the
Loans and the range of original
and remaining terms-to-stated
maturity, if applicable; (v) the
range and Combined Loan-to-Value
Ratios or Loan-to-Value Ratios,
as applicable, of the Loans,
computed in the manner described
in the related Prospectus
Supplement; (vi) the percentage
(by Principal Balance as of the
Cut-off Date) of Loans that
accrue interest at adjustable or
fixed interest rates; (vii) any
enhancement relating to the
Loans; (viii) the percentage (by
Principal Balance as of the
Cut-off Date) of Loans that are
secured by Mortgaged Properties
or Home Improvements, or that are
unsecured; (ix) the geographic
distribution of any Mortgaged
Properties securing the Loans;
(x) the use and type of each
Property securing a Loan; (xi)
the lien priority of the Loans;
(xii) the delinquency status and
year of origination of the Loans;
(xiii) whether such Loans are
Closed-End Loans and/or Revolving
Credit Line Loans; and (xiv) in
the case of Revolving Credit Line
Loans, the general payment and
credit line features of such
Loans and other pertinent
features thereof.
(2) Private Securities......... Primary Assets for a Series may
consist, in whole or in part, of
Private Securities, which include
(i) pass-through certificates
representing beneficial interests
in loans of the type that would
otherwise be eligible to be Loans
(the "Underlying Loans") or (ii)
collateralized obligations
secured by Underlying Loans. Such
pass-through certificates or
collateralized obligations will
have previously been (i) offered
and distributed to the public
pursuant to an effective
registration statement or (ii)
purchased in a transaction not
involving any public offering
from a person who is not an
affiliate of the issuer of such
securities at the time of sale
(nor an affiliate thereof at any
time during the three preceding
months); provided, that a period
of three years has elapsed since
the later of the date such
securities were acquired from the
related issuer or an affiliate
thereof. Although individual
Underlying Loans may be insured
or guaranteed by the United
States or an agency or
instrumentality thereof, they
need not be, and the Private
Securities themselves will not
be, so insured or guaranteed. See
"The Trust Funds--Private
Securities." Unless otherwise
specified in the Prospectus
Supplement relating to a Series
of Securities, payments on the
Private Securities will be
distributed directly to the
related PS Trustee as registered
owner of such Private Securities.
The related Prospectus Supplement
for a Series will specify (on an
approximate basis, as described
above, and as of the date
specified in the related
Prospectus Supplement), to the
extent relevant and to the extent
such information is reasonably
available to the Depositor and
the Depositor reasonably believes
such information to be reliable:
(i) the aggregate approximate
principal amount and type of any
Private Securities to be included
in the Trust Fund for such
Series; (ii) certain
characteristics of the Underlying
Loans, including (a) the payment
features of such Underlying Loans
(i.e., whether they are
Closed-End Loans and/or Revolving
Credit Line Loans, whether they
are fixed rate or adjustable rate
and whether they provide for
fixed level payments, negative
amortization or other payment
features), (b) the approximate
aggregate principal amount of
such Underlying Loans that are
insured or guaranteed by a
governmental entity, (c) the
servicing fee or range of
servicing fees with respect to
such Underlying Loans (d) the
minimum and maximum stated
maturities of such Underlying
Loans at origination, (e) the
lien priority of such Underlying
Loans and (f) the delinquency
status and year of origination of
such Underlying Loans; (iii) the
maximum original term-to-stated
maturity of the Private
Securities; (iv) the weighted
average term-to-stated maturity
of the Private Securities; (v)
the pass-through or certificate
rate or ranges thereof for the
Private Securities; (vi) the
sponsor or depositor of the
Private Securities (the "PS
Sponsor"), the servicer of the
Private Securities (the "PS
Servicer") and the trustee of the
Private Securities (the "PS
Trustee"); (vii) certain
characteristics of enhancement,
if any, such as reserve funds,
insurance policies, letters of
credit or guarantees, relating to
the Loans underlying the Private
Securities, or to such Private
Securities themselves; (viii) the
terms on which the Underlying
Loans may or are required to be
repurchased prior to stated
maturity; and (ix) the terms on
which substitute Underlying Loans
may be delivered to replace those
initially deposited with the PS
Trustee. See "The Trust
Funds--Additional Information"
herein.
B. Collection and Distribution
Accounts....................... Unless otherwise provided in the
related Prospectus Supplement,
all payments on or in respect of
the Primary Assets for a Series
will be remitted directly to an
account (each, a "Collection
Account") to be established for
such Series with the Trustee or
the Servicer, in the name of the
Trustee. Unless otherwise
provided in the related
Prospectus Supplement, the
applicable Trustee shall be
required to apply a portion of
the amount in the Collection
Account, together with
reinvestment earnings from
eligible investments specified in
the related Prospectus
Supplement, to the payment of
certain amounts payable to the
Servicer under the related
Agreement and any other person
specified in the Prospectus
Supplement, and to deposit a
portion of the amount in the
Collection Account into a
separate account (each, a
"Distribution Account") to be
established for such Series, each
in the manner and at the times
specified in the related
Prospectus Supplement. All
amounts deposited into such
Distribution Account(s) will be
available, unless otherwise
specified in the related
Prospectus Supplement, for (i)
application to the payment of
principal of and interest on such
Series of Securities on the next
Distribution Date, (ii) the
making of adequate provision for
future payments on certain
Classes of Securities and (iii)
any other purpose specified in
the related Prospectus
Supplement. After applying the
funds in the Collection Account
as described above, any funds
remaining in the Collection
Account may be paid over to the
Servicer, the Depositor, any
provider of Enhancement with
respect to such Series (an
"Enhancer") or any other person
entitled thereto in the manner
and at the times specified in the
related Prospectus Supplement.
C. Pre-Funding and Capitalized
Interest Accounts ............. If specified in the related
Prospectus Supplement, a Trust
Fund will include one or more
segregated trust accounts (each,
a "Pre-Funding Account")
established and maintained with
the Trustee of the Trust Fund for
the related Series (the
"Trustee"). If so specified, on
the Closing Date for such Series,
a portion of the proceeds of the
sale of the Securities of such
Series (such amount, the
"Pre-Funded Amount") will be
deposited into the Pre-Funding
Account and may be used to
purchase additional Primary
Assets during the period of time
specified in the related
Prospectus Supplement (the
"Pre-Funding Period"). The
Primary Assets to be so purchased
generally will be selected on the
basis of the same criteria as
those used to select the initial
Primary Assets, and the same
representations and warranties
will be made with respect
thereto. If any Pre-Funded Amount
remains on deposit in the
Pre-Funding Account at the end of
the Pre-Funding Period, such
amount will be applied in the
manner specified in the related
Prospectus Supplement to prepay
the Notes and/or the Certificates
of the applicable Series.
If a Pre-Funding Account is
established, one or more
segregated trust accounts (each,
a "Capitalized Interest Account")
may be established and maintained
with the Trustee for the related
Series. On the related Closing
Date, a portion of the proceeds
of the sale of the Securities of
such Series will be deposited
into the Capitalized Interest
Account and used to fund the
excess, if any, of (i) the sum of
(a) the amount of interest
accrued on the Securities of such
Series and (b) if specified in
the related Prospectus
Supplement, certain fees or
expenses during the Pre-Funding
Period such as trustee fees and
credit enhancement fees, over
(ii) the amount of interest
available therefor from the
Primary Assets in the Trust Fund.
Any amounts on deposit in the
Capitalized Interest Account at
the end of the Pre-Funding Period
that are not necessary for such
purposes will be distributed as
specified in the related
Prospectus Supplement.
Enhancement............................... If stated in the Prospectus
Supplement relating to a Series,
the Depositor will obtain an
irrevocable letter of credit,
surety bond, insurance policy
(each, a "Security Policy") or
other form of credit support
(collectively, "Enhancement") in
favor of the applicable Trustee
on behalf of the Holders of such
Series and any other person
specified in such Prospectus
Supplement from an institution
acceptable to the rating agency
or agencies identified in the
related Prospectus Supplement as
rating such Series of Securities
(each, a "Rating Agency") for the
purposes specified in such
Prospectus Supplement. The
Enhancement will support the
payments on the Securities and
may be used for other purposes,
to the extent and under the
conditions specified in such
Prospectus Supplement. See
"Enhancement."
Enhancement for a Series may
include one or more of the
following types of Enhancement,
or such other type of Enhancement
specified in the related
Prospectus Supplement.
A. Subordinate Securities........... If stated in the related
Prospectus Supplement,
Enhancement for a Series may
consist of one or more Classes of
Subordinated Securities. The
rights of the related
Subordinated Securityholders to
receive distributions on any
Distribution Date will be
subordinate in right and priority
to the rights of Holders of
Senior Securities of the Series,
but only to the extent described
in the related Prospectus
Supplement.
B. Insurance....................... If stated in the related
Prospectus Supplement,
Enhancement for a Series may
consist of special hazard
Insurance Policies, bankruptcy
bonds and other types of
insurance supporting payments on
the Securities.
C. Reserve Funds.................... If stated in the Prospectus
Supplement, the Depositor may
deposit cash, a letter or letters
of credit, short-term
investments, or other instruments
acceptable to the Rating Agencies
in one or more reserve funds to
be established in the name of the
applicable Trustee (each, a
"Reserve Fund"), which will be
used, as specified in such
Prospectus Supplement, by such
Trustee to make required payments
of principal of or interest on
the Securities of such Series, to
make adequate provision for
future payments on such
Securities, or for any other
purpose specified in the
Agreement with respect to such
Series, to the extent that funds
are not otherwise available. In
the alternative or in addition to
such deposit, a Reserve Fund for
a Series may be funded through
application of all or a portion
of the excess cash flow from the
Primary Assets for such Series,
to the extent described in the
related Prospectus Supplement.
D. Minimum Principal Payment
Agreement...................... If stated in the Prospectus
Supplement relating to a Series
of Securities, the Depositor will
enter into a minimum principal
payment agreement (the "Minimum
Principal Payment Agreement")
with an entity meeting the
criteria of the Rating Agencies,
pursuant to which such entity
will provide funds in the event
that aggregate principal payments
on the Primary Assets for such
Series are not sufficient to make
certain payments, as provided in
the related Prospectus
Supplement. See
"Enhancement--Minimum Principal
Payment Agreement."
E. Deposit Agreement................ If stated in the related
Prospectus Supplement, the
Depositor and the applicable
Trustee will enter into a
guaranteed investment contract or
an investment agreement (the
"Deposit Agreement") pursuant to
which all or a portion of the
amounts held in the Collection
Account, the Distribution
Account(s) or in any Reserve Fund
will be invested with the entity
specified in such Prospectus
Supplement. Such Trustee will be
entitled to withdraw amounts so
invested, plus interest at a rate
equal to the Assumed Reinvestment
Rate, in the manner specified in
such Prospectus Supplement. See
"Enhancement--Deposit Agreement."
Servicing................................. The Servicer will be responsible
for servicing, managing and
making collections on the Loans
for a Series. In addition, the
Servicer, if so specified in the
related Prospectus Supplement,
will act as custodian and will be
responsible for maintaining
custody of the Loans and related
documentation on behalf of the
Trustee. Advances with respect to
delinquent payments of principal
of or interest on a Loan will be
made by the Servicer only to the
extent described in the related
Prospectus Supplement. Such
advances will be intended to
provide liquidity only and,
unless otherwise specified in the
related Prospectus Supplement,
will be reimbursable to the
Servicer from scheduled payments
of principal and interest, late
collections, the proceeds of
liquidation of the related Loans
or other recoveries relating to
such Loans (including any
Insurance Proceeds or payments
from other credit support). In
performing these functions, the
Servicer will exercise the same
degree of skill and care that it
customarily exercises with
respect to similar receivables or
Loans owned or serviced by it.
Under certain limited
circumstances, the Servicer may
resign or be removed, in which
event either the Trustee or a
third-party servicer will be
appointed as successor servicer.
The Servicer will receive a
periodic fee as servicing
compensation (the "Servicing
Fee") and may, as specified
herein and in the related
Prospectus Supplement, receive
certain additional compensation.
See "Servicing of
Loans--Servicing Compensation and
Payment of Expenses" herein.
Federal Income Tax Considerations
A. Debt Securities and REMIC
Residual Securities............ If (i) an election is made to
treat all or a portion of a Trust
Fund for a Series as a "real
estate mortgage investment
conduit" (a "REMIC") or (ii) so
provided in the related
Prospectus Supplement, a Series
of Securities will include one or
more Classes of taxable debt
obligations under the Internal
Revenue Code of 1986, as amended
(the "Code"). Stated interest
with respect to such Classes of
Securities will be reported by
the related Holder in accordance
with such Holder's method of
accounting except that, in the
case of Securities constituting
"regular interests" in a REMIC
("Regular Interests"), such
interest will be required to be
reported on the accrual methods
regardless of such Holder's usual
method of accounting. Securities
that are Compound Interest
Securities, Zero Coupon
Securities or Interest Only
Securities will, and certain
other Classes of Securities may,
be issued with original issue
discount that is not de minimis.
In such cases, the related Holder
will be required to include
original issue discount in gross
income as it accrues, which may
be prior to the receipt of cash
attributable to such income. If a
Security is issued at a premium,
such Holder may be entitled to
make an election to amortize such
premium on a constant yield
method.
In the case of a REMIC election,
a Class of Securities may be
treated as a REMIC "residual
interest" (each, a "Residual
Interest"). A Holder of a
Residual Interest will be
required to include in its income
its pro rata share of the taxable
income of the REMIC. In certain
circumstances, the Holder of a
Residual Interest may have REMIC
taxable income or tax liability
attributable to REMIC taxable
income for a particular period in
excess of cash distributions for
such period or have an after-tax
return that is less than the
after-tax return on comparable
debt instruments. In addition, a
portion (or, in some cases, all)
of the income from a Residual
Interest (i) may not be subject
to offset by losses from other
activities or investments, (ii)
for a Holder that is subject to
tax under the Code on unrelated
business taxable income, may be
treated as unrelated business
taxable income and (iii) for a
foreign Holder, may not qualify
for exemption from or reduction
of withholding. In addition, (i)
Residual Interests are subject to
transfer restrictions and (ii)
certain transfers of Residual
Interests will not be recognized
for federal income tax purposes.
Further, individual Holders are
subject to limitations on the
deductibility of expenses of the
REMIC. See "Certain Federal
Income Tax Considerations."
B. Non-REMIC Pass-Through
Securities...................... If so specified in the related
Prospectus Supplement, the Trust
Fund for a Series will be treated
as a grantor trust and will not
be classified as an association
taxable as a corporation for
federal income tax purposes, and
Holders of Securities of such
Series ("Pass-Through
Securities") will be treated as
owning directly rights to receive
certain payments of interest or
principal, or both, on the
Primary Assets held in the Trust
Fund for such Series. All income
with respect to a Stripped
Security will be accounted for as
original issue discount and,
unless otherwise specified in the
related Prospectus Supplement,
will be reported by the
applicable Trustee on an accrual
basis, which may be prior to the
receipt of cash associated with
such income.
C. Owner Trust Securities........... If so specified in the Prospectus
Supplement, the Trust Fund will
be treated as a partnership for
purposes of federal and state
income tax. Each Noteholder, by
the acceptance of a Note of a
given Series, will agree to treat
such Note as indebtedness; and
each Certificateholder, by the
acceptance of a Certificate of a
given Series, will agree to treat
the related Trust Fund as a
partnership in which such
Certificateholder is a partner
for federal income and state tax
purposes. Alternative
characterizations of such Trust
Fund and such Certificates are
possible, but would not result in
materially adverse tax
consequences to
Certificateholders. See "Certain
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 own
legal advisors whether the
purchase or holding of Securities
could give rise to a transaction
prohibited or otherwise
impermissible under ERISA or the
Code. Certain Classes of
Securities may not be transferred
unless the applicable 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 applicable
Trustee, the Depositor or the
Servicer to additional
obligations. See "Description of
the Securities--General" and
"ERISA Considerations."
Legal Investment.......................... Unless otherwise specified in the
related Prospectus Supplement,
Securities of each Series offered
by this Prospectus and the
related Prospectus Supplement
will not constitute "mortgage
related securities" under the
Secondary Mortgage Market
Enhancement Act of 1984, as
amended ("SMMEA"). Investors
whose investment authority is
subject to legal restrictions
should consult their own legal
advisors to determine whether and
to what extent the Securities
constitute legal investments for
them. See "Legal Investment."
Use of Proceeds........................... The Depositor will use the net
proceeds from the sale of each
Series for one or more of the
following purposes: (i) to
purchase the related Primary
Assets, (ii) to repay
indebtedness incurred to obtain
funds to acquire such Primary
Assets, (iii) to establish any
Reserve Funds described in the
related Prospectus Supplement and
(iv) to pay costs of structuring
and issuing such Securities,
including the costs of obtaining
Enhancement, if any. If so
specified in the related
Prospectus Supplement, the
purchase of the Primary Assets
for a Series will be effected by
an exchange of Securities with
the Seller of such Primary
Assets. See "Use of Proceeds."
Ratings................................... It will be a requirement for
issuance of any Series that the
Securities offered by this
Prospectus and the related
Prospectus Supplement be rated by
at least one Rating Agency in one
of its four highest applicable
rating categories. The rating or
ratings applicable to Securities
of each Series offered hereby and
by the related Prospectus
Supplement will be as set forth
in the related Prospectus
Supplement. A securities rating
should be evaluated independently
of similar ratings on different
types of securities. A securities
rating is not a recommendation to
buy, hold or sell securities, and
does not address the effect that
the rate of prepayments on Loans
or Underlying Loans relating to
Private Securities, as
applicable, for a Series may have
on the yield to investors in the
Securities of such Series. See
"Risk Factors--Ratings Are Not
Recommendations."
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
No Secondary Market. 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
Holders with liquidity of investment or will continue for the life of the
Securities of such Series. The underwriter(s) specified in the related
Prospectus Supplement (the "Underwriters") expect to make a secondary market
in the related Securities, but will have no obligation to do so.
Primary Assets Are Only Source of Repayment. The Depositor does not have,
nor is it expected to have, any significant assets. The Securities of a Series
will be payable solely from the assets of the Trust Fund for such Securities.
There will be no recourse to the Depositor or any other person for any default
on or any failure to receive distributions on the Securities. Further, unless
otherwise stated in the related Prospectus Supplement, at the times set forth
in such Prospectus Supplement, certain Primary Assets and/or any balance
remaining in the Collection Account or Distribution Account(s) immediately
after making all payments due on the Securities of such Series and other
payments specified in Securities Prospectus Supplement, may be promptly
released or remitted to the Depositor, the Servicer, the Enhancer or any other
person entitled thereto, and will no longer be available for making payments
to Holders. Consequently, Holders of Securities of each Series must rely
solely upon payments with respect to the Primary Assets and the other assets
constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any Enhancement for such Series,
for the payment of principal of and interest on the Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust
Fund in the case of a default with respect to such Notes and may not proceed
against any assets of the Depositor. There is no assurance that the market
value of the Primary Assets or any other assets for a Series will at any time
be equal to or greater than the aggregate principal amount of the Securities
of such Series then outstanding, plus accrued interest thereon. Moreover, upon
an Event of Default under the Indenture for a Series of Notes 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 Certificates, the Trustee under the related Indenture (the
"Indenture Trustee"), the Servicer, if any, the Enhancer 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 Holders of Securities. 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 only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See "The Agreements--Assignment of Primary Assets" herein. 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 Primary
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 Primary
Asset, its only source of funds from which to make such repurchase would be
from funds obtained from the enforcement of a corresponding obligation, if
any, on the part of the originator of the Primary Assets, the Servicer or the
Seller, as the case may be, or from a Reserve Fund established to provide
funds for such repurchases.
Limited Protection Against Losses. Although any 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 Enhancement will be
limited, as set forth in the related Prospectus Supplement, and will decline
and could be depleted under certain circumstances prior to the payment in full
of the related Series of Securities, and as a result, Holders may suffer
losses. See "Enhancement."
Yield May Vary; Subordination. The yield to maturity experienced by a
Holder of Securities may be affected by the rate of payment of principal of
the Loans or Underlying Loans relating to the Private Securities, as
applicable. The timing of principal payments on the Securities of a Series
will be affected by a number of factors, including the following: (i) the
extent of prepayments of the Loans or Underlying Loans relating to the Private
Securities, as applicable, which prepayments may be influenced by a variety of
factors; (ii) the manner of allocating principal 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) in the case of Trust Funds comprised of Revolving Credit
Line Loans, any provisions in the related Agreement described in the
applicable Prospectus Supplement respecting any non-amortization, early
amortization or scheduled amortization period. See "Description of the
Securities--Weighted Average Life of Securities." Prepayments may also result
from repurchases of Loans or Underlying Loans, as applicable, due to material
breaches of the Seller's or the Depositor's warranties.
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 during the calendar month
prior to a Distribution Date, the effective yield to Holders 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 Holders will be less
than the indicated coupon rate. See "Description of the Securities--Payments
of Interest."
The rights of Subordinated Securityholders to receive distributions to
which they would otherwise be entitled with respect to the Trust Fund will be
subordinate to the rights of the Servicer and the Holders of Senior
Securities, to the extent described in the related Prospectus Supplement. As a
result of the foregoing, investors must be prepared to bear the risk that they
may be subject to delays in payment and may not recover their initial
investments in the Subordinated Securities.
Balloon Payments. Certain of the Loans as of the related 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
such borrower's ability either to timely refinance the related 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. Losses on such Loans that are not otherwise covered by
the credit enhancement described in the applicable Prospectus Supplement will
be borne by the Holders of one or more Classes of Securities of the related
Series.
Property Values May Be Insufficient. If the Mortgage Loans in a Trust
Fund are primarily junior liens subordinate to the rights of the mortgagee
under the related senior mortgage or mortgages, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to
satisfy the outstanding balance of such junior mortgage 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 the senior mortgages, in which case it must either pay the entire
amount due on the senior mortgages to the senior mortgagees at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgages in the event the mortgagor is in default thereunder. The Trust Fund
will not have any source of funds to satisfy the senior mortgages or make
payments due to the senior mortgagees.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loan, together
with any senior financing on the Properties, 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. Any such decline could
extinguish the value of a junior interest in a Property before having any
effect on the related senior interest therein. If such a decline occurs, the
actual rates of delinquencies, foreclosure and losses on the junior Loans
could be higher than those currently experienced in the mortgage lending
industry in general.
Risks relating to Certain Geographic Regions where Mortgage Loans may be
Concentrated. Certain geographic regions of the United States from time to
time will experience weaker regional economic conditions and housing markets,
and, consequently, will experience higher rates of loss and delinquency than
will be experienced on mortgage loans generally. The Mortgage Loans underlying
certain Series of Securities may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Book-Entry Registration. If Securities are issued in book-entry form,
such registration may reduce the liquidity of such Securities in the secondary
trading market, since investors may be unwilling to purchase Securities for
which they cannot obtain physical certificates. Since transactions in
book-entry Securities can be effected only through the Depository Trust
Company ("DTC"), participating organizations, Financial Intermediaries and
certain banks, the ability of a Holder to pledge a book-entry Security to
persons or entities that do not participate in the DTC system may be limited
due to lack of a physical certificate representing such Securities. Security
Owners will not be recognized as Holders as such term is used in the related
Agreement, and Security Owners will be permitted to exercise the rights of
Holders only indirectly through DTC and its Participants.
In addition, Holders may experience some delay in their receipt of
distributions of principal of and interest on book-entry Securities, since
distributions are required to be forwarded by the applicable Trustee to DTC
and DTC will then be required to credit such distributions to the accounts of
Depository participants, which thereafter will be required to credit them to
the accounts of Holders either directly or indirectly through Financial
Intermediaries.
Pre-Funding May Adversely Affect Investment. If a Trust Fund includes a
Pre-Funding Account and the Principal Balance of additional Loans delivered to
the Trust Fund during the Pre-Funding Period is less than the original
Pre-Funded Amount, the Holders of the Securities of the related Series will
receive a prepayment of principal as and to the extent described in the
related Prospectus Supplement. Any such principal prepayment may adversely
affect the yield to maturity of the applicable Securities. Since prevailing
interest rates are subject to fluctuation, there can be no assurance that
investors will be able to reinvest such a prepayment at yields equaling or
exceeding the yields on the related Securities. It is possible that the yield
on any such reinvestment will be lower, and may be significantly lower, than
the yield on the related Securities.
The ability of a Trust Fund to invest in subsequent Loans during the
related Pre-Funding Period will be dependant on the ability of the Seller to
originate or acquire Loans that satisfy the requirements for transfer to the
Trust Fund. The ability of the Seller to originate or acquire such Loans will
be affected by a variety of social and economic factors, including the
prevailing level of market interest rates, unemployment levels and consumer
perceptions of general economic conditions.
Although subsequent Loans must satisfy the characteristics described in
the related Prospectus Supplement and generally must be selected on the basis
of the same criteria as those used to select the initial Loans, such Loans may
have been originated more recently than the Loans originally transferred to
the Trust Fund and may be of a lesser credit quality. As a result, the
addition of subsequent Loans may adversely affect the performance of the
related Securities.
Bankruptcy Risks. Federal and state statutory provisions, including the
federal bankruptcy laws 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 a mortgaged property without the
permission of the bankruptcy court. The rehabilitation plan proposed by the
related debtor may provide, if the mortgaged property is not the debtor's
principal residence and the court determines that the value of the mortgaged
property is less than the principal balance of the related mortgage loan, for
the reduction of the secured indebtedness to the value of the mortgaged
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.
Consequences of Owning Original Issue Discount Securities. Debt
Securities that are Compound Interest Securities will be, and certain of the
Debt Securities may be, issued with original issue discount for federal income
tax purposes. A Holder of Debt Securities issued with original issue discount
will be required to include original issue discount in ordinary gross income
for federal income tax purposes as it accrues, in advance of receipt of the
cash attributable to such income. Accrued but unpaid interest on the Debt
Securities that are Compound Interest Securities generally will be treated as
having original issue discount for this purpose. See "Certain Federal Income
Tax Considerations--Interest and Acquisition Discount" herein.
REMIC-Related Risks. Holders of Residual Interest Securities will be
required to report on their federal income tax returns as ordinary income
their pro rata share of the taxable income of the REMIC, regardless of the
amount or timing of their receipt of cash payments, as described in "Certain
Federal Income Tax Considerations." Accordingly, under certain circumstances,
Holders of Securities that constitute Residual Interest Securities may have
taxable income and tax liabilities arising from such investment during a
taxable year in excess of the cash received during such period. Individual
Holders of Residual Interest Securities may be limited in their ability to
deduct servicing fees and other expenses of the REMIC. In addition, Residual
Interest Securities are subject to certain restrictions on transfer. Because
of the special tax treatment of Residual Interest Securities, the taxable
income arising in a given year on a Residual Security will not be equal to the
taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on the Residual Interest Security may be
significantly less than that of a corporate bond or stripped instrument having
similar cash flow characteristics. Additionally, prospective purchasers of a
REMIC Residual Interest Security should be aware that the IRS recently
finalized regulations that 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 such regulations. See "Certain
Federal Income Tax Considerations--Taxation of Holders of Residual Interest
Securities--Mark to Market Rules."
Unsecured Home Improvement and Other Loans. The Trust Fund for any Series
may include Home Improvement Contracts that are not secured by an interest in
real estate or otherwise. The Trust Fund for any Series may also include home
equity contracts that were originated with Loan-to-Value Ratios or Combined
Loan-to-Value Ratios in excess of the value of the related Mortgaged Property
pledged as security therefor. Under such circumstances, the Trust Fund for the
related Series could be treated as a general unsecured creditor as to any
unsecured portion of any such Loan. In the event of a default under a Loan
that is unsecured in whole or in part, the related Trust Fund will have
recourse only against the borrower's assets generally for the unsecured
portion of the Loan, along with all other general unsecured creditors of the
borrower. In a bankruptcy or insolvency proceeding relating to a borrower on
any such Loan, the unsecured obligations of the borrower with respect to such
Loan may be discharged, even though the value of the borrower's assets made
available to the related Trust Fund as a general unsecured creditor is
insufficient to pay amounts due and owning under the related Loan.
Risk of Losses Associated with Adjustable Rate Loans. Adjustable rate
Loans may be underwritten on the basis of an assessment that Mortgagors will
have the ability to make payments in higher amounts after relatively short
periods of time. In some instances, Mortgagors' income may not be sufficient
to enable them to continue to make their loan payments as such payments
increase and thus the likelihood of default will increase.
Potential Liability For Environmental Conditions. Real property pledged
as security to a lender may be subject to certain 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.
In particular, 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.
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 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."
Consumer Protection Laws May Affect Loans. Applicable state laws
generally regulate interest rates and other charges and require certain
disclosures. In addition, other state laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the 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 owner of the Loan to damages and
administrative enforcement.
The Loans are also 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 specified 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 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 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."
Contracts Will Not Be Stamped. In order to give notice of the right,
title and interest of Holders to the Home Improvement Contracts, the Depositor
will cause a UCC-1 financing statement to be executed by the Depositor or the
Seller identifying the applicable Trustee as the secured party and identifying
all Home Improvement Contracts as collateral. Unless otherwise specified in
the related Prospectus Supplement, the Home Improvement Contracts will not be
stamped or otherwise marked to reflect their assignment to the Trust Fund.
Therefore, if, through negligence, fraud or otherwise, a subsequent purchaser
were able to take physical possession of the Home Improvement Contracts
without notice of such assignment, the interest of Holders in the Home
Improvement Contracts could be defeated. See "Certain Legal Aspects of the
Loans--The Home Improvement Contracts."
Ratings Are Not Recommendations. It will be a condition to the issuance
of a Series of Securities that they be rated in one of the four highest rating
categories by the Rating Agencies identified in the related Prospectus
Supplement. Any such rating would be based on, among other things, the
adequacy of the value of the Primary Assets and any Enhancement with respect
to such Series. 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. There is also no assurance that any
such rating will remain in effect for any given period of time or may not be
lowered or withdrawn entirely by the Rating Agencies if in their 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 Primary
Assets, such rating might also be lowered or withdrawn, among other reasons,
because of an adverse change in the financial or other condition of an
Enhancer or a change in the rating of such Enhancer's long term debt.
DESCRIPTION OF THE SECURITIES
General
Each Series of Notes will be issued pursuant to an indenture (each, an
"Indenture") between the related Trust Fund and the entity named in the
related Prospectus Supplement as Indenture 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. The Certificates will also be
issued in Series pursuant to separate agreements (each, a "Pooling and
Servicing Agreement" or a "Trust Agreement") among the Depositor, the
Servicer, if the Series relates to Loans, and the Trustee. A form of Pooling
and Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. A Series may consist of both
Notes and Certificates.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, the provisions of the Agreements and the Prospectus Supplement relating to
each Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities or Participating Securities. A Series may
also include one or more Classes of Subordinated Securities. The Securities of
each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related
Prospectus Supplement. Upon satisfaction of the conditions, if any, applicable
to a Class of a Series, as described in the related Prospectus Supplement, the
transfer of the Securities may be registered and the Securities may be
exchanged at the office of the applicable Trustee specified in the Prospectus
Supplement without the payment of any service charge other than any tax or
governmental charge payable in connection with such registration of transfer
or exchange. If specified in the related Prospectus Supplement, one or more
Classes of a Series may be available in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments
of principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing
on the security register, except that (a) payments may be made by wire
transfer (at the expense of the Holder requesting payment by wire transfer) in
certain circumstances described in the related Prospectus Supplement and (b)
final payments of principal in retirement of each Security will be made only
upon presentation and surrender of such Security at the office of the
applicable Trustee specified in the Prospectus Supplement. Notice of the final
payment on a Security will be mailed to the Holder of such Security before the
Distribution Date on which the final principal payment on any Security is
expected to be made to the Holder of such Security.
Payments of principal of and interest on the Securities will be made by
the applicable Trustee, or a paying agent on behalf of such Trustee, as
specified in the related Prospectus Supplement. Unless otherwise provided in
the related Prospectus Supplement, all payments with respect to the Primary
Assets for a Series, together with reinvestment income thereon, amounts
withdrawn from any Reserve Fund, and amounts available pursuant to any other
Enhancement will be deposited directly into the Collection Account. If
provided in the related Prospectus Supplement, such deposits may be net of
certain amounts payable to the related Servicer and any other person specified
in such Prospectus Supplement. Such amounts thereafter will be deposited into
the Distribution Account(s) and will be available to make payments on the
Securities of such Series on the next Distribution Date. See "The Trust
Funds--Collection and Distribution Accounts."
Valuation of the Primary Assets
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial "Asset Value." Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will
be equal to the product of the Asset Value Percentage as set forth in the
Indenture and the lesser of (a) the stream of remaining regularly scheduled
payments on the Primary Assets, net, unless otherwise provided in the related
Prospectus Supplement, of certain amounts payable as expenses, together with
income earned on each such scheduled payment received through the day
preceding the next Distribution Date at the Assumed Reinvestment Rate, if any,
discounted to present value at the highest interest rate on the Notes of such
Series over periods equal to the interval between payments on the Notes, and
(b) the then-outstanding Principal Balance of the Primary Assets. Unless
otherwise specified in the related Prospectus Supplement, the initial Asset
Value of the Primary Assets will be at least equal to the principal amount of
the Notes of the related Series at the date of issuance thereof.
The "Assumed Reinvestment Rate," if any, for a Series will be the highest
rate permitted by the Rating Agencies or a rate insured by means of a surety
bond, guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to the Rating Agencies. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set forth the terms of such
arrangement.
Payments of Interest
The Securities of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360-day year of twelve 30-day months)
from the date and at the per annum rate specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities
of a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of the
Loans or Underlying Loans relating to the Private Securities, as applicable,
included in the related Trust Fund and/or as prepayments occur with respect to
such Loans or Underlying Loans, as applicable. Principal Only Securities may
not be entitled to receive any interest distributions or may be entitled to
receive only nominal interest distributions. Any interest on Zero Coupon
Securities that is not paid on the related Distribution Date will accrue and
be added to the principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include
all interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding
a Distribution Date, the effective yield to Holders will be reduced from the
yield that would otherwise be obtainable if interest payable on the Securities
were to accrue through the day immediately preceding such Distribution Date.
Payments of Principal
On each Distribution Date for a Series, principal payments will be made
to the Holders of the Securities of such Series on which principal is then
payable, to the extent set forth in the related Prospectus Supplement. Such
payments will be made in an aggregate amount determined as specified in the
related Prospectus Supplement and will be allocated among the respective
Classes of a Series in the manner, at the times and in the priority (which
may, in certain cases, include allocation by random lot) set forth in the
related Prospectus Supplement.
Final Scheduled Distribution Date
The Final Scheduled Distribution Date with respect to each Class of a
Series of Notes is the date no later than which the principal thereof will be
fully paid and with respect to each Class of a Series of Certificates will be
the date on which the entire aggregate principal balance of such Class is
expected to be reduced to zero, in each case calculated on the basis of the
assumptions applicable to such Series described in the related Prospectus
Supplement. The Final Scheduled Distribution Date for each Class of a Series
will be specified in the related Prospectus Supplement. Since payments on the
Primary Assets will be used to make distributions in reduction of the
outstanding principal amount of the Securities, it is likely that the actual
final Distribution Date of any such Class will occur earlier, and may occur
substantially earlier, than its Final Scheduled Distribution Date.
Furthermore, with respect to a Series of Certificates, unless otherwise
specified in the related Prospectus Supplement, as a result of delinquencies,
defaults and liquidations of the Primary Assets in the Trust Fund, the actual
final Distribution Date of any Certificate may occur later than its Final
Scheduled Distribution Date. No assurance can be given as to the actual
prepayment experience with respect to a Series. See "Weighted Average Life of
the Securities" below.
Special Redemption
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes
of Securities of such Series may be subject to special redemption, in whole or
in part, on the day specified in the related Prospectus Supplement (the
"Special Redemption Date") if, as a consequence of prepayments on the Loans or
Underlying Loans, as applicable, relating to such Securities, or low yields
then available for reinvestment, the entity specified in the related
Prospectus Supplement determines, based on assumptions specified in the
applicable Agreement, that the amount available for the payment of interest
that will have accrued on such Securities (the "Available Interest Amount")
through the designated interest accrual date specified in the related
Prospectus Supplement is less than the amount of interest that will have
accrued on such Securities to such date. In such event and as further
described in the related Prospectus Supplement, the applicable Trustee will
redeem a principal amount of outstanding Securities of such Series as will
cause the Available Interest Amount to equal the amount of interest that will
have accrued through such designated interest accrual date for such Series of
Securities outstanding immediately after such redemption.
Optional Redemption, Purchase or Termination
The Depositor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances,
if any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a
Series of Certificates, the Depositor, the Servicer, or another entity
designated in the related Prospectus Supplement may, at its option, cause an
early termination of a Trust Fund by repurchasing all of the Primary Assets
from such Trust Fund on or after a date specified in the related Prospectus
Supplement, or on or after such time as the aggregate outstanding principal
amount of the Certificates or Primary Assets, as specified in the related
Prospectus Supplement, is equal to or less than the amount or percentage
specified in the related Prospectus Supplement. Notice of such redemption,
purchase or termination must be given by the Depositor or the Trustee prior to
the related date. The redemption, purchase or repurchase price will be set
forth in the related Prospectus Supplement. If specified in the related
Prospectus Supplement, in the event that a REMIC election has been made, the
Trustee shall receive a satisfactory opinion of counsel that the optional
redemption, purchase or termination will be conducted so as to constitute a
"qualified liquidation" under Section 860F of the Code.
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid
significantly earlier than would otherwise be the case if payments or
distributions were solely based on the activity of the related Primary Assets.
Weighted Average Life of the Securities
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. Unless otherwise specified in
the related Prospectus Supplement, the weighted average life of the Securities
of a Class will be influenced by the rate at which the amount financed under
the Loans or Underlying Loans relating to the Private Securities, as
applicable, included in the Trust Fund for a Series is paid, which may be in
the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and
may contain tables setting forth the projected weighted average life of each
Class of Securities of such Series and the percentage of the original
principal amount of each Class of Securities of such Series that would be
outstanding on specified Distribution Dates for such Series based on the
assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the Loans or Underlying Loans relating to the Private
Securities, as applicable, included in the related Trust Fund are made at
rates corresponding to various percentages of the prepayment standard or model
specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or
Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund will conform to any level of any prepayment standard
or model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or
industry, also may affect the rate of principal prepayments. Demographic and
social factors may influence the rate of principal prepayments in that some
borrowers have greater financial flexibility to move or refinance than do
other borrowers. The deductibility of mortgage interest payments, servicing
decisions and other factors also affect the rate of principal prepayments. As
a result, there can be no assurance as to the rate or timing of principal
prepayments of the Loans or Underlying Loans either from time to time or over
the lives of such Loans or Underlying Loans.
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on
the Loans or Underlying Loans relating to the Private Securities, as
applicable, for a Series, such loans are likely to prepay at rates higher than
if prevailing interest rates remain at or above the interest rates borne by
such loans. In this regard, it should be noted that the Loans or Underlying
Loans, as applicable, for a Series may have different interest rates. In
addition, the weighted average life of the Securities may be affected by the
varying maturities of the Loans or Underlying Loans relating to the Private
Securities, as applicable. If any Loans or Underlying Loans relating to the
Private Securities, as applicable, for a Series have actual terms-to-stated
maturity of less than those assumed in calculating the Final Scheduled
Distribution Date of the related Securities, one or more Classes of the Series
may be fully paid prior to their respective Final Scheduled Distribution Date,
even in the absence of prepayments and a reinvestment return higher than the
Assumed Reinvestment Rate.
THE TRUST FUNDS
General
The Notes of each Series will be secured by the pledge of the assets of
the related Trust Fund, and the Certificates of each Series will represent
interests in the assets of the related Trust Fund. The Trust Fund of each
Series will include assets purchased from the Seller composed of (i) the
Primary Assets, (ii) amounts available from the reinvestment of payments on
such Primary Assets at the Assumed Reinvestment Rate, if any, specified in the
related Prospectus Supplement, (iii) any Enhancement, (iv) any Property that
secured a Loan but which is acquired by foreclosure or deed in lieu of
foreclosure or repossession and (v) the amount, if any, initially deposited
into the Collection Account or Distribution Account(s) for a Series as
specified in the related Prospectus Supplement.
The Securities will be non-recourse obligations of the related Trust
Fund. The assets of the Trust Fund specified in the related Prospectus
Supplement for a Series of Securities, unless otherwise specified in the
related Prospectus Supplement, will serve as collateral only for that Series
of Securities. Holders of a Series of Notes may only proceed against such
collateral securing such Series of Notes in the case of a default with respect
to such Series of Notes and may not proceed against any assets of the
Depositor or the related Trust Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the
Depositor or purchased by the Depositor in the open market or in privately
negotiated transactions, which may include transactions with affiliates and
will be transferred by the Depositor to the Trust Fund. Loans relating to a
Series will be serviced by the Servicer, which may be the Seller, specified in
the related Prospectus Supplement, pursuant to a Pooling and Servicing
Agreement, with respect to a Series of Certificates or a servicing agreement
(each, a "Servicing Agreement") between the Trust Fund and Servicer, with
respect to a Series of Notes.
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 specified in the related Prospectus Supplement.
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 the related Primary 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 Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Loans and Private Securities, to the extent and as specified in
the related Prospectus Supplement.
The Loans
Mortgage Loans. The Primary Assets for a Series may consist, in whole or
in part, of closed-end home equity loans (the "Closed-End Loans") and/or
revolving home equity loans or certain balances therein (the "Revolving Credit
Line Loans" and, together with the Closed-End Loans, the "Mortgage Loans")
secured by mortgages primarily on Single Family Properties that may be
subordinated to other mortgages on the same Mortgaged Property. The Mortgage
Loans may have fixed interest rates or adjustable interest rates and may
provide for other payment characteristics as described below and in the
related Prospectus Supplement.
The full principal amount of a Closed-End Loan is advanced at origination
of the loan and generally is repayable in equal (or substantially equal)
installments of an amount sufficient to fully amortize such loan at its stated
maturity. Unless otherwise described in the related Prospectus Supplement, the
original terms to stated maturity of Closed-End Loans will not exceed 360
months. Principal amounts on a Revolving Credit Line Loan may be drawn down
(up to a maximum amount as set forth in the related Prospectus Supplement) or
repaid under each Revolving Credit Line Loan from time to time, but may be
subject to a minimum periodic payment. Except to the extent provided in the
related Prospectus Supplement, the Trust Fund will not include any amounts
borrowed under a Revolving Credit Line Loan after the Cut-off Date. As more
fully described in the related Prospectus Supplement, interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, is computed and payable monthly on the
average daily Principal Balance of such Loan. Under certain circumstances,
under either a Revolving Credit Line Loan or a Closed-End Loan, a borrower may
choose an interest only payment option and is obligated to pay only the amount
of interest that 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 rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans have been originated in significant volume only during the past
few years and the Depositor is not aware of any publicly available studies or
statistics on the rate of prepayment of such loans. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the
Mortgage Loans may experience a higher rate of prepayment than traditional
first mortgage loans. On the other hand, because home equity loans such as the
Revolving Credit Line Loans generally are not fully amortizing, the absence of
voluntary borrower prepayments could cause rates of principal payments 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 first mortgage loans, and
the use of first mortgage loans as long-term financing for home purchase and
subordinate mortgage loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, the Mortgage Loans may
experience a higher rate of prepayment than traditional fixed-rate 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. Moreover, 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 in Mortgage Loans."
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 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 Mortgage Loans may vary due
to seasonal purchasing and the payment habits of borrowers.
The Mortgaged Properties will include Single Family Property (i.e., one-
to four-family residential housing, including Condominium Units and
Cooperative Dwellings) and mixed-use property. Mixed-use properties will
consist of structures of no more than three stories that include one- to
four-residential dwelling units and space used for retail, professional or
other commercial uses. Such uses, which will not involve more than 50% of the
space in the structure, may include doctor, dentist or law offices, real
estate agencies, boutiques, newsstands, convenience stores or other similar
types of uses intended to cater to individual customers as specified in the
related Prospectus Supplement. The properties may be located in suburban or
metropolitan districts. Any such non-residential use will be in compliance
with local zoning laws and regulations. The Mortgaged Properties may consist
of detached individual dwellings, individual condominiums, townhouses,
duplexes, row houses, individual units in planned unit developments and other
attached dwelling units. Each Single Family Property will be located on land
owned in fee simple by the borrower or on land leased by the borrower for a
term at least ten years (unless otherwise provided in the related Prospectus
Supplement) greater than the term of the related Loan. Attached dwellings may
include owner-occupied structures where each borrower owns the land upon which
the unit is built, with the remaining adjacent land owned in common or
dwelling units subject to a proprietary lease or occupancy agreement in a
cooperatively owned apartment building.
Unless otherwise specified in the related Prospectus Supplement,
Mortgages on Cooperative Dwellings consist of a lien on the shares issued by
such Cooperative Dwelling and the proprietary lease or occupancy agreement
relating to such Cooperative Dwelling.
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 Prospectus Supplement, the sole basis for a
representation that a given percentage of the Loans are secured by Single
Family Property that is owner-occupied will be either (i) the making of a
representation by the Mortgagor at origination of the Mortgage Loan either
that the underlying Mortgaged Property will be used by the Mortgagor for a
period of at least six months every year or that the Mortgagor intends to use
the Mortgaged Property as a primary residence, or (ii) a finding that the
address of the underlying Mortgaged Property is the Mortgagor's mailing
address as reflected in the Servicer's records. To the extent specified in the
related Prospectus Supplement, the Mortgaged Properties may include non-owner
occupied investment properties and vacation and second homes.
Unless otherwise specified in the related Prospectus Supplement, the
initial Combined Loan-to-Value Ratio of a Loan is computed in the manner
described in the related Prospectus Supplement, taking into account the
amounts of any related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may consist,
in whole or in part, of home improvement installment sales contracts and
installment loan agreements (the "Home Improvement Contracts") originated by a
home improvement contractor in the ordinary course of business. As specified
in the related Prospectus Supplement, the Home Improvement Contracts will
either be unsecured or secured by the Mortgages primarily on Single Family
Properties, which are generally subordinated to other mortgages on the same
Mortgaged Property or by purchase money security interests in the Home
Improvements financed thereby. Unless otherwise specified in the applicable
Prospectus Supplement, the Home Improvement Contracts will be fully amortizing
and may have fixed interest rates or adjustable interest rates and may provide
for other payment characteristics as described below and in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the "Home Improvements") securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels. The initial Loan-to-Value Ratio of a Home Improvement
Contract will be computed in the manner described in the related Prospectus
Supplement.
Additional Information. The selection criteria that will apply with
respect to the Loans, including, but not limited to, the Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as applicable, original terms to
maturity and delinquency information, will be specified in the related
Prospectus Supplement.
The Loans for a Series may include Loans that do not amortize their
entire Principal Balance by their stated maturity in accordance with their
terms and require a balloon payment of the remaining Principal Balance at
maturity, as specified in the related Prospectus Supplement. As further
described in the related Prospectus Supplement, the Loans for a Series may
include Loans that do not have a specified stated maturity.
The Loans will be conventional contracts or contracts insured by the
Federal Housing Administration (the "FHA") or partially guaranteed by the
Veterans Administration (the "VA"). Loans designated in the related Prospectus
Supplement as insured by the FHA will be insured by the FHA as authorized
under the United States Housing Act of 1937, as amended. Such Loans will be
insured under various FHA programs. These programs generally limit the
principal amount and interest rates of the mortgage loans insured. Loans
insured by the FHA generally require a minimum down payment of approximately
5% of the original principal amount of the loan. No FHA-insured Loans relating
to a Series may have an interest rate or original principal amount exceeding
the applicable FHA limits at the time or origination of such loan.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD")
and are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the
mortgaged premises to HUD or upon assignment of the defaulted Loan to HUD.
With respect to a defaulted FHA-insured Loan, the Servicer is limited in its
ability to initiate foreclosure proceedings. When it is determined, either by
the Servicer or HUD, that default was caused by circumstances beyond the
mortgagor's control, the Servicer is expected to make an effort to avoid
foreclosure by entering, if feasible, into one of a number of available forms
of forbearance plans with the 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 beyond the maturity
date. In addition, when a default caused by such circumstances is accompanied
by certain other criteria, HUD may provide relief by making payments to the
Servicer in partial or full satisfaction of amounts due under the Loan (which
payments are to be repaid by the mortgagor to HUD) or by accepting assignment
of the loan from the Servicer. With certain exceptions, at least three full
monthly installments must be due and unpaid under the Loan and HUD must have
rejected any request for relief from the mortgagor before the Servicer may
initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA-insured Loan will be
obligated to purchase any such debenture issued in satisfaction of such Loan
upon default for an amount equal to the principal amount of any such
debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted Loan adjusted to reimburse
the Servicer for certain costs and expenses and to deduct certain amounts
received or retained by the Servicer after default. When entitlement to
insurance benefits results from foreclosure (or other acquisition of
possession) and conveyance to HUD, the Servicer is compensated for no more
than two-thirds of its foreclosure costs, and is compensated for interest
accrued and unpaid prior to 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 mortgagor's
first uncorrected failure to perform any obligation to make any payment due
under the Loan and, upon assignment, from the date of assignment to the date
of payment of the claim, in each case at the same interest rate as the
applicable HUD debenture interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (the "VA Guaranty"). The Serviceman's
Readjustment Act of 1944, as amended, permits a veteran (or in certain
instances, the spouse of a veteran) to obtain a mortgage loan guaranty by the
VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no
mortgage loan limits, requires no down payment from the purchaser and permits
the guarantee of mortgage loans of up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction
or increase in the amount of indebtedness, but in no event will the amount
payable on the guaranty exceed the amount of the original guaranty. The VA
may, at its option and without regard to the guaranty, make full payment to a
mortgage holder of unsatisfied indebtedness on a mortgage upon its assignment
to the VA.
With respect to a defaulted VA guaranteed Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for
the guaranty is submitted after liquidation of the Mortgaged Property.
The amount payable under the guaranty 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 guaranty will be equal to the unpaid principal amount of
the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guaranty
may in no event exceed the amount of the original guaranty.
The related Prospectus Supplement for each Series will provide
information with respect to the Loans that are Primary Assets as of the
Cut-off Date, including, among other things, and to the extent relevant: (a)
the aggregate unpaid Principal Balance of the Loans; (b) the range and
weighted average Loan Rate on the Loans, and, in the case of adjustable rate
Loans, the range and weighted average of the current Loan Rates and the
Lifetime Rate Caps, if any; (c) the range and average Principal Balance of the
Loans; (d) the weighted average original and remaining term-to-stated maturity
of the Loans and the range of original and remaining terms-to-stated maturity,
if applicable; (e) the range and weighted average of Combined Loan-to-Value
Ratios or Loan-to-Value Ratios for the Loans, as applicable; (f) the
percentage (by Principal Balance as of the Cut-off Date) of Loans that accrue
interest at adjustable or fixed interest rates; (g) any special hazard
Insurance Policy or bankruptcy bond or other enhancement relating to the
Loans; (h) the percentage (by Principal Balance as of the Cut-off Date) of
Loans that are secured by Mortgaged Properties or Home Improvements or that
are unsecured; (i) the geographic distribution of any Mortgaged Properties
securing the Loans; (j) the percentage of Loans (by Principal Balance as of
the Cut-off Date) that are secured by Single Family Properties, shares
relating to Cooperative Dwellings, Condominium Units, investment property and
vacation or second homes; (k) the lien priority of the Loans; (l) the
delinquency status and year of origination of the Loans; (m) whether such
Loans are Closed-End Loans and/or Revolving Credit Line Loans; and (n) in the
case of Revolving Credit Line Loans, the general payments and credit line
terms of such Loans and other pertinent features thereof. The related
Prospectus Supplement will also specify any other limitations on the types or
characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within
15 days after the initial issuance of such Securities.
Private Securities
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities that include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to
be Loans (the "Underlying Loans") or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
will have previously been (a) offered and distributed to the public pursuant
to an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided a period of three years
elapsed since the later of the date the securities were acquired from the
issuer or an affiliate thereof. Although individual Underlying Loans may be
insured or guaranteed by the United States or an agency or instrumentality
thereof, they need not be, and Private Securities themselves will not be so
insured or guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a "PS
Agreement"). The seller/servicer of the Underlying Loans will have entered
into the PS Agreement with the trustee under such PS Agreement (the "PS
Trustee"). The PS Trustee or its agent, or a custodian, will possess the
Underlying Loans. Underlying Loans will be serviced by a servicer (the "PS
Servicer") directly or by one or more sub-servicers who may be subject to the
supervision of the PS Servicer.
The sponsor of the Private Securities (the "PS Sponsor") will be a
financial institution or other entity engaged generally in the business of
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 loans to
such trusts, and selling beneficial interests in such trusts. If so specified
in the Prospectus Supplement, the PS Sponsor may be an affiliate of the
Depositor. The obligations of the PS Sponsor will generally be limited to
certain representations and warranties with respect to the assets conveyed by
it to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PS Sponsor will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Securities issued under the PS
Agreement. Additionally, although the Underlying Loans may be guaranteed by an
agency or instrumentality of the United States, the Private Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the
PS Servicer. The PS Sponsor or the PS Servicer may have the right to
repurchase the Underlying Loans after a certain date or under other
circumstances specified in the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
Credit Support Relating to Private Securities. Credit support in the form
of Reserve Funds, subordination of other private securities issued under the
PS Agreement, guarantees, cash collateral accounts, Security Policies or other
types of credit support may be provided with respect to the Underlying Loans
or with respect to the Private Securities themselves. The type,
characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Loans and other factors and will have been
established for the Private Securities on the basis of requirements of the
nationally recognized statistical rating organization that rated the Private
Securities. Additional Information. The Prospectus Supplement for a Series for
which the Primary Assets include Private Securities will specify (such
disclosure may be on an approximate basis and will be as of the date specified
in the related Prospectus Supplement), to the extent relevant and to the
extent such information is reasonably available to the Depositor and the
Depositor reasonably believes such information to be reliable: (i) the
aggregate approximate principal amount and type of the Private Securities to
be included in the Trust Fund for such Series; (ii) certain characteristics of
the Underlying Loans, including (a) the payment features of such Underlying
Loans (i.e., whether they are Closed-End Loans and/or Revolving Credit Line
Loans, whether they are fixed rate or adjustable rate and whether they provide
for fixed level payments or other payment features), (b) the approximate
aggregate Principal Balance, if known, of such Underlying Loans insured or
guaranteed by a governmental entity, (c) the servicing fee or range of
servicing fees with respect to the Underlying Loans, (d) the minimum and
maximum stated maturities of such Underlying Loans at origination, (e) the
lien priority of such Underlying Loans and (f) the delinquency status and year
of origination of such Underlying Loans; (iii) the maximum original
term-to-stated maturity of the Private Securities; (iv) the weighted average
term-to-stated maturity of the Private Securities; (v) the pass-through or
certificate rate or ranges thereof for the Private Securities; (vi) the PS
Sponsor, the PS Servicer (if other than the PS Sponsor) and the PS Trustee for
such Private Securities; (vii) certain characteristics of credit support if
any, such as Reserve Funds, Security Policies or guarantees relating to such
Loans underlying the Private Securities or to such Private Securities
themselves; (viii) the terms on which Underlying Loans may, or are required
to, be purchased prior to their stated maturity or the stated maturity of the
Private Securities; and (ix) the terms on which Underlying Loans may be
substituted for those originally underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the
additional information, if available, will be set forth in a Current Report on
Form 8-K to be available to investors on the date of issuance of the related
Series and to be filed with the Commission within 15 days of the initial
issuance of such Securities.
Collection and Distribution Accounts
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for
receipt of the amount of cash, if any, specified in the related Prospectus
Supplement to be initially deposited therein by the Depositor, all amounts
received on or with respect to the Primary Assets and, unless otherwise
specified in the related Prospectus Supplement, income earned thereon. Certain
amounts on deposit in such Collection Account and certain amounts available
pursuant to any Enhancement, as provided in the related Prospectus Supplement,
will be deposited into the applicable Distribution Account, which will also be
established by the applicable Trustee for each such Series of Securities, for
distribution to the related Holders. Unless otherwise specified in the related
Prospectus Supplement, the applicable Trustee will invest the funds in the
Collection Account and the Distribution Account(s) in Eligible Investments
maturing, with certain exceptions, not later, in the case of funds in the
Collection Account, than the day preceding the date such funds are due to be
deposited into the Distribution Account(s) or otherwise distributed and, in
the case of funds in the Distribution Account(s), than the day preceding the
next Distribution Date for the related Series of Securities. Eligible
Investments include, among other investments, obligations of the United States
and certain agencies thereof, federal funds, certificates of deposit,
commercial paper, demand and time deposits and banker's acceptances, certain
repurchase agreements of United States government securities and certain
guaranteed investment contracts, in each case acceptable to the Rating
Agencies.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for the related Series. If so
specified, on the Closing Date for such Series, a portion of the proceeds of
the sale of the Securities of such Series (such amount, the "Pre-Funded
Amount") will be deposited into the Pre-Funding Account and may be used to
purchase additional Primary Assets during the period of time specified in the
related Prospectus Supplement (the "Pre-Funding Period"). In no case will the
Pre-Funded Amount exceed 50% of the aggregate principal amount of the related
Securities, and in no case will the Pre-Funding Period exceed one year. The
Primary Assets to be so purchased generally will be selected on the basis of
the same criteria as those used to select the initial Primary Assets, and the
same representations and warranties will be made with respect thereto. If any
Pre-Funded Amount remains on deposit in the Pre-Funding Account at the end of
the Pre-Funding Period, such amount will be applied in the manner specified in
the related Prospectus Supplement to prepay the Notes and/or the Certificates
of the applicable Series.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the Closing Date for
such Series, a portion of the proceeds of the sale of the Securities of such
Series will be deposited into the Capitalized Interest Account and used to
fund the excess, if any, of the sum of (i) the amount of interest accrued on
the Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period, over the
amount of interest available therefor from the Primary Assets in the Trust
Fund. Any amounts on deposit in the Capitalized Interest Account at the end of
the Pre-Funding Period that are not necessary for such purposes will be
distributed to the person specified in the related Prospectus Supplement.
ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of
Securities, simultaneously with the Depositor's assignment of the Primary
Assets to the Trustee, the Depositor will obtain a Security Policy, issue
Subordinated Securities or obtain any other form of enhancement or combination
thereof (collectively, "Enhancement") in favor of the Trustee on behalf of the
Holders of the related Series or designated Classes of such Series from an
institution or by other means acceptable to the Rating Agencies. The
Enhancement will support the payment of principal of and interest on the
Securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in such Prospectus Supplement. Enhancement for
a Series may include one or more of the following forms, or such other form as
may be specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, any of such Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund, in the manner
described therein.
Subordinated Securities
If specified in the related Prospectus Supplement, Enhancement for a
Series may consist of one or more Classes of Subordinated Securities. The
rights of the related Subordinated Securityholders to receive distributions on
any Distribution Date will be subordinate in right and priority to the rights
of Holders of Senior Securities of the Series, but only to the extent
described in the related Prospectus Supplement.
Insurance
If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of special hazard Insurance Policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in
the related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy (the "Pool Insurance Policy") for the Loans in the related Trust Fund.
The Pool Insurance Policy will cover any loss (subject to the limitations
described in a related Prospectus Supplement) by reason of default. but will
not cover the portion of the Principal Balance of any Loan that is required to
be covered by any primary mortgage Insurance Policy. The amount and terms of
any such coverage will be set forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard Insurance Policy typically provides that,
where there has been damage to Property securing a defaulted or foreclosed
Loan (title to which has been acquired by the insured) and to the extent such
damage is not covered by the standard hazard Insurance Policy or any flood
Insurance Policy, if applicable, required to be maintained with respect to
such Property, or in connection with partial loss resulting from the
application of the coinsurance clause in a standard hazard Insurance Policy,
the special hazard insurer will pay the lesser of (i) the cost of repair or
replacement of such Property or (ii) upon transfer of such 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 Servicer with respect to such Property. If the unpaid
Principal Balance plus accrued interest and certain expenses is paid by the
special hazard insurer, the amount of further coverage under the special
hazard Insurance Policy will be reduced by such amount less any net proceeds
from the sale of such Property. Any amount paid as the cost of repair of such
Property will reduce coverage by such amount. Special hazard Insurance
Policies typically do not cover losses occasioned by war, civil insurrection,
certain governmental actions, errors in design, faulty workmanship or
materials (except under certain circumstances), nuclear reaction, flood (if
the mortgaged property is in a federally designated flood area), chemical
contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above
is expected to satisfy the condition under any Pool Insurance Policy that such
Property be restored before a claim under such Pool Insurance Policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of
a claim in respect of such Loan under any Pool Insurance Policy. Therefore, so
long as such Pool Insurance Policy remains in effect, the payment by the
special hazard insurer of the cost of repair or of the unpaid Principal
Balance of the related Loan plus accrued interest and certain expenses will
not affect the total amount in respect of insurance proceeds paid to Holders
of the Securities, but will affect the relative amounts of coverage remaining
under the special hazard Insurance Policy and Pool Insurance Policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Loan at an amount less than the then-outstanding Principal Balance of such
Loan. The amount of the secured debt could be reduced to such value, and the
holder of such Loan thus would become an unsecured creditor to the extent the
Principal Balance of such Loan exceeds the value so assigned to the Property
by the bankruptcy court. In addition, certain other modifications of the terms
of a Loan can result from a bankruptcy proceeding. See "Certain Legal Aspects
of the Loans." If so provided in the related Prospectus Supplement, the
Depositor or other entity specified in the related Prospectus Supplement will
obtain a bankruptcy bond or similar insurance contract (the "bankruptcy bond")
covering losses resulting from proceedings with respect to borrowers under the
Bankruptcy Code. The bankruptcy bond will cover certain losses resulting from
a reduction by a bankruptcy court of scheduled payments of principal of and
interest on a Loan or a reduction by 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 bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement for all Loans in the Trust Fund
for such Series. Such amount will be reduced by payments made under such
bankruptcy bond in respect of such Loans, unless otherwise specified in the
related Prospectus Supplement, and will not be restored.
Reserve Funds
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be
established with the applicable Trustee as part of the Trust Fund for such
Series or for the benefit of any Enhancer with respect to such Series (each, a
"Reserve Fund") cash, a letter or letters of credit, cash collateral accounts,
Eligible Investments, or other instruments meeting the criteria of the Rating
Agencies rating any Series of the Securities in the amount specified in such
Prospectus Supplement. In the alternative or in addition to such deposit, a
Reserve Fund for a Series may be funded over time through application of all
or a portion of the excess cash flow from the Primary Assets for such Series,
to the extent described in the related Prospectus Supplement. If applicable,
the initial amount of the Reserve Fund and the Reserve Fund maintenance
requirements for a Series of Securities will be described in the related
Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the applicable
Trustee to make payments on the Securities of a Series, to pay expenses, to
reimburse any Enhancer or for any other purpose, in the manner and to the
extent specified in the related Prospectus Supplement.
Amounts deposited into a Reserve Fund will be invested by the applicable
Trustee in Eligible Investments maturing no later than the day specified in
the related Prospectus Supplement.
Minimum Principal Payment Agreement
If stated in the Prospectus Supplement relating to a Series of
Securities, the Depositor will enter into a Minimum Principal Payment
Agreement with an entity meeting the criteria of the Rating Agencies pursuant
to which such entity will provide certain payments on the Securities of such
Series in the event that aggregate scheduled principal payments and/or
prepayments on the Primary Assets for such Series are not sufficient to make
certain payments on the Securities of such Series, as provided in the
Prospectus Supplement.
Deposit Agreement
If specified in a Prospectus Supplement, the Depositor and the applicable
Trustee for such Series of Securities will enter into a Deposit Agreement with
the entity specified in such Prospectus Supplement on or before the sale of
such Series of Securities. The purpose of a Deposit Agreement would be to
accumulate available cash for investment so that such cash, together with
income thereon, can be applied to future distributions on one or more Classes
of Securities. The Prospectus Supplement for a Series of Securities pursuant
to which a Deposit Agreement is used will contain a description of the terms
of such Deposit Agreement.
SERVICING OF LOANS
General
Customary servicing functions with respect to Loans comprising the
Primary Assets in the Trust Fund will be provided by the Servicer directly
pursuant to the related Servicing Agreement or Pooling and Servicing
Agreement, as the case may be, with respect to a Series of Securities.
Collection Procedures; Escrow Accounts
The Servicer will make reasonable efforts to collect all payments
required to be made under the Loans and will, consistent with the terms of the
related Agreement for a Series and any applicable Enhancement, follow such
collection procedures as it follows with respect to comparable loans held in
its own portfolio. Consistent with the above, the Servicer may, in its
discretion, (i) waive any assumption fee, late payment charge, or other charge
in connection with a Loan and (ii) to the extent provided in the related
Agreement, arrange with an obligor a schedule for the liquidation of
delinquencies by extending the Due Dates for Scheduled Payments on such Loan.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound
accounts (each, an "Escrow Account") with respect to Loans in which payments
by obligors to pay taxes, assessments, mortgage and hazard Insurance Policy
premiums, and other comparable items will be deposited. Loans may not require
such payments under the loan related documents, in which case the Servicer
would not be required to establish any Escrow Account with respect to such
Loans. Withdrawals from the Escrow Accounts are to be made to effect timely
payment of taxes, assessments and mortgage and hazard insurance, to refund to
obligors amounts determined to be overages, to pay interest to obligors on
balances in the Escrow Account to the extent required by law, to repair or
otherwise protect the property securing the related Loan and to clear and
terminate such Escrow Account. The Servicer will be responsible for the
administration of the Escrow Accounts and generally will make advances to such
accounts when a deficiency exists therein.
Deposits to and Withdrawals from the Collection Account
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the "Collection
Account") in the name of the Trustee. Unless otherwise indicated in the
related Prospectus Supplement, the Collection Account will be an account
maintained (i) at a depository institution, the long-term unsecured debt
obligations of which at the time of any deposit therein are rated by each
Rating Agency rating the Securities of such Series at levels satisfactory to
each Rating Agency or (ii) in an account or accounts the deposits in which are
insured to the maximum extent available by the Federal Deposit Insurance
Corporation or that are secured in a manner meeting requirements established
by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the
funds held in the Collection Account may be invested in Eligible Investments.
If so specified in the related Prospectus Supplement, the Servicer will be
entitled to receive as additional compensation any interest or other income
earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will
deposit into the Collection Account for each Series on the Business Day
following the Closing Date, any amounts representing Scheduled Payments due
after the related Cut-off Date but received by the Servicer on or before the
Closing Date, and thereafter, within two business days after the date of
receipt thereof, the following payments and collections received or made by it
(other than, unless otherwise provided in the related Prospectus Supplement,
in respect of principal of and interest on the related Primary Assets due on
or before such Cut-off Date):
(i) All payments in respect of principal, including prepayments, on
such Primary Assets;
(ii) All payments in respect of interest on such Primary Assets
after deducting therefrom, at the discretion of the Servicer but only to
the extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the
Servicing Fee in respect of such Primary Assets;
(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Primary Assets received from the
obligor, other than amounts required to be paid or refunded to the
obligor pursuant to the terms of the applicable loan documents or
otherwise pursuant to law, net of related liquidation expenses
("Liquidation Proceeds"), exclusive of, in the discretion of the
Servicer, but only to the extent of the amount permitted to be withdrawn
from the Collection Account in accordance with the related Agreement, the
Servicing Fee, if any, in respect of the related Primary Asset;
(iv) All proceeds under any title insurance, hazard Insurance Policy
or other Insurance Policy covering any such Primary Asset, other than
proceeds to be applied to the restoration or repair of the related
Property or released to the obligor in accordance with the related
Agreement;
(v) All amounts required to be deposited therein from any Reserve
Fund for such Series pursuant to the related Agreement;
(vi) All Advances made by the Servicer required pursuant to the
related Agreement; and
(vii) All repurchase prices of any such Primary Assets repurchased
by the Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; provided, that the Servicer's right to
reimburse itself is limited to amounts received on or in respect of
particular Loans (including, for this purpose, Liquidation Proceeds and
Insurance Proceeds) that represent late recoveries of Scheduled Payments
with respect to which any such Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Advance was made
or from Liquidation Proceeds or Insurance Proceeds;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Property and, in the event deposited into the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the Principal
Balance of the related Loan, together with accrued and unpaid interest
thereon to the Due Date for such Loan next succeeding the date of its
receipt of such Liquidation Proceeds, to pay to itself out of such excess
the amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Loan prior to the deposit of
such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the
related Agreement, from any such Scheduled Payment, late payment or such
other recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by
or reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary
Asset or REO Property acquired in respect thereof that has been
repurchased or removed from the Trust Fund by the Depositor, the Servicer
or the Seller pursuant to the related Agreement, all amounts received
thereon and not distributed as of the date on which the related
repurchase price was determined;
(vii) to make payments to the applicable Trustee of such Series for
deposit into the related Distribution Account, if any, or for remittance
to the Holders of such Series in the amounts and in the manner provided
for in the related Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits into the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
Advances and Limitations Thereon
The related Prospectus Supplement will describe the circumstances, if
any, under which the Servicer will make Advances with respect to delinquent
payments on Loans. If specified in the related Prospectus Supplement, the
Servicer will be obligated to make Advances, and such obligation may be
limited in amount, or may not be activated until a certain portion of a
specified Reserve Fund is depleted. Advances are intended to provide liquidity
and, except to the extent specified in the related Prospectus Supplement, not
to guarantee or insure against losses. Accordingly, any funds advanced are
recoverable by the Servicer out of amounts received on particular Loans that
represent late recoveries of principal or interest, Insurance Proceeds or
Liquidation Proceeds respecting which any such Advance was made. If an Advance
is made and subsequently determined to be nonrecoverable from late
collections, Insurance Proceeds or Liquidation Proceeds from the related Loan,
the Servicer may be entitled to reimbursement from other funds in the
Collection Account or Distribution Account(s), as the case may be, or from a
specified Reserve Fund, as applicable, to the extent specified in the related
Prospectus Supplement.
Maintenance of Insurance Policies and Other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Servicer will be required to
maintain or to cause the obligor on each Loan to maintain a standard hazard
Insurance Policy providing coverage of the standard form of fire insurance
with extended coverage for certain other hazards as is customary in the state
in which the related Property is located. The standard hazard Insurance
Policies will provide for coverage at least equal to the applicable state
standard form of fire Insurance Policy with extended coverage for property of
the type securing the related Loans. In general, the standard form of fire and
extended coverage policy will cover physical damage to or destruction of, the
related Property caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Because the standard hazard Insurance Policies
relating to the Loans will be underwritten by different hazard insurers and
will cover Properties located in various states, such policies will not
contain identical terms and conditions. The basic terms, however, generally
will be determined by state law and generally will be similar. Most such
policies typically will not cover any physical damage resulting from war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mudflows), nuclear reaction,
wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not intended to be all inclusive. Uninsured
risks not covered by a special hazard Insurance Policy or other form of
Enhancement will adversely affect distributions to Holders. When a Property
securing a Loan is located in a flood area identified by HUD pursuant to the
Flood Disaster Protection Act of 1973, as amended, the Servicer will be
required to cause flood insurance to be maintained with respect to such
Property, to the extent available.
The standard hazard Insurance Policies covering Properties securing Loans
typically will contain a "coinsurance" clause, which in effect will require
the insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the Property,
including any improvements on the Property, in order to recover the full
amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause will provide that the hazard insurer's
liability in the event of partial loss will not exceed the greater of (i) the
actual cash value (the replacement cost less physical depreciation) of the
Property, including the improvements, if any, damaged or destroyed or (ii)
such proportion of the loss, without deduction for depreciation, as the amount
of insurance carried bears to the specified percentage of the full replacement
cost of such Property and improvements. Since the amount of hazard insurance
to be maintained on the improvements securing the Loans declines as the
Principal Balances owing thereon decrease, and since the value of the
Properties will fluctuate over time, the effect of this requirement in the
event of partial loss may be that hazard Insurance Proceeds will be
insufficient to restore fully the damage to the affected Property.
Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding Principal Balance of the related Loan. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also
maintain on REO Property that secured a defaulted Loan and that has been
acquired upon foreclosure, deed in lieu of foreclosure or repossession, a
standard hazard Insurance Policy in an amount that is at least equal to the
maximum insurable value of such REO Property. No earthquake or other
additional insurance will be required of any obligor or will be maintained on
REO Property acquired in respect of a defaulted Loan, other than pursuant to
such applicable laws and regulations as shall at any time be in force and
shall require such additional insurance.
Any amounts collected by the Servicer under any such Insurance Policies
(other than amounts to be applied to the restoration or repair of the
Property, released to the obligor in accordance with normal servicing
procedures or used to reimburse the Servicer for amounts to which it is
entitled to reimbursement) will be deposited into the Collection Account. In
the event that the Servicer obtains and maintains a blanket policy insuring
against hazard losses on all of the Loans, written by an insurer then
acceptable to each Rating Agency that assigns a rating to such Series, it will
conclusively be deemed to have satisfied its obligations to cause to be
maintained a standard hazard Insurance Policy for each Loan or related REO
Property. This blanket policy may contain a deductible clause, in which case
the Servicer will be required, in the event that there has been a loss that
would have been covered by such policy absent such deductible clause, to
deposit into the Collection Account the amount not otherwise payable under the
blanket policy because of the application of such deductible clause.
Realization Upon Defaulted Loans
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Loans as come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In connection with such foreclosure or other conversion, the
Servicer will follow such practices and procedures as it deems necessary or
advisable and as are normal and usual in its servicing activities with respect
to comparable loans serviced by it. However, the Servicer will not be required
to expend its own funds in connection with any foreclosure or towards the
restoration of the Property unless it determines that (i) such restoration or
foreclosure will increase the Liquidation Proceeds in respect of the related
Loan available to the Holders after reimbursement to itself for such expenses
and (ii) such expenses will be recoverable by it either through Liquidation
Proceeds or Insurance Proceeds. Notwithstanding anything to the contrary
herein, in the case of a Trust Fund for which a REMIC election has been made,
the Servicer will be required to liquidate any Property acquired through
foreclosure within two years after the acquisition of the beneficial ownership
of such Property. While the holder of a Property acquired through foreclosure
can often maximize its recovery by providing financing to a new purchaser, the
Trust Fund, if applicable, will have no ability to do so and neither the
Servicer nor the Depositor will be required to do so.
The Servicer may arrange with the obligor on a defaulted Loan a change in
the terms of such Loan (a "Modification") to the extent provided in the
related Prospectus Supplement. Such Modifications may only be entered into if
they meet the underwriting policies and procedures employed by the Servicer in
servicing receivables for its own account and meet the other conditions set
forth in the related Prospectus Supplement.
Enforcement of Due-On-Sale Clauses
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior
to the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Loan under the applicable "due-on-sale"
clause, if any, unless it reasonably believes that such clause is not
enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage Insurance Policy. In
such event, the Servicer is authorized to accept from or enter into an
assumption agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
Loan and pursuant to which the original obligor is released from liability and
such person is substituted as the obligor and becomes liable under the Loan.
Any fee collected in connection with an assumption will be retained by the
Servicer as additional servicing compensation. The terms of a Loan may not be
changed in connection with an assumption.
Servicing Compensation and Payment of Expenses
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
"Servicing Fee") in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as
specified in the related Prospectus Supplement. In addition, unless otherwise
specified in the related Prospectus Supplement, the Servicer will be entitled
to servicing compensation in the form of assumption fees, late payment charges
and similar items, or excess proceeds following disposition of Property in
connection with defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing
of the Loans, including, without limitation, the payment of the fees and
expenses of each applicable Trustee and independent accountants, payment of
Security Policy and Insurance Policy premiums, if applicable, and the cost of
credit support, if any, and payment of expenses incurred in preparation of
reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Loan, the obligor will generally be required to pay interest on
the amount prepaid only to the date of prepayment. If and to the extent
provided in the related Prospectus Supplement, in order that one or more
Classes of the Holders of a Series will not be adversely affected by any
resulting shortfall in interest, the amount of the Servicing Fee may be
reduced to the extent necessary to include in the Servicer's remittance to the
applicable Trustee for deposit into the related Distribution Account an amount
equal to one month's interest on the related Loan (less the Servicing Fee). If
the aggregate amount of such shortfalls in a month exceeds the Servicing Fee
for such month, a shortfall to Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Loans. The related Holders
will suffer no loss by reason of such expenses to the extent expenses are
covered under related Insurance Policies or from excess Liquidation Proceeds.
If claims are either not made or paid under the applicable Insurance Policies
or if coverage thereunder has been exhausted, the related Holders will suffer
a loss to the extent that Liquidation Proceeds, after reimbursement of the
Servicer's expenses, are less than the Principal Balance of and unpaid
interest on the related Loan that would be distributable to Holders. In
addition, the Servicer will be entitled to reimbursement of expenditures
incurred by it in connection with the restoration of property securing a
defaulted Loan, such right of reimbursement being prior to the rights of the
Holders to receive any related Insurance Proceeds, Liquidation Proceeds or
amounts derived from other Enhancement. The Servicer is generally also
entitled to reimbursement from the Collection Account for Advances.
Unless otherwise specified in the related Prospectus Supplement, the
rights of the Servicer to receive funds from the Collection Account for a
Series, whether as the Servicing Fee or other compensation, or for the
reimbursement of Advances, expenses or otherwise, are not subordinate to the
rights of Holders of such Series.
Evidence as to Compliance
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the applicable Trustee to the
effect that such firm has examined certain documents and records relating to
the servicing of the Loans by the Servicer and that, on the basis of such
examination, such firm is of the opinion that the servicing has been conducted
in compliance with such Agreement, except for (i) such exceptions as such firm
believes to be immaterial and (ii) such other exceptions as are set forth in
such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the applicable
Trustee for such Series of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fulfilled its obligations under
such Agreement throughout the preceding calendar year.
Certain Matters Regarding the Servicer
The Servicer for each Series will be identified in the related Prospectus
Supplement. The Servicer may be an affiliate of the Depositor and may have
other business relationships with the Depositor and its affiliates.
If an Event of Default occurs under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee
or a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of a Trustee upon such a
default under the Agreement for the related Series will be substantially
similar to those described under "The Agreements--Events of Default; Rights
Upon Events of Default--Pooling and Servicing Agreement; Servicing Agreement"
herein.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the
successor Servicer accepting such assignment or delegation (i) services
similar loans in the ordinary course of its business, (ii) is reasonably
satisfactory to the Trustee for the related Series, (iii) has a net worth of
not less than the amount specified in the related Prospectus Supplement, (iv)
would not cause any Rating Agency's rating of the Securities for such Series
in effect immediately prior to such assignment, sale or transfer to be
qualified, downgraded or withdrawn as a result of such assignment, sale or
transfer and (v) executes and delivers to the Trustee an agreement, in form
and substance reasonably satisfactory to the Trustee, that contains an
assumption by such Servicer of the due and punctual performance and observance
of each covenant and condition to be performed or observed by the Servicer
under the related Agreement from and after the date of such agreement. No such
assignment will become effective until the Trustee or a successor Servicer has
assumed the servicer's obligations and duties under the related Agreement. To
the extent that the Servicer transfers its obligations to a wholly-owned
subsidiary or affiliate, such subsidiary or affiliate need not satisfy the
criteria set forth above; however, in such instance, the assigning Servicer
will remain liable for the servicing obligations under the related Agreement.
Any entity into which the Servicer is merged or consolidated or any successor
corporation resulting from any merger, conversion or consolidation will
succeed to the Servicer's obligations under the related Agreement; provided,
that such successor or surviving entity meets the requirements for a successor
Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or
agent of the Servicer, will be under any liability to the related Trust Fund,
the Depositor or the Holders for any action taken or for failing to take any
action in good faith pursuant to the related Agreement, or for errors in
judgment; provided, however, that neither the Servicer nor any such person
will be protected against any breach of warranty or representations made under
such Agreement or the failure to perform its obligations in compliance with
any standard of care set forth in such Agreement, or liability that would
otherwise be imposed by reason of willful misfeasance, bad faith or negligence
in the performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that
the Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Agreement or the Securities, other than any
loss, liability or expense incurred by reason of willful misfeasance, bad
faith or negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
related Agreement will provide that the Servicer is not under any obligation
to appear in, prosecute or defend any legal action that is not incidental to
its servicing responsibilities under such Agreement that, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action that it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to
be reimbursed therefor out of the Collection Account.
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements.
The summaries do not purport to be complete and are subject to, and qualified
in their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
Assignment of Primary Assets
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Depositor will, as to each Loan, deliver or cause
to be delivered to the Trustee, or, as specified in the related Prospectus
Supplement, a custodian on behalf of the Trustee (the "Custodian"), the
Mortgage Note endorsed without recourse to the order of the Trustee or in
blank, the original Mortgage with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording office, in
which case a copy of such Mortgage will be delivered, together with a
certificate that the original of such Mortgage was delivered to such recording
office) and an assignment of the Mortgage in recordable form. The Trustee, or,
if so specified in the related Prospectus Supplement, the Custodian, will hold
such documents in trust for the benefit of the Holders.
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 (or the Custodian) 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 Holders to the Home Improvement Contracts, the Depositor will cause a UCC-1
financing statement to be executed by the Depositor or the Seller identifying
the Trustee as the secured party and identifying all Home Improvement
Contracts as collateral. Unless otherwise specified in the related Prospectus
Supplement, the Home Improvement Contracts will not be stamped or otherwise
marked to reflect their assignment to the Trust. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Holders in the Home Improvement Contracts could be
defeated. See "Certain Legal Aspects of the Loans--The Home Improvement
Contracts."
With respect to Loans secured by Mortgages, if so specified in the
related Prospectus Supplement, the Depositor will, at the time of issuance of
the Securities, cause assignments to the Trustee of the Mortgages relating to
the Loans for a Series to be recorded in the appropriate public office for
real property records, except in states where, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the related Loans. If specified in the related
Prospectus Supplement, the Depositor will cause such assignments to be so
recorded within the time after issuance of the Securities as is specified in
the related Prospectus Supplement, in which event, the Agreement may, as
specified in the related Prospectus Supplement, require the Depositor to
repurchase from the Trustee any Loan the related Mortgage of which is not
recorded within such time, at the price described below with respect to
repurchases by reason of defective documentation. Unless otherwise provided in
the related Prospectus Supplement, the enforcement of the repurchase
obligation would constitute the sole remedy available to the Holders or the
Trustee for the failure of a Mortgage to be recorded.
Each Loan will be identified in a schedule appearing as an exhibit to the
related Agreement (the "Loan Schedule"). Such Loan Schedule will specify with
respect to each Loan: the original principal amount and unpaid Principal
Balance as of the Cut-off Date; the current Loan Rate; the current Scheduled
Payment of principal and interest; the maturity date, if any, of the related
Mortgage Note; if the Loan is an adjustable rate Loan, the Lifetime Rate Cap,
if any, and the current index.
Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the PS Trustee (or its nominee or
correspondent). The PS Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified
in the related Prospectus Supplement, the PS Trustee will not be in possession
of or be assignee of record of any underlying assets for a Private Security.
See "The Trust Funds--Private Securities" herein. Each Private Security will
be identified in a schedule appearing as an exhibit to the related Agreement
(the "Certificate Schedule"), which will specify the original principal
amount, Principal Balance as of the Cut-off Date, annual pass-through rate or
interest rate and maturity date for each Private Security conveyed to the
Trust Fund. In the Agreement, the Depositor will represent and warrant to the
PS Trustee regarding the Private Securities: (i) that the information
contained in the Certificate Schedule is true and correct in all material
respects; (ii) that, immediately prior to the conveyance of the Private
Securities, the Depositor had good title thereto, and was the sole owner
thereof (subject to any Retained Interest); (iii) that there has been no other
sale by it of such Private Securities; and (iv) that there is no existing
lien, charge, security interest or other encumbrance (other than any Retained
Interest) on such Private Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in
the file relating to the Primary Assets delivered by the Depositor to the
Trustee (or Custodian) is found by the Trustee within 90 days of the execution
of the related Agreement (or promptly after the Trustee's receipt of any
document permitted to be delivered after the Closing Date) to be defective in
any material respect and the Depositor or Seller does not cure such defect
within 90 days, or within such other period specified in the related
Prospectus Supplement, the Depositor or Seller will, not later than 90 days or
within such other period specified in the related Prospectus Supplement, after
the Trustee's notice to the Depositor or the Seller, as the case may be, of
the defect, repurchase the related Primary Asset or any property acquired in
respect thereof from the Trustee at a price equal to, unless otherwise
specified in the related Prospectus Supplement, (a) the lesser of (i) the
Principal Balance of such Primary Asset and (ii) the Trust Fund's federal
income tax basis in the Primary Asset and (b) accrued and unpaid interest to
the date of the next scheduled payment on such Primary Asset at the rate set
forth in the related Agreement, provided, however, the purchase price shall
not be limited in (i) above to the Trust Fund's federal income tax basis if
the repurchase at a price equal to the Principal Balance of such Primary Asset
will not result in any prohibited transaction tax under Section 860F(a) of the
Code.
If provided in the related Prospectus Supplement, the Depositor or
Seller, as the case may be, may, rather than repurchase the Primary Asset as
described above, remove such Primary Asset from the Trust Fund (the "Deleted
Primary Asset") and substitute in its place one or more other Primary Assets
(each, a "Qualifying Substitute Primary Asset"); provided, however, that (i)
with respect to a Trust Fund for which no REMIC election is made, such
substitution must be effected within 120 days of the date of initial issuance
of the Securities and (ii) with respect to a Trust Fund for which a REMIC
election is made, after a specified time period, the Trustee must have
received a satisfactory opinion of counsel that such substitution will not
cause the Trust Fund to lose its status as a REMIC or otherwise subject the
Trust Fund to a prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution,
(i) a Principal Balance, after deduction of all Scheduled Payments due in the
month of substitution, not in excess of the Principal Balance of the Deleted
Primary Asset (the amount of any shortfall to be deposited to the Collection
Account in the month of substitution for distribution to Holders), (ii) an
interest rate not less than (and not more than 2% greater than) the interest
rate of the Deleted Primary Asset, (iii) a remaining term-to-stated maturity
not greater than (and not more than two years less than) that of the Deleted
Primary Asset, and will comply with all of the representations and warranties
set forth in the applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the
sole remedies available to the Holders or the Trustee for a material defect in
a document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all
material respects within the time period specified in the related Prospectus
Supplement after notification by the Trustee of such breach, and if such
breach is of a nature that materially and adversely affects the value of such
Primary Asset, the Depositor or such entity will be obligated to repurchase
the affected Primary Asset or, if provided in the related Prospectus
Supplement, provide a Qualifying Substitute Primary Asset therefor, subject to
the same conditions and limitations on purchases and substitutions as
described above.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or seller of such Primary Assets. See
"Special Considerations--Limited Assets."
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for
such Series to institute any proceeding with respect to such Agreement, unless
such Holder previously has given to the applicable Trustee for such Series
written notice of default and unless the Holders of Securities evidencing not
less than 51% of the aggregate voting rights of the Securities for such Series
have made written request upon the applicable Trustee to institute such
proceeding in its own name as Trustee thereunder and have offered to such
Trustee reasonable indemnity, and such Trustee for 60 days has neglected or
refused to institute any such proceeding.
Reports to Holders
The applicable Trustee or other entity specified in the related
Prospectus Supplement will prepare and forward to each Holder on each
Distribution Date, or as soon thereafter as is practicable, a statement
setting forth, to the extent applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on such Securities;
(iii) the amount of (a) any overdue accrued interest included in
such distribution, (b) any remaining overdue accrued interest with
respect to such Securities or (c) any current shortfall in amounts to be
distributed as accrued interest to Holders of such Securities;
(iv) the amount of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal
amounts with respect to such Securities, (c) any current shortfall in
receipt of scheduled principal payments on the related Primary Assets or
(d) any realized losses or Liquidation Proceeds to be allocated as
reductions in the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and the
remaining amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related
Trust Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the applicable Trustee, unless otherwise specified in the
related Prospectus Supplement, will furnish to each Holder of record at any
time during such calendar year (a) the aggregate of amounts reported pursuant
to (i), (ii) and (iv)(d) above for such calendar year and (b) such information
specified in the related Agreement to enable Holders to prepare their tax
returns including, without limitation, the amount of original issue discount
accrued on the Securities, if applicable. Information in the Distribution Date
and annual statements provided to the Holders will not have been examined and
reported upon by an independent public accountant. However, the Servicer will
provide to each applicable Trustee a report by independent public accountants
with respect to the Servicer's servicing of the Loans. See "Servicing of
Loans--Evidence as to Compliance" herein.
If so specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series will be issued in book-entry
form. In such event, owners of beneficial interests in such Securities will
not be considered Holders and will not receive such reports directly from the
applicable Trustee. The applicable Trustee will forward such reports only to
the entity or its nominee that is the registered holder of the global
certificate that evidences such book-entry securities. Beneficial owners will
receive such reports from the participants and indirect participants of the
applicable book-entry system in accordance with the policies and procedures of
such entities.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates relating to
Loans include (i) any failure by the Servicer to deposit amounts in the
Collection Account and Distribution Account(s) to enable the applicable
Trustee to distribute to Holders of such Series any required payment, which
failure continues unremedied for the number of days specified in the related
Prospectus Supplement after the giving of written notice of such failure to
the Servicer by the applicable Trustee for such Series, or to the Servicer and
such Trustee by the Holders of such Series evidencing not less than 25% of the
aggregate voting rights of the Securities for such Series, (ii) any failure by
the Servicer duly to observe or perform in any material respect any other of
its covenants or agreements in the applicable Agreement that continues
unremedied for the number of days specified in the related Prospectus
Supplement after the giving of written notice of such failure to the Servicer
by the applicable Trustee, or to the Servicer and such Trustee by the Holders
of such Series evidencing not less than 25% of the aggregate voting rights of
the Securities for such Series, and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings and certain actions by the Servicer indicating its insolvency,
reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans,
unless otherwise specified in the related Prospectus Supplement, the Trustee
for such Series or Holders of Securities of such Series evidencing not less
than 51% of the aggregate voting rights of the Securities for such Series may
terminate all of the rights and obligations of the Servicer as servicer under
the applicable Agreement (other than its right to recovery of other expenses
and amounts advanced pursuant to the terms of such Agreement, which rights the
Servicer will retain under all circumstances), whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under such Agreement and will be entitled to reasonable servicing compensation
not to exceed the applicable servicing fee, together with other servicing
compensation in the form of assumption fees, late payment charges or otherwise
as provided in such Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be
entitled to reasonable servicing compensation in an amount not to exceed the
Servicing Fee as set forth in the related Prospectus Supplement, together with
other servicing compensation in the form of assumption fees, late payment
charges or otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the applicable Trustee for such Series
will have the right to take action to enforce its rights and remedies and to
protect and enforce the rights and remedies of the Holders of such Series,
and, unless otherwise specified in the related Prospectus Supplement, Holders
of Securities evidencing not less than 51% of the aggregate voting rights of
the Securities for such Series may direct the time, method and place of
conducting any proceeding for any remedy available to the applicable Trustee
or exercising any trust or power conferred upon such Trustee. However, the
applicable Trustee will not be under any obligation to pursue any such remedy
or to exercise any of such trusts or powers unless such Holders have offered
such Trustee reasonable security or indemnity against the cost, expenses and
liabilities that may be incurred by such Trustee therein or thereby. The
applicable Trustee may decline to follow any such direction if such Trustee
determines that the action or proceeding so directed may not lawfully be taken
or would involve it in personal liability or be unjustly prejudicial to the
non-assenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture that
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund
in the Indenture or in any certificate or other writing delivered pursuant
thereto or in connection therewith with respect to or affecting such Series
having been incorrect in a material respect as of the time made, and such
breach is not cured within sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iv) certain events of bankruptcy, insolvency, receivership or liquidation of
the Depositor or the Trust Fund; or (v) any other Event of Default provided
with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Indenture 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
are Zero Coupon Securities, 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 a majority in aggregate outstanding amount 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
Indenture 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 Indenture Trustee may not sell or otherwise
liquidate the collateral securing the Notes of a Series following an Event of
Default other than a default in the payment of any principal of or interest on
any Note of such Series for thirty (30) days or more, unless (a) the Holders
of 100% of the then-aggregate outstanding amount 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
Indenture Trustee determines that such collateral would not be sufficient on
an ongoing basis to make all payments on such Notes as such payments would
have become due if such Notes had not been declared due and payable, and the
Indenture Trustee obtains the consent of the Holders of 66 2/3% of the
then-aggregate outstanding amount of the Notes of such Series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days
or more in the payment of principal of or interest on the Notes of a Series,
the Indenture provides that the Indenture Trustee will have a prior lien on
the proceeds of any such liquidation for unpaid fees and expenses. As a
result, upon the occurrence of such an Event of Default, the amount available
for distribution to the Noteholders may be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event 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 that is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a Series of Notes, the Indenture Trustee will be under no
obligation to exercise any of 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 Indenture Trustee security or indemnity
satisfactory to it against the costs, expenses and liabilities that 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
Indenture Trustee or exercising any trust or power conferred on the Indenture
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.
The Trustees
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee or Indenture Trustee, as the case may be,
for each Series of Securities will be set forth in the related Prospectus
Supplement. Entities serving as Trustee may have normal banking relationships
with the Depositor or the Servicer. In addition, for the purpose of meeting
the legal requirements of certain local jurisdictions, each Trustee will have
the power to appoint co-trustees or separate trustees. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the applicable Trustee by the Agreement relating to such Series will be
conferred or imposed upon such Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which such Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who will exercise and perform such rights, powers,
duties and obligations solely at the direction of the applicable Trustee. The
applicable Trustee may also appoint agents to perform any of the
responsibilities of such Trustee, which agents will have any or all of the
rights, powers, duties and obligations of such Trustee conferred on them by
such appointment; provided, that the applicable Trustee will continue to be
responsible for its duties and obligations under the Agreement.
Duties of Trustees
No Trustee will make any representations as to the validity or
sufficiency of the related Agreement, the Securities or of any Primary Asset
or related documents. If no Event of Default (as defined in the related
Agreement) has occurred, the applicable Trustee will be required to perform
only those duties specifically required of it under such Agreement. Upon
receipt of the various certificates, statements, reports or other instruments
required to be furnished to it, the applicable Trustee will be required to
examine them to determine whether they are in the form required by the related
Agreement. However, such Trustee will not be responsible for the accuracy or
content of any such documents furnished to it by the Holders or the Servicer
under the related Agreement.
Each Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that no Trustee will be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the related
Holders in an Event of Default. No Trustee will be required to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties under the related Agreement, or in the exercise of any of
its rights or powers, if it has reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability
is not reasonably assured to it.
Resignation of Trustees
Each Trustee may, upon written notice to the Depositor, resign at any
time, in which event the Depositor will be obligated to use its best efforts
to appoint a successor Trustee. If no successor Trustee has been appointed and
has accepted such appointment within 30 days after the giving of such notice
of resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. Each Trustee may also be
removed at any time (i) if such Trustee ceases to be eligible to continue as
such under the related Agreement, (ii) if such Trustee becomes insolvent or
(iii) by the Holders of Securities evidencing over 50% of the aggregate voting
rights of the Securities in the Trust Fund upon written notice to the
applicable Trustee and to the Depositor. Any resignation or removal of a
Trustee and appointment of a successor Trustee will not become effective until
acceptance of the appointment by the successor Trustee.
Amendment of Agreement
Unless otherwise specified in the Prospectus Supplement, the Agreement
for each Series of Securities may be amended by the Depositor, the Servicer
(with respect to a Series relating to Loans), and the applicable Trustee with
respect to such Series, without notice to or consent of the Holders (i) to
cure any ambiguity, (ii) to correct any defective provisions or to correct or
supplement any provision therein, (iii) to add to the duties of the Depositor,
the applicable Trustee or the Servicer, (iv) to add any other provisions with
respect to matters or questions arising under such Agreement or related
Enhancement, (v) to add or amend any provisions of such Agreement as required
by a Rating Agency in order to maintain or improve the rating of the
Securities (it being understood that none of the Depositor, the Seller, the
Servicer or any Trustee is obligated to maintain or improve such rating), or
(vi) to comply with any requirements imposed by the Code; provided, that any
such amendment except pursuant to clause (vi) above will not adversely affect
in any material respect the interests of any Holders of such Series, as
evidenced by an opinion of counsel delivered to the applicable Trustee. Any
such amendment except pursuant to clause (vi) above shall be deemed not to
adversely affect in any material respect the interests of any Holder if the
applicable Trustee receives written confirmation from each Rating Agency
rating such Securities that such amendment will not cause such Rating Agency
to reduce the then-current rating thereof. Unless otherwise specified in the
Prospectus Supplement, each Agreement for each Series may also be amended by
the applicable Trustee, the Servicer, if applicable, and the Depositor with
respect to such Series with the consent of the Holders possessing not less
than 66 2/3% of the aggregate outstanding principal amount of the Securities
of such Series or, if only certain Classes of such Series are affected by such
amendment, 66 2/3% of the aggregate outstanding principal amount of the
Securities of each Class of such Series affected thereby, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of such Agreement or modifying in any manner the rights of Holders
of such Series; provided, however, that no such amendment may (a) reduce the
amount or delay the timing of payments on any Security without the consent of
the Holder of such Security; or (b) reduce the aforesaid percentage of the
aggregate outstanding principal amount of Securities of each Class, the
Holders of which are required to consent to any such amendment, without the
consent of the Holders of 100% of the aggregate outstanding principal amount
of each Class of Securities affected thereby.
Voting Rights
The related Prospectus Supplement will set forth the method of
determining allocation of voting rights with respect to a Series.
List of Holders
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights
under the Agreement, which request is accompanied by a copy of the
communication such Holders propose to transmit, the applicable Trustee will
afford such Holders access during business hours to the most recent list of
Holders of that Series held by such Trustee.
No Agreement will provide for the holding of any annual or other meeting
of Holders.
Book-Entry Securities
If specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series may be issued in book-entry
form. In such event, beneficial owners of such Securities will not be
considered "Holders" under the Agreements and may exercise the rights of
Holders only indirectly through the participants in the applicable book-entry
system.
REMIC Administrator
For any Series with respect to which a REMIC election is made,
preparation of certain reports and certain other administrative duties with
respect to the Trust Fund may be performed by a REMIC administrator, who may
be an affiliate of the Depositor.
Termination
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to
them pursuant to such Agreement under the circumstances described in the
related Prospectus Supplement. See "Description of the Securities--Optional
Redemption, Purchase or Termination" herein.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Indenture Trustee for cancellation of all
the Notes of such Series or, with certain limitations, upon deposit with the
Indenture Trustee of funds sufficient for the payment in full of all of the
Notes of 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 Indenture Trustee, in trust, of money and/or
direct obligations of or obligations guaranteed by the United States of
America that, through the payment of interest and principal in 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 Final 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 of and interest on, if any, their Notes until maturity.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that are general in nature. Because
certain of such legal aspects are governed by applicable state law (which laws
may differ substantially), the summaries do not purport to be complete nor
reflect the laws of any particular state, nor encompass the laws of all states
in which the properties securing the Loans are situated.
Mortgages
The Loans for a Series will, and certain Home Improvement Contracts for a
Series may, be secured by either mortgages or deeds of trust or deeds to
secure debt (such Mortgage Loans and Home Improvement Contracts are
hereinafter referred to in this section as "mortgage loans"), depending upon
the prevailing practice in the state in which the property subject to a
mortgage loan is located. The filing of a mortgage, deed of trust or deed to
secure debt creates a lien or title interest upon the real property covered by
such instrument and represents the security for the repayment of an obligation
that is customarily evidenced by a promissory note. It is not prior to the
lien for real estate taxes and assessments or other charges imposed under
governmental police powers and may also be subject to other liens pursuant to
the laws of the jurisdiction in which the Mortgaged Property is located.
Priority with respect to such instruments depends on their terms, the
knowledge of the parties to the mortgage and generally on the order of
recording with the applicable state, county or municipal office. There are two
parties to a mortgage, the mortgagor, who is the borrower/property owner or
the land trustee (as described below), and the mortgagee, who is the lender.
Under the mortgage instrument, the mortgagor delivers to the mortgagee a note
or bond and the mortgage. In the case of a land trust, there are three parties
because title to the property is held by a land trustee under a land trust
agreement of which the borrower/property owner is the beneficiary; at
origination of a mortgage loan, the borrower executes a separate undertaking
to make payments on the mortgage note. A deed of trust transaction normally
has three parties: the trustor, who is the borrower/property owner; the
beneficiary, who is the lender; and the trustee, a third-party grantee. Under
a deed of trust, the trustor grants the property, irrevocably until the debt
is paid, in trust, generally with a power of sale, to the trustee to secure
payment of the obligation. The mortgagee's authority under a mortgage and the
trustee's authority under a deed of trust are governed by the law of the state
in which the real property is located, the express provisions of the mortgage
or deed of trust, and, in some cases, in deed of trust transactions, the
directions of the beneficiary.
Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating necessary parties defendant. When the mortgagee's right to
foreclosure is contested, the legal proceedings necessary to resolve the issue
can be time-consuming and expensive. After the completion of a judicial
foreclosure proceeding, the court may issue a judgment of foreclosure and
appoint a receiver or other officer to conduct the sale of the property. In
some states, mortgages may also be foreclosed by advertisement, pursuant to a
power of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also
may be accomplished by judicial action in the manner provided for foreclosure
of mortgages. In some states, the trustee must record a notice of default and
send a copy to the borrower-trustor and to any person who has recorded a
request for a copy of a notice of default and notice of sale. In addition, the
trustee in some states must provide notice to any other individual having an
interest in the real property, including any junior lienholders. If the deed
of trust is not reinstated within any applicable cure period, a notice of sale
must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest of record in the property. The trustor,
borrower, or any person having a junior encumbrance on the real estate, may,
during a reinstatement period, cure the default by paying the entire amount in
arrears plus the costs and expenses incurred in enforcing the obligation.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorney's fees, which may be recovered by a lender. If the deed of
trust is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specified period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property, recorded and sent to all parties having an
interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated
by statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may
exercise equitable powers to relieve a mortgagor of a default and deny the
mortgagee foreclosure on proof that either the mortgagor's default was neither
willful nor in bad faith or the mortgagee's action established a waiver,
fraud, bad faith, or oppressive or unconscionable conduct such as to warrant a
court of equity to refuse affirmative relief to the mortgagee. Under certain
circumstances a court of equity may relieve the mortgagor from an entirely
technical default where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes
requiring up to several years to complete. Moreover, a non-collusive,
regularly conducted foreclosure sale may be challenged as a fraudulent
conveyance, regardless of the parties' intent, if a court determines that the
sale was for less than fair consideration and such sale occurred while the
mortgagor was insolvent and within one year (or within the state statute of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy. Similarly, a suit
against the debtor on the related mortgage note may take several years and,
generally, is a remedy alternative to foreclosure, the mortgagee being
precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty potential third party
purchasers at the sale have in determining the exact status of title and
because the physical condition of the property may have deteriorated during
the foreclosure proceedings, it is uncommon for a third party to purchase the
property at a foreclosure sale. Rather, it is common for the lender to
purchase the property from the trustee or referee for an amount that may be
equal to the unpaid principal amount of the mortgage note secured by the
mortgage or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure, in which event the mortgagor's debt will be extinguished or the
lender may purchase for a lesser amount in order to preserve its right against
a borrower to seek a deficiency judgment in states where such a judgment is
available. Thereafter, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burdens of ownership, including obtaining hazard insurance, paying taxes and
making such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real
estate broker and pay the broker's commission in connection with the sale of
the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Any loss may be reduced by the receipt of any mortgage guaranty Insurance
Proceeds.
Environmental Risks
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions,
hazardous and toxic substances, impacts to wetlands, leaks from underground
storage tanks and the management, removal and disposal of lead- and
asbestos-containing materials. In certain circumstances, these laws and
regulations impose obligations on the owners or operators of residential
properties such as those subject to the Loans. The failure to comply with such
laws and regulations may result in fines and penalties.
Moreover, under various federal, state and local laws and regulations, an
owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator.
In addition, persons who transport or dispose of hazardous substances, or
arrange for the transportation, disposal or treatment of hazardous substances,
at off-site locations may also be held liable if there are releases or
threatened releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), contamination of property may give rise to a lien on the property
to assure the payment of the costs of clean-up. In several states, such a lien
has priority over the lien of an existing mortgage against such property.
Under CERCLA, such a lien is subordinate to pre-existing, perfected security
interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the
facility. The Solid Waste Disposal Act (the "SWDA") provides similar
protection to secured creditors in connection with liability for releases of
petroleum from certain underground storage tanks. However, if a lender
"participates in the management" of the facility in question or is found not
to have held its interest primarily to protect a security interest, the lender
may forfeit its secured creditor exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency (the
"EPA") in April 1992 attempted to clarify the activities in which lenders
could engage both prior to and subsequent to foreclosure of a security
interest without forfeiting the secured creditor exemption under CERCLA. The
rule was struck down in 1994 by the United States Court of Appeals for the
District of Columbia Circuit in Kelley ex rel State of Michigan v.
Environmental Protection Agency, 15 F.3d 1100 (D.C Cir. 1994), reh'g denied,
25 F.3d 1088, cert. denied sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900
(1995). Another EPA regulation promulgated in 1995 clarifies the activities in
which lenders may engage without forfeiting the secured creditor exemption
under the underground storage tank provisions of the SWDA. That regulation has
not been struck down.
On September 30, 1996, Congress 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 (a) overall
management of the facility encompassing daily decision-making with respect to
environmental compliance or (b) overall or substantially all of the
operational functions (as distinguished from financial or administrative
functions) of the facility other than the function of environmental
compliance. The 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 Mortgage Loans and the Home Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, such persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with environmental cleanup and related actions may be substantial. Moreover,
some state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing
a release or threatened release at a property pledged as collateral for one of
the Loans would be imposed on the Trust Fund, and thus occasion a loss to the
Holders, therefore depends on the specific factual and legal circumstances at
issue.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of
a mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale.
The right of redemption should be distinguished from the equity of redemption,
which is a non-statutory right that must be exercised prior to the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure.
In other states, redemption may be authorized if the former borrower pays only
a portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect
of a right of redemption is to force the lender to retain the property and pay
the expenses of ownership until the redemption period has run. In some states,
there is no right to redeem property after a trustee's sale under a deed of
trust.
Junior Mortgages; Rights of Senior Mortgages
The Mortgage Loans comprising or underlying the Primary Assets included
in the Trust Fund for a Series will be secured by Mortgages or deeds of trust,
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the Trust Fund (and
therefore the Holders), as mortgagee under a junior mortgage, are subordinate
to those of the mortgagee under the senior mortgage, including the prior
rights of the senior mortgagee to receive hazard insurance and condemnation
proceeds and to cause the property securing the mortgage loan to be sold upon
default of the mortgagor, thereby extinguishing the junior mortgagee's lien
unless the junior mortgagee asserts its subordinate interest in the property
in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full and,
in some states, may cure 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 that appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon
a failure of the mortgagor to perform any of these obligations, the mortgagee
is given the right under certain mortgages to perform the obligation itself,
at its election, with the mortgagor agreeing to reimburse the mortgagee for
any sums expended by the mortgagee on behalf of the mortgagor. All sums so
expended by the mortgagee become part of the indebtedness secured by the
mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment is a personal
judgment against the former borrower equal in most cases to the difference
between the net amount realized upon the public sale of the real property and
the amount due to the lender. Other statutes require the beneficiary or
mortgagee to exhaust the security afforded under a deed of trust or mortgage
by foreclosure in an attempt to satisfy the full debt before bringing a
personal action against the borrower. In certain other states, the lender has
the option of bringing a personal action against the borrower on the debt
without first exhausting such security; however, in some of these states, the
lender, following judgment on 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 laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws,
the Federal Soldiers' and Sailors' Relief Act and state laws affording relief
to debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example,
with respect to federal bankruptcy law, the filing of a petition acts as a
stay against the enforcement of remedies for collection of a debt. Moreover, a
court with federal bankruptcy jurisdiction may permit a debtor through a
Chapter 13 Bankruptcy Code rehabilitative plan to cure a monetary default with
respect to a loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original loan payment schedule even
though the lender accelerated the loan and the lender has taken all steps to
realize upon his security (provided no sale of the property has yet occurred)
prior to the filing of the debtor's Chapter 13 petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a loan default
by permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and
the outstanding balance of the loan. Federal bankruptcy law and limited case
law indicate that the foregoing modifications could not be applied to the
terms of a loan secured by property that is the principal residence of the
debtor. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorney's fees and costs to the extent
the value of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted
to market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights
in respect of a defaulted mortgage loan. In addition, substantive requirements
are imposed upon lenders in connection with the origination and the servicing
of mortgage loans by numerous federal and some state consumer protection laws.
The laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes and regulations. These federal laws
impose specific statutory liabilities upon lenders who originate loans and who
fail to comply with the provisions of the law. In some cases, this liability
may affect assignees of the loans.
Due-on-Sale Clauses in Mortgage Loans
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically
involving single family residential mortgage transactions, their
enforceability has been limited or denied. In any event, the Garn-St. Germain
Depository Institutions Act of 1982 (the "Garn-St. Germain Act") preempts
state constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain exceptions. As a result, due-on-sale
clauses have become generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of such
clauses with respect to mortgage loans that were (i) originated or assumed
during the "window period" under the Garn-St. Germain Act, which ended in all
cases not later than October 15, 1982, and (ii) originated by lenders other
than national banks, federal savings institutions and federal credit unions.
FHLMC has taken the position in its published mortgage servicing standards
that, out of a total of eleven "window period states," five states (Arizona,
Michigan, Minnesota, New Mexico and Utah) have enacted statutes extending, on
various terms and for varying periods, the prohibition on enforcement of
due-on-sale clauses with respect to certain categories of window period loans.
Also, the Garn-St. Germain Act does "encourage" lenders to permit assumption
of loans at the original rate of interest or at some other rate less than the
average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations, upon the late charges a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. Late charges and prepayment fees are typically retained
by servicers as additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have
been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes of the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have substituted their judgment for the lender's
judgment and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from temporary
financial disability. In other cases, courts have limited the right of a
lender to realize upon his security if the default under the security
agreement is not monetary, such as the borrower's failure to adequately
maintain the property or the borrower's execution of secondary financing
affecting the property. Finally, some courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under security
agreements receive notices in addition to the statutorily-prescribed minimums.
For the most part, these cases have upheld the notice provisions as being
reasonable or have found that, in cases involving the sale by a trustee under
a deed of trust or by a mortgagee under a mortgage having a power of sale,
there is insufficient state action to afford constitutional protections to the
borrower.
Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. The regulations of the Office of Thrift Supervision
(the "OTS") prohibit the imposition of a prepayment penalty or equivalent fee
for or in connection with the acceleration of a loan by exercise of a
due-on-sale clause. A mortgagee to whom a prepayment in full has been tendered
may be compelled to give either a release of the mortgage or an instrument
assigning the existing mortgage. The absence of a restraint on prepayment,
particularly with respect to mortgage loans having higher mortgage rates, may
increase the likelihood of refinancing or other early retirements of such
mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. Similar federal
statutes were in effect with respect to mortgage loans made during the first
three months of 1980. The OTS, as successor to the Federal Home Loan Bank
Board, is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. Title V authorizes any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
state law, or by certifying that the voters of such state have voted in favor
of any provision, constitutional or otherwise, which expressly rejects an
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V is not so rejected,
any state is authorized by the law to adopt a provision limiting discount
points or other charges on mortgage loans covered by Title V.
The Home Improvement Contracts
General
The Home Improvement Contracts, other than those Home Improvement
Contracts that are unsecured or secured by mortgages on real estate (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 in effect
in the applicable jurisdiction (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, under the UCC, a security interest does not exist under the UCC in
ordinary building material incorporated into an improvement on land. Home
Improvement Contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose such
characterization, upon incorporation of such materials into the related
property, will not be secured by a purchase money security interest in the
Home Improvement being financed.
Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real estate
law, a creditor can repossess a Home Improvement securing a 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 it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgement from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgements, and in many cases
the defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgement.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract that is the seller of goods that gave rise to the transaction (and
certain related lenders and assignees) to transfer 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 the debtor
could assert against the seller of goods. Liability under this rule is limited
to amounts paid under a contract; however, the obligor also may be able to
assert the rule to set off remaining amounts due as a defense against a claim
brought by the Trustee against such obligor. Numerous other federal and state
consumer protection laws impose requirements applicable to the origination and
lending pursuant to the contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of
these laws, the failure to comply with their provisions may affect the
enforceability of the related contract.
Applicability of Usury Laws
Title V provides that, subject to the following conditions, state usury
limitations shall not apply to any contract that is secured by a first lien on
certain kinds of consumer goods. The contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V.
Installment Sales Contracts
The Loans may also consist of installment sales contracts. Under an
installment sales contract (each, an "Installment Sales Contract") the seller
(hereinafter referred to in this section as the "lender") retains legal title
to the property and enters into an agreement with the purchaser (hereinafter
referred to in this section as the "borrower") for the payment of the purchase
price, plus interest, over the term of such contract. Only after full
performance by the borrower of the contract is the lender obligated to convey
title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the Installment Sales Contract, the
borrower is generally responsible for maintaining the property in good
condition and for paying real estate taxes, assessments and hazard Insurance
Policy premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Sales Contract varies on a state-by-state basis depending upon the extent to
which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his 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 Sales Contract in local land records
and an ejectment action may be necessary to recover possession. In a few
states, particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and
a forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Sales Contracts from the harsh consequences of
forfeiture. Under 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 Sales
Contract may be reinstated upon full payment of the default amount and the
borrower may have a post-foreclosure statutory redemption right. In other
states, courts in equity may permit a borrower with significant investment in
the property under an Installment Sales Contract for the sale of real estate
to share in the proceeds of sale of the property after the indebtedness is
repaid or may otherwise refuse to enforce the forfeiture clause. Nevertheless,
generally speaking, the lender's procedures for obtaining possession and clear
title under an Installment Sales Contract in a given state are simpler and
less time-consuming and costly than are the procedures for foreclosing and
obtaining clear title to a property subject to one or more liens.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped
at 6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii)
may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on such obligations entered into
prior to military service for the duration of military service and (iii) may
have the maturity of such obligations incurred prior to military service
extended, the payments lowered and the payment schedule readjusted for a
period of time after the completion of military service. However, the benefits
of (i), (ii), or (iii) above are subject to challenge by creditors and if, in
the opinion of the court, the ability of a person to comply with such
obligations is not materially impaired by military service, the court may
apply equitable principles accordingly. If a borrower's obligation to repay
amounts otherwise due on a Loan included in a Trust Fund for a Series is
relieved pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940, none
of the Trust Fund, the Servicer, the Depositor nor any Trustee will be
required to advance such amounts, and any loss in respect thereof may reduce
the amounts available to be paid to the Holders of the Securities of such
Series. Unless otherwise specified in the related Prospectus Supplement, any
shortfalls in interest collections on Loans or Underlying Loans relating to
the Private Securities, as applicable, included in a Trust Fund for a Series
resulting from application of the Soldiers' and Sailors' Civil Relief Act of
1940 will be allocated to each Class of Securities of such Series that is
entitled to receive interest in respect of such Loans or Underlying Loans in
proportion to the interest that each such Class of Securities would have
otherwise been entitled to receive in respect of such Loans or Underlying
Loans had such interest shortfall not occurred.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware in June 1995, and
is a wholly-owned subsidiary of The Bear Stearns Companies Inc. The
Depositor's principal executive offices are located at 245 Park Avenue, New
York, New York 10167. Its telephone number is (212) 272-4095.
The Depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts,
which will issue and sell, bonds, notes, debt or equity securities,
obligations and other securities and instruments ("Depositor Securities")
collateralized or otherwise secured or backed by, or otherwise representing an
interest in, among other things, receivables or pass-through certificates, or
participations or certificates of participation or beneficial ownership in one
or more pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by certain first or junior mortgages on real
estate or manufactured housing and any and all other commercial transactions
and commercial, sovereign, student or consumer loans or indebtedness and, in
connection therewith or otherwise, purchasing, acquiring, owning, holding,
transferring, conveying, servicing, selling, pledging, assigning, financing
and otherwise dealing with such receivables, pass-through certificates, or
participations or certificates of participation or beneficial ownership.
Article Third of the Depositor's Certificate of Incorporation limits the
Depositor's activities to the above activities and certain related activities,
such as credit enhancement with respect to such Depositor Securities, and to
any activities incidental to and necessary or convenient for the
accomplishment of such purposes.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds
from the sale of each Series of Securities for one or more of the following
purposes: (i) to purchase the related Primary Assets, (ii) to repay
indebtedness incurred to obtain funds to acquire such Primary Assets, (iii) to
establish any Reserve Funds described in the related Prospectus Supplement and
(iv) to pay costs of structuring and issuing such Securities, including the
costs of obtaining Enhancement, if any. If so specified in the related
Prospectus Supplement, the purchase of the Primary Assets for a Series may be
effected by an exchange of Securities with the Seller of such Primary Assets.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of certain anticipated material federal income
tax consequences of the purchase, ownership, and disposition of the Securities
and is based on the opinion of Brown & Wood LLP, special counsel to the
Depositor (in such capacity, "Tax Counsel"). The summary is based upon the
provisions of the Code, the regulations promulgated thereunder, including,
where applicable, proposed regulations, and the judicial and administrative
rulings and decisions now in effect, all of which are subject to change or
possible differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change,
and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Code. Prospective investors may wish
to consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit (a "REMIC") under the
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; or (v) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a Financial Asset Securitization Investment Trust ("FASIT")
under the Code. The Prospectus Supplement for each Series of Securities will
specify how the Securities will be treated for federal income tax purposes and
will discuss whether a REMIC election, if any, will be made with respect to
such Series.
As used herein, the term "U.S. Person" means a citizen or resident of the
United States, a corporation, partnership or other entity (including an entity
treated as a corporation or partnership for United States federal income tax
purposes) created or organized in or under the laws of the United States, any
state thereof or the District of Columbia (other than a partnership that is
not treated as a United States person under any applicable Treasury
regulations), an estate whose income is subject to U.S. federal income tax
regardless of its source of income, or a trust if a court within the United
States is able to exercise primary supervision of the trust and one or more
United States persons have the authority to control all substantial decisions
of the trust. Notwithstanding the preceding sentence, to the extent provided
in regulations, certain trusts in existence on August 20, 1996 and treated as
United States persons prior to such date that elect to continue to be treated
as United States persons shall be considered U.S. Persons as well.
Taxation of Debt Securities
Status as Real Property Loans. Except to the extent otherwise provided in
the related Prospectus Supplement, if the Securities are regular interests in
a REMIC ("Regular Interest Securities") or represent interests in a grantor
trust, Tax Counsel is of the opinion that: (i) Securities held by a domestic
building and loan association will constitute "loans... secured by an interest
in real property" within the meaning of Code section 7701(a)(19)(C)(v); and
(ii) Securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code section 856(c)(4)(A) and interest on
Securities will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
section 856(c)(3)(B).
Interest and Acquisition Discount. In the opinion of Tax Counsel, Regular
Interest Securities are generally taxable to Holders in the same manner as
evidences of indebtedness issued by the REMIC. Stated interest on the Regular
Interest Securities will be taxable as ordinary income and taken into account
using the accrual method of accounting, regardless of the Holder's normal
accounting method. Interest (other than original issue discount) on Securities
(other than Regular Interest Securities) that are characterized as
indebtedness for federal income tax purposes will be includible in income by
Holders thereof in accordance with their usual methods of accounting.
Securities characterized as debt for federal income tax purposes and Regular
Interest Securities will be referred to hereinafter collectively as "Debt
Securities."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at a
discount may, be issued with "original issue discount" ("OID"). The following
discussion is based in part on the rules governing OID, which are set forth in
Sections 1271-1275 of the Code and the Treasury regulations issued thereunder
on February 2, 1994 and amended on June 11, 1996 (the "OID Regulations"). A
Holder should be aware, however, that the OID Regulations do not adequately
address certain issues relevant to prepayable securities, such as the Debt
Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a Holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero if
it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that Class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular Class of Debt Securities is sold for cash
on or prior to the Closing Date, the issue price for such Class will be
treated as the fair market value of such Class on the Closing Date. The issue
price of a Debt Security also includes the amount paid by an initial Debt
Security Holder for accrued interest that relates to a period prior to the
issue date of the Debt Security. The stated redemption price at maturity of a
Debt Security includes the original principal amount of the Debt Security, but
generally will not include distributions of interest if such distributions
constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below); provided, that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are unconditionally
payable only if a late payment or nonpayment is expected to be penalized or
reasonable remedies exist to compel payment. Certain Debt Securities may
provide for default remedies in the event of late payment or nonpayment of
interest. In the opinion of Tax Counsel, the interest on such Debt Securities
will be unconditionally payable and constitute qualified stated interest, not
OID. However, absent clarification of the OID Regulations, where Debt
Securities do not provide for default remedies, the interest payments will be
included in the Debt Security's stated redemption price at maturity and taxed
as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments,
in which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the
shorter interval, will be included in the stated redemption price at maturity
and tested under the de minimis rule described below. In the case of a Debt
Security with a long first period that has non-de minimis OID, all stated
interest in excess of interest payable at the effective interest rate for the
long first period will be included in the stated redemption price at maturity
and the Debt Security will generally have OID. Holders of Debt Securities
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of
the Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of
each distribution included in the stated redemption price at maturity of the
Debt Security and the denominator of which is the stated redemption price at
maturity of the Debt Security. Holders generally must report de minimis OID
pro rata as principal payments are received, and such income will be capital
gain if the Debt Security is held as a capital asset. However, accrual method
Holders may elect to accrue all de minimis OID as well as market discount
under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest
is unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and
(iii) interest is based on a "qualified floating rate," an "objective rate,"
or a combination of "qualified floating rates" that do not operate in a manner
that significantly accelerates or defers interest payments on such Debt
Security. In the case of Compound Interest Securities, certain Interest
Weighted Securities, and certain of the other Debt Securities, none of the
payments under the instrument will be considered qualified stated interest,
and thus the aggregate amount of all payments will be included in the stated
redemption price.
The Internal Revenue Service (the "IRS") recently issued final
regulations (the "Contingent Payment Regulations") governing the calculation
of OID on instruments having contingent interest payments. The Contingent
Payment Regulations, represent the only guidance regarding the views of the
IRS with respect to contingent interest instruments and specifically do not
apply for purposes of calculating OID on debt instruments subject to Code
Section 1272(a)(6), such as the Debt Security. Additionally, the OID
Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the applicable
Trustee intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this Prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that such methodology represents the correct manner of calculating
OID.
The Holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount. The
amount of OID includible in income by a Holder will be computed by allocating
to each day during a taxable year a pro rata portion of the original issue
discount that accrued during the relevant accrual period. In the case of a
Debt Security that is not a Regular Interest Security and the principal
payments on which are not subject to acceleration resulting from prepayments
on the Loans, the amount of OID includible in income of a Holder for an
accrual period (generally the period over which interest accrues on the debt
instrument) will equal the product of the yield to maturity of the Debt
Security and the adjusted issue price of the Debt Security, reduced by any
payments of qualified stated interest. The adjusted issue price is the sum of
its issue price plus prior accruals or OID, reduced by the total payments made
with respect to such Debt Security in all prior periods, other than qualified
stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments
is to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding
at the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events that have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method
is to increase the portions of OID required to be included in income by a
Holder to take into account prepayments with respect to the Loans at a rate
that exceeds the Prepayment Assumption, and to decrease (but not below zero
for any period) the portions of OID required to be included in income by a
Holder of a Pay-Through Security to take into account prepayments with respect
to the Loans at a rate that is slower than the Prepayment Assumption. Although
OID will be reported to Holders of Pay-Through Securities based on the
Prepayment Assumption, no representation is made to Holders that Loans will be
prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular
Interest Securities (or other regular interests in a REMIC) in a manner that
it believes to be appropriate, to take account of realized losses on the
Loans, although the OID Regulations do not provide for such adjustments. If
the IRS were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain Classes of Regular Interest Securities may represent more than
one Class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the applicable Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the
purposes of computing OID, the separate regular interests were a single debt
instrument.
A subsequent Holder of a Debt Security will also be required to include
OID in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset
such OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax Counsel,
Holders will be required to report income with respect to the related
Securities under an accrual method without giving effect to delays and
reductions in distributions attributable to a default or delinquency on the
Loans, except possibly to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income (including OID)
reported by a Holder of such a Security in any period could significantly
exceed the amount of cash distributed to such Holder in that period. The
Holder will eventually be allowed a loss (or will be allowed to report a
lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Loan default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, Holders of Securities should consult their own tax
advisors on this point.
Interest Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities (as
defined under "--Tax Status as a Grantor Trust; General" herein) the payments
on which consist solely or primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC or on Loans underlying
Pass-Through Securities ("Interest Weighted Securities"). The Trustee intends
to take the position that all of the income derived from an Interest Weighted
Security should be treated as OID and that the amount and rate of accrual of
such OID should be calculated by treating the Interest Weighted Security as a
Compound Interest Security. However, in the case of Interest Weighted
Securities that are entitled to some payments of principal and that are
Regular Interest Securities the Internal Revenue Service could assert that
income derived from an Interest Weighted Security should be calculated as if
the Security were a security purchased at a premium equal to the excess of the
price paid by such Holder for such Security over its stated principal amount,
if any. Under this approach, a Holder would be entitled to amortize such
premium only if it has in effect an election under Section 171 of the Code
with respect to all taxable debt instruments held by such Holder, as described
below. Alternatively, the IRS could assert that an Interest Weighted Security
should be taxable under the rules governing bonds issued with contingent
payments. Such treatment may be more likely in the case of Interest Weighted
Securities that are Stripped Securities as described below. See "--Tax Status
as a Grantor Trust--Discount or Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in the case
of Debt Securities bearing interest at a rate that varies directly, according
to a fixed formula, with an objective index, it appears that (i) the yield to
maturity of such Debt Securities and (ii) in the case of Pay-Through
Securities, the present value of all payments remaining to be made on such
Debt Securities, should be calculated as if the interest index remained at its
value as of the issue date of such Securities. Because the proper method of
adjusting accruals of OID on a variable rate Debt Security is uncertain,
Holders of variable rate Debt Securities should consult their own tax advisers
regarding the appropriate treatment of such Securities for federal income tax
purposes.
Market Discount. In the opinion of Tax Counsel, a purchaser of a Security
may be subject to the market discount rules of Sections 1276-1278 of the Code.
A Holder that acquires a Debt Security with more than a prescribed de minimis
amount of "market discount" (generally, the excess of the principal amount of
the Debt Security over the purchaser's purchase price) will be required to
include accrued market discount in income as ordinary income in each month,
but limited to an amount not exceeding the principal payments on the Debt
Security received in that month and, if the Securities are sold, the gain
realized. Such market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, such market
discount would in general accrue either (i) on the basis of a constant yield
(in the case of a Pay-Through Security, taking into account a prepayment
assumption) or (ii) in the ratio of (a) in the case of Securities (or in the
case of a Pass-Through Security, as set forth below, the Loans underlying such
Security) not originally issued with original issue discount, stated interest
payable in the relevant period to total stated interest remaining to be paid
at the beginning of the period or (b) in the case of Securities (or, in the
case of a Pass-Through Security, as described below, the Loans underlying such
Security) originally issued at a discount, OID in the relevant period to total
OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a Security
(or, in the case of a Pass-Through Security, as described below, the
underlying Loans) with market discount over interest received on such Security
is allowed as a current deduction only to the extent such excess is greater
than the market discount that accrued during the taxable year in which such
interest expense was incurred. In general, the deferred portion of any
interest expense will be deductible when such market discount is included in
income, including upon the sale, disposition, or repayment of the Security (or
in the case of a Pass-Through Security, an underlying Loan). A Holder may
elect to include market discount in income currently as it accrues, on all
market discount obligations acquired by such Holder during the taxable year
such election is made and thereafter, in which case the interest deferral rule
will not apply.
Premium. In the opinion of Tax Counsel, a Holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity,
generally will be considered to have purchased the Security at a premium,
which it may elect to amortize as an offset to interest income on such
Security (and not as a separate deduction item) on a constant yield method.
Although no regulations addressing the computation of premium accrual on
securities similar to the Securities have been issued, the legislative history
of the 1986 Act indicates that premium is to be accrued in the same manner as
market discount. Accordingly, it appears that the accrual of premium on a
Class of Pay-Through Securities will be calculated using the prepayment
assumption used in pricing such Class. If a Holder makes an election to
amortize premium on a Debt Security, such election will apply to all taxable
debt instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the Holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter
by such Holder, and will be irrevocable without the consent of the IRS.
Purchasers who pay a premium for the Securities should consult their tax
advisers regarding the election to amortize premium and the method to be
employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all
interest, discount (including de minimis market or original issue discount)
and premium in income as interest, based on a constant yield method for Debt
Securities acquired on or after April 4, 1994. If such an election were to be
made with respect to a Debt Security with market discount, the Holder of the
Debt Security would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Holder of the Debt Security acquires during the year
of the election or thereafter. Similarly, a Holder of a Debt Security that
makes this election for a Debt Security that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that such Holder owns or
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a Debt Security is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of Tax Counsel, if a REMIC election is made with
respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, in the opinion
of Tax Counsel (i) Securities held by a domestic building and loan association
will constitute "a regular or a residual interest in a REMIC" within the
meaning of Code Section 7701(a)(19)(C)(xi) (assuming that at least 95% of the
REMIC's assets consist of cash, government securities, "loans secured by an
interest in real property," and other types of assets described in Code
Section 7701(a)(19)(C)); and (ii) Securities held by a real estate investment
trust will constitute "real estate assets" within the meaning of Code Section
856(c)(4)(A), and income with respect to the Securities will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B) (assuming,
for both purposes, that at least 95% of the REMIC's assets are qualifying
assets). If less than 95% of the REMIC's assets consist of assets described in
(i) or (ii) above, then a Security will qualify for the tax treatment
described in (i) or (ii) in the proportion that such REMIC assets are
qualifying assets.
REMIC Expenses; Single Class REMICs
As a general rule, in the opinion of Tax Counsel, all of the expenses of
a REMIC will be taken into account by Holders of the Residual Interest
Securities. In the case of a "single class REMIC," however, the expenses will
be allocated, under Treasury regulations, among the Holders of the Regular
Interest Securities and the Holders of the Residual Interest Securities on a
daily basis in proportion to the relative amounts of income accruing to each
Holder on that day. In the case of a Holder of a Regular Interest Security who
is an individual or a "pass-through interest holder" (including certain
pass-through entities but not including real estate investment trusts), such
expenses will be deductible only to the extent that such expenses, plus other
"miscellaneous itemized deductions" of the Holder, exceed 2% of such Holder's
adjusted gross income. In addition, for taxable years beginning after December
31, 1990, the amount of itemized deductions otherwise allowable for the
taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation for taxable
years beginning after 1990) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the applicable amount, or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year. The
reduction or disallowance of this deduction may have a significant impact on
the yield of the Regular Interest Security to such a Holder. In general terms,
a single class REMIC is one that either (i) would qualify, under existing
Treasury regulations, as a grantor trust if it were not a REMIC (treating all
interests as ownership interests, even if they would be classified as debt for
federal income tax purposes) or (ii) is similar to such a trust and that is
structured with the principal purpose of avoiding the single class REMIC
rules. Unless otherwise specified in the related Prospectus Supplement, the
expenses of the REMIC will be allocated to Holders of the related residual
interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the Holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC.
Calculation of REMIC Income. In the opinion of Tax Counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with
certain adjustments. In general, the taxable income or net loss will be the
difference between (i) the gross income produced by the REMIC's assets,
including stated interest and any original issue discount or market discount
on loans and other assets, and (ii) deductions, including stated interest and
original issue discount accrued on Regular Interest Securities, amortization
of any premium with respect to Loans, and servicing fees and other expenses of
the REMIC. A Holder of a Residual Interest Security that is an individual or a
"pass-through interest holder" (including certain pass-through entities, but
not including real estate investment trusts) will be unable to deduct
servicing fees payable on the loans or other administrative expenses of the
REMIC for a given taxable year, to the extent that such expenses, when
aggregated with such Holder's other miscellaneous itemized deductions for that
year, do not exceed two percent of such Holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the
aggregate fair market value of the regular interests and the residual
interests on the Startup Day (generally, the day that the interests are
issued). That aggregate basis will be allocated among the assets of the REMIC
in proportion to their respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which Holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the Holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See "Taxation of Debt Securities" above. However, a REMIC
that acquires loans at a market discount must include such market discount in
income currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant
yield method. Although the law is somewhat unclear regarding recovery of
premium attributable to loans originated on or before such date, it is
possible that such premium may be recovered in proportion to payments of loan
principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject
to a limited exception, the sale or other disposition of a cash flow
investment; (iii) the receipt of any income from assets not permitted to be
held by the REMIC pursuant to the Code; or (iv) the receipt of any fees or
other compensation for services rendered by the REMIC. It is anticipated that
a REMIC will not engage in any prohibited transactions in which it would
recognize a material amount of net income. In addition, subject to a number of
exceptions, a tax is imposed at the rate of 100% on amounts contributed to a
REMIC after the close of the three-month period beginning on the Startup Day.
The Holders of Residual Interest Securities will generally be responsible for
the payment of any such taxes imposed on the REMIC. To the extent not paid by
such Holders or otherwise, however, such taxes will be paid out of the Trust
Fund and will be allocated pro rata to all outstanding Classes of Securities
of such REMIC.
Taxation of Holders of Residual Interest Securities
In the opinion of Tax Counsel, the Holder of a Certificate representing a
residual interest (a "Residual Interest Security") will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which such Holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the Holders (on
such day) of the Residual Interest Securities in proportion to their
respective holdings on such day.
In the opinion of Tax Counsel, the Holder of a Residual Interest Security
must report its proportionate share of the taxable income of the REMIC whether
or not it receives cash distributions from the REMIC attributable to such
income or loss. The reporting of taxable income without corresponding
distributions could occur, for example, in certain REMIC issues in which the
loans held by the REMIC were issued or acquired at a discount, since mortgage
prepayments cause recognition of discount income, while the corresponding
portion of the prepayment could be used in whole or in part to make principal
payments on REMIC Regular Interests issued without any discount or at an
insubstantial discount (if this occurs, it is likely that cash distributions
will exceed taxable income in later years). Taxable income may also be greater
in earlier years of certain REMIC issues as a result of the fact that interest
expense deductions, as a percentage of outstanding principal on REMIC Regular
Interest Securities, will typically increase over time as lower yielding
Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the Holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond
or instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a Holder may take into account currently is limited to
the Holder's adjusted basis at the end of the calendar quarter in which such
loss arises. A Holder's basis in a Residual Interest Security will initially
equal such Holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the Holder, and decreased
(but not below zero) by the amount of distributions made and the amount of the
REMIC's net loss allocated to the Holder. Any disallowed loss may be carried
forward indefinitely, but may be used only to offset income of the REMIC
generated by the same REMIC. The ability of Holders of Residual Interest
Securities to deduct net losses may be subject to additional limitations under
the Code, as to which such Holders should consult their tax advisers.
Distributions. In the opinion of Tax Counsel, distributions on a Residual
Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or
loss to a Holder of a Residual Interest Security. If the amount of such
payment exceeds a Holder's adjusted basis in the Residual Interest Security,
however, the Holder will recognize gain (treated as gain from the sale of the
Residual Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel, a Holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the amount
realized and such Holder's adjusted basis in the Residual Interest Security at
the time of such sale or exchange. Except to the extent provided in
regulations, which have not yet been issued, any loss upon disposition of a
Residual Interest Security will be disallowed if the selling Holder acquires
any residual interest in a REMIC or similar mortgage pool within six months
before or after such disposition.
Excess Inclusions. In the opinion of Tax Counsel, the portion of the
REMIC taxable income of a Holder of a Residual Interest Security consisting of
"excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on such Holder's federal income tax return.
Further, if the Holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by Code Section 511,
such Holder's excess inclusion income will be treated as unrelated business
taxable income of such Holder. In addition, under Treasury regulations yet to
be issued, if a real estate investment trust, a regulated investment company,
a common trust fund, or certain cooperatives were to own a Residual Interest
Security, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a Residual Security is owned by a foreign person, excess inclusion
income is subject to tax at a rate of 30%, which may not be reduced by treaty,
is not eligible for treatment as "portfolio interest" and is subject to
certain additional limitations. See "Tax Treatment of Foreign Investors." The
Small Business Job Protection Act of 1996 has eliminated the special rule
permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from Residual Interest Securities that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995, except with respect to Residual
Interest Securities continuously held by a thrift institution since November
1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual Holder. First, alternative minimum
taxable income for such residual Holder is determined without regard to the
special rule that taxable income cannot be less than excess inclusions.
Second, a residual Holder's alternative minimum taxable income for a tax year
cannot be less than excess inclusions for the year. Third, the amount of any
alternative minimum tax net operating loss deductions must be computed without
regard to any excess inclusions. These rules are effective for tax years
beginning after December 31, 1986, unless a residual Holder elects to have
such rules apply only to tax years beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period allocable
to a Residual Interest Security, over the daily accruals for such quarterly
period of (i) 120% of the long term applicable federal rate on the Startup Day
multiplied by (ii) the adjusted issue price of such Residual Interest Security
at the beginning of such quarterly period. The adjusted issue price of a
Residual Interest at the beginning of each calendar quarter will equal its
issue price (calculated in a manner analogous to the determination of the
issue price of a Regular Interest), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by
the amount of loss allocated to a Holder and the amount of distributions made
on the Residual Interest Security before the beginning of the quarter. The
long-term federal rate, which is announced monthly by the Treasury Department,
is an interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be
made to prevent the ownership of a REMIC residual interest by any
"Disqualified Organization." Disqualified Organizations include the United
States, any State or political subdivision thereof, any foreign government,
any international organization, or any agency or instrumentality of any of the
foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
Sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income. Accordingly, the applicable Pooling and Servicing
Agreement will prohibit Disqualified Organizations from owning a Residual
Interest Security. In addition, no transfer of a Residual Interest Security
will be permitted unless the proposed transferee shall have furnished to the
Trustee an affidavit representing and warranting that it is neither a
Disqualified Organization nor an agent or nominee acting on behalf of a
Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all
federal tax purposes unless no significant purpose of the transfer was to
impede the assessment or collection of tax. A Residual Interest Security is a
"noneconomic residual interest" unless, at the time of the transfer (i) the
present value of the expected future distributions on the Residual Interest
Security at least equals the product of the present value of the anticipated
excess inclusions and the highest rate of tax for the year in which the
transfer occurs and (ii) the transferor reasonably expects that the transferee
will receive distributions from the REMIC at or after the time at which the
taxes accrue on the anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes. If a transfer of a Residual Interest is
disregarded, the transferor would be liable for any federal income tax imposed
upon taxable income derived by the transferee from the REMIC. The REMIC
Regulations provide no guidance as to how to determine if a significant
purpose of a transfer is to impede the assessment or collection of tax. A
similar type of limitation exists with respect to certain transfers of
residual interests by foreign persons to United States persons. See "--Tax
Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that the IRS recently finalized regulations (the
"Final Mark-to-Market Regulations"), which provide that a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the possible application of the Mark to Market
Regulations.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in
a unified administrative proceeding.
Tax Status as a Grantor Trust
General. As further specified in the related Prospectus Supplement, if a
REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as
an association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a Holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("Stripped Securities"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
In the opinion of Tax Counsel, each Holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the applicable Trustee and the
Servicer and similar fees (collectively, the "Servicing Fee")), at the same
time and in the same manner as such items would have been reported under the
Holder's tax accounting method had it held its interest in the Loans directly,
received directly its share of the amounts received with respect to the Loans,
and paid directly its share of the Servicing Fees. In the case of Pass-Through
Securities other than Stripped Securities, such income will consist of a pro
rata share of all of the income derived from all of the Loans and, in the case
of Stripped Securities, such income will consist of a pro rata share of the
income derived from each stripped bond or stripped coupon in which the Holder
owns an interest. The Holder of a Security will generally be entitled to
deduct such Servicing Fees under Section 162 or Section 212 of the Code to the
extent that such Servicing Fees represent "reasonable" compensation for the
services rendered by the applicable Trustee and the Servicer (or third parties
that are compensated for the performance of services). In the case of a
noncorporate Holder, however, Servicing Fees (to the extent not otherwise
disallowed, e.g., because they exceed reasonable compensation) will be
deductible in computing such Holder's regular tax liability only to the extent
that such fees, when added to other miscellaneous itemized deductions, exceed
2% of adjusted gross income and may not be deductible to any extent in
computing such Holder's alternative minimum tax liability. In addition, for
taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation in taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the Holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values,
determined as of the time of purchase of the Securities. In the typical case,
the Trustee (to the extent necessary to fulfill its reporting obligations)
will treat each Loan as having a fair market value proportional to the share
of the aggregate Principal Balances of all of the Loans that it represents,
since the Securities, unless otherwise specified in the related Prospectus
Supplement, will have a relatively uniform interest rate and other common
characteristics. To the extent that the portion of the purchase price of a
Pass-Through Security allocated to a Loan (other than to a right to receive
any accrued interest thereon and any undistributed principal payments) is less
than or greater than the portion of the Principal Balance of the Loan
allocable to the Security, the interest in the Loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of
a prescribed de minimis amount or a Stripped Security, a Holder of a Security
will be required to report as interest income in each taxable year its share
of the amount of OID that accrues during that year in the manner described
above. OID with respect to a Loan could arise, for example, by virtue of the
financing of points by the originator of the Loan, or by virtue of the
charging of points by the originator of the Loan in an amount greater than a
statutory de minimis exception, in circumstances under which the points are
not currently deductible pursuant to applicable Code provisions. Any market
discount or premium on a Loan will be includible in income, generally in the
manner described above, except that in the case of Pass-Through Securities,
market discount is calculated with respect to the Loans underlying the
Certificate, rather than with respect to the Security. A Holder that acquires
an interest in a Loan originated after July 18, 1984 with more than a de
minimis amount of market discount (generally, the excess of the principal
amount of the Loan over the purchaser's allocable purchase price) will be
required to include accrued market discount in income in the manner set forth
above. See "--Taxation of Debt Securities; Market Discount" and "--Premium"
above.
In the case of market discount on a Pass-Through Security attributable to
Loans originated on or before July 18, 1984, the Holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal
payment is made. Such treatment would generally result in discount being
included in income at a slower rate than discount would be required to be
included in income using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Loans, a right to receive only
principal payments on the Loans, or a right to receive certain payments of
both interest and principal. Certain Stripped Securities ("Ratio Strip
Securities") may represent a right to receive differing percentages of both
the interest and principal on each Loan. Pursuant to Section 1286 of the Code,
the separation of ownership of the right to receive some or all of the
interest payments on an obligation from ownership of the right to receive some
or all of the principal payments results in the creation of "stripped bonds"
with respect to principal payments and "stripped coupons" with respect to
interest payments. Section 1286 of the Code applies the OID rules to stripped
bonds and stripped coupons. For purposes of computing original issue discount,
a stripped bond or a stripped coupon is treated as a debt instrument issued on
the date that such stripped interest is purchased with an issue price equal to
its purchase price or, if more than one stripped interest is purchased, the
ratable share of the purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees (the "excess
servicing fee") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan's
Principal Balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be
treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a Loan by Loan basis, which could result in
some Loans being treated as having more than 100 basis points of interest
stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to apply
to Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made that take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury
regulations, appear specifically to cover instruments such as the Stripped
Securities, which technically represent ownership interests in the underlying
Loans, rather than being debt instruments "secured by" those loans.
Nevertheless, it is believed that the Cash Flow Bond Method is a reasonable
method of reporting income for such Securities, and it is expected that OID
will be reported on that basis unless otherwise specified in the related
Prospectus Supplement. In applying the calculation to Pass-Through Securities,
the Trustee will treat all payments to be received by a Holder with respect to
the underlying Loans as payments on a single installment obligation. The IRS
could, however, assert that original issue discount must be calculated
separately for each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate
a Holder's recognition of income. If, however, the Loans prepay at a rate
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the applicable Trustee intends, absent contrary authority, to report income to
Holders as OID, in the manner described above for Interest Weighted
Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations
of the applicable Code provisions. Among other possibilities, the Internal
Revenue Service could contend that (i) in certain Series, each non-Interest
Weighted Security is composed of an unstripped undivided ownership interest in
Loans and an installment obligation consisting of stripped principal payments;
(ii) the non-Interest Weighted Securities are subject to the contingent
payment provisions of the Proposed Regulations; or (iii) each Interest
Weighted Stripped Security is composed of an unstripped undivided ownership
interest in Loans and an installment obligation consisting of stripped
interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income
tax purposes.
Character as Qualifying Loans. In the case of Stripped Securities, there
is no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans.
The IRS could take the position that the Loans character is not carried over
to the Securities in such circumstances. Pass-Through Securities will be, and,
although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code, and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; and interest
income attributable to the Securities should be considered to represent
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Section 856(c)(3)(B) of the Code.
Reserves or funds underlying the Securities may cause a proportionate
reduction in the above-described qualifying status categories of Securities.
Sale or Exchange
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, in the opinion of Tax Counsel, a Holder's tax
basis in its Security is the price such Holder pays for a Security, plus
amounts of original issue or market discount included in income and reduced by
any payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption
of a Security, measured by the difference between the amount realized and the
Security's basis as so adjusted, will generally be capital gain or loss,
assuming that the Security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the Security is one
year or more and short-term capital gain or loss if the holding period of the
Security is less than one year. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of
capital losses is subject to certain limitations. Prospective investors should
consult their own tax advisors concerning these tax law provisions.
In the case of a Security held by a bank, thrift, or similar institution
described in Section 582 of the Code, however, gain or loss realized on the
sale or exchange of a Regular Interest Security will be taxable as ordinary
income or loss. In addition, gain from the disposition of a Regular Interest
Security that might otherwise be capital gain will be treated as ordinary
income to the extent of the excess, if any, of (i) the amount that would have
been includible in the Holder's income if the yield on such Regular Interest
Security had equaled 110% of the applicable federal rate as of the beginning
of such Holder's holding period, over the amount of ordinary income actually
recognized by the Holder with respect to such Regular Interest Security.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a
Holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to distributions
or the proceeds of a sale of certificates to or through brokers that represent
interest or original issue discount on the Securities. This withholding
generally applies if the Holder of a Security (i) fails to furnish the
applicable Trustee with its taxpayer identification number (the "TIN"); (ii)
furnishes the applicable Trustee an incorrect TIN; (iii) fails to report
properly interest, dividends or other "reportable payments" as defined in the
Code; or (iv) under certain circumstances, fails to provide the applicable
Trustee or such Holder's securities broker with a certified statement, signed
under penalty of perjury, that the TIN provided is its correct number and that
the Holder is not subject to backup withholding. Backup withholding will not
apply, however, with respect to certain payments made to Holders, including
payments to certain exempt recipients (such as exempt organizations) and to
certain Nonresidents (as defined below). Holders should consult their tax
advisers as to their qualification for exemption from backup withholding and
the procedure for obtaining the exemption.
The applicable Trustee will report to the Holders and to the Servicer for
each calendar year the amount of any "reportable payments" during such year
and the amount of tax withheld, if any, with respect to payments on the
Securities.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations"), which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 2000, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to
be "effectively connected" with a trade or business conducted in the United
States by a nonresident alien individual, foreign partnership or foreign
corporation ("Nonresidents"), in the opinion of Tax Counsel, such interest
will normally qualify as portfolio interest (except where (i) the recipient is
a holder, directly or by attribution, of 10% or more of the capital or profits
interest in the issuer, or (ii) the recipient is a controlled foreign
corporation to which the issuer is a related person) and will be exempt from
federal income tax. Upon receipt of appropriate ownership statements, the
issuer normally will be relieved of obligations to withhold tax from such
interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate (unless such rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Nonresidents. Holders of
Pass-Through Securities and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the
Loans were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the
regular United States income tax.
Payments to Holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax
as "portfolio interest." It is clear that, to the extent that a payment
represents a portion of REMIC taxable income that constitutes excess inclusion
income, a Holder of a Residual Interest Security will not be entitled to an
exemption from or reduction of the 30% (or lower treaty rate) withholding tax
rule. If the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only when
paid or distributed (or when the Residual Interest Security is disposed of).
The Treasury has statutory authority, however, to promulgate regulations that
would require such amounts to be taken into account at an earlier time in
order to prevent the avoidance of tax. Such regulations could, for example,
require withholding prior to the distribution of cash in the case of Residual
Interest Securities that do not have significant value. Under the REMIC
Regulations, if a Residual Interest Security has tax avoidance potential, a
transfer of a Residual Interest Security to a Nonresident will be disregarded
for all federal tax purposes. A Residual Interest Security has tax avoidance
potential unless, at the time of the transfer the transferor reasonably
expects that the REMIC will distribute to the transferee residual interest
Holder amounts that will equal at least 30% of each excess inclusion, and that
such amounts will be distributed at or after the time at which the excess
inclusions accrue and not later than the calendar year following the calendar
year of accrual. If a Nonresident transfers a Residual Interest Security to a
United States person, and if the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, then the transfer is
disregarded and the transferor continues to be treated as the owner of the
Residual Interest Security for purposes of the withholding tax provisions of
the Code. See "--Excess Inclusions."
Tax Characterization of the Trust Fund as a Partnership
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion is
based on the assumption that the terms of the Trust Agreement and related
documents will be complied with, and on counsel's conclusions that the nature
of the income of the Trust Fund will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or the issuance of
the Certificates has been structured as a private placement under an IRS safe
harbor, so that the Trust Fund will not be characterized as a publicly traded
partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the
Trust Fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. In such a circumstance, Tax Counsel is,
except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified
stated interest" under the OID Regulations, and that any OID on the Notes
(i.e., any excess of the principal amount of the Notes over their issue price)
does not exceed a de minimis amount (i.e., 0.25% of their principal amount
multiplied by the number of full years included in their term), all within the
meaning of the OID regulations. If these conditions are not satisfied with
respect to any given series of Notes, additional tax considerations with
respect to such Notes will be disclosed in the applicable Prospectus
Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of Tax Counsel, the Notes
will not be considered issued with OID. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued
in accordance with such Noteholder's method of tax accounting. Under the OID
Regulations, a Holder of a Note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are
made on the Note. It is believed that any prepayment premium paid as a result
of a mandatory redemption will be taxable as contingent interest when it
becomes fixed and unconditionally payable. A purchaser who buys a Note for
more or less than its principal amount will generally be subject,
respectively, to the premium amortization or market discount rules of the
Code.
A Holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis Holder of a Short-Term Note (and certain cash
method Holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis Holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the Short-Term Note). However, a cash
basis Holder of a Short-Term Note reporting interest income as it is paid may
be required to defer a portion of any interest expense otherwise deductible on
indebtedness incurred to purchase or carry the Short-Term Note until the
taxable disposition of the Short-Term Note. A cash basis taxpayer may elect
under Section 1281 of the Code to accrue interest income on all nongovernment
debt obligations with a term of one year or less, in which case the taxpayer
would include interest on the Short-Term Note in income as it accrues, but
would not be subject to the interest expense deferral rule referred to in the
preceding sentence. Certain special rules apply if a Short-Term Note is
purchased for more or less than its principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a Noteholder
sells a Note, the Holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the Holder's adjusted
tax basis in the Note. The adjusted tax basis of a Note to a particular
Noteholder will equal the Holder's cost for the Note, increased by any market
discount, acquisition discount, OID and gain previously included by such
Noteholder in income with respect to the Note and decreased by the amount of
bond premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such Note. Any
such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued
market discount not previously included in income. Capital losses generally
may be used only to offset capital gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made
(or accrued) to a Noteholder who is a nonresident alien, foreign corporation
or other non-United States person (a "foreign person") generally will be
considered "portfolio interest," and generally will not be subject to United
States federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the
United States by the foreign person and the foreign person (i) is not actually
or constructively a "10 percent shareholder" of the Trust Fund or the Seller
(including a Holder of 10% of the outstanding Certificates) or a "controlled
foreign corporation" with respect to which the Trust Fund or the Seller is a
"related person" within the meaning of the Code and (ii) provides the Trustee
or other person who is otherwise required to withhold U.S. tax with respect to
the Notes with an appropriate statement (on Form W-8 or a similar form),
signed under penalties of perjury, certifying that the beneficial owner of the
Note is a foreign person and providing the foreign person's name and address.
If a Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however, the
signed statement must be accompanied by a Form W-8 or substitute form provided
by the foreign person that owns the Note. If such interest is not portfolio
interest, then it will be subject to United States federal income and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax; provided, that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each Holder of a Note (other than an exempt Holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the Holder's
name, address, correct federal taxpayer identification number and a statement
that the Holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the Holder,
and remit the withheld amount to the IRS as a credit against the Holder's
federal income tax liability.
The New Regulations described herein make certain modifications to the
backup withholding and information reporting rules. The New Regulations
generally will be effective for payments made after December 31, 2000, subject
to certain transition rules. Prospective investors are urged to consult their
own tax advisors regarding the New Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Tax Counsel, the IRS successfully asserted that one or more of the Notes
did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust Fund. If so treated, the Trust Fund
might be taxable as a corporation with the adverse consequences described
above (and the taxable corporation would not be able to reduce its taxable
income by deductions for interest expense on Notes recharacterized as equity).
Alternatively, and most likely in the view of Tax Counsel, the Trust Fund
might be treated as a publicly traded partnership that would not be taxable as
a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain Holders. For
example, income to certain tax-exempt entities (including pension funds) would
be "unrelated business taxable income," income to foreign Holders generally
would be subject to U.S. tax and U.S. tax return filing and withholding
requirements, and individual Holders might be subject to certain limitations
on their ability to deduct their share of the Trust Fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase
of Certificates, to treat the Trust Fund as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the
assets held by the Trust Fund, the partners of the partnership being the
Certificateholders, and the Notes being debt of the partnership. However, the
proper characterization of the arrangement involving the Trust Fund, the
Certificates, the Notes, the Trust Fund and the Servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series
of Securities includes a single Class of Certificates. If these conditions are
not satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the opinion
of Tax Counsel, the Trust Fund will not be subject to federal income tax.
Rather, in the opinion of Tax Counsel, each Certificateholder will be required
to separately take into account such Holder's allocated share of income,
gains, losses, deductions and credits of the Trust Fund. The Trust Fund's
income will consist primarily of interest and finance charges earned on the
Loans (including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Loans. The Trust
Fund's deductions will consist primarily of interest accruing with respect to
the Notes, servicing and other fees, and losses or deductions upon collection
or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations
and the partnership agreement (here, the Trust Agreement and related
documents). The Trust Agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Trust Fund for each
month equal to the sum of (i) the interest that accrues on the Certificates in
accordance with their terms for such month, including interest accruing at the
Pass-Through Rate for such month and interest on amounts previously due on the
Certificates but not yet distributed; (ii) any Trust Fund income attributable
to discount on the Loans that corresponds to any excess of the principal
amount of the Certificates over their initial issue price (iii) prepayment
premium payable to the Certificateholders for such month; and (iv) any other
amounts of income payable to the Certificateholders for such month. Such
allocation will be reduced by any amortization by the Trust Fund of premium on
Loans that corresponds to any excess of the issue price of Certificates over
their principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Depositor. Based on the economic arrangement of the parties,
in the opinion of Tax Counsel, this approach for allocating Trust Fund income
should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of
income to be allocated to Certificateholders. Moreover, in the opinion of Tax
Counsel, even under the foregoing method of allocation, Certificateholders may
be allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis Holders will
in effect be required to report income from the Certificates on the accrual
basis and Certificateholders may become liable for taxes on Trust Fund income
even if they have not received cash from the Trust Fund to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders
may be required to report on their tax returns taxable income that is greater
or less than the amount reported to them by the Trust Fund. In the opinion of
Tax Counsel, all of the taxable income allocated to a Certificateholder that
is a pension, profit sharing or employee benefit plan or other tax-exempt
entity (including an individual retirement account) will constitute "unrelated
business taxable income" generally taxable to such a Holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of expenses
of the Trust Fund (including fees to the Servicer but not interest expense)
would be miscellaneous itemized deductions. Such deductions might be
disallowed to the individual in whole or in part and might result in such
Holder being taxed on an amount of income that exceeds the amount of cash
actually distributed to such Holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were
to require that such calculations be made separately for each Loan, the Trust
Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID, and, therefore, the Trust Fund should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining Principal Balance of the Loans at the time of purchase. If
so, in the opinion of Tax Counsel, the Loan will have been acquired at a
premium or discount, as the case may be. (As indicated above, the Trust Fund
will make this calculation on an aggregate basis, but might be required to
recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. In the opinion of Tax Counsel, under Section 708
of the Code, the Trust Fund will be deemed to terminate for federal income tax
purposes if 50% or more of the capital and profits interests in the Trust Fund
are sold or exchanged within a 12-month period. Pursuant to final Treasury
regulations issued May 9, 1997 under Section 708 of the Code, if such a
termination occurs, the Trust Fund (the "old partnership") would be deemed to
contribute its assets to a new partnership (the "new partnership") in exchange
for interests in the new partnership. Such interests would be deemed
distributed to the partners of the old partnership in liquidation thereof,
which would not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the Certificates sold. A Certificateholder's tax basis in a Certificate
will generally equal the Holder's cost increased by the Holder's share of
Trust Fund income (includible in income) and decreased by any distributions
received with respect to such Certificate. In addition, both the tax basis in
the Certificates and the amount realized on a sale of a Certificate would
include the Holder's share of the Notes and other liabilities of the Trust
Fund. A Holder acquiring Certificates at different prices may be required to
maintain a single aggregate adjusted tax basis in such Certificates, and, upon
sale or other disposition of some of the Certificates, allocate a portion of
such aggregate tax basis to the Certificates sold (rather than maintaining a
separate tax basis in each Certificate for purposes of computing gain or loss
on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Holder's share
of unrecognized accrued market discount on the Loans would generally be
treated as ordinary income to the Holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates owned
by them as of the close of the last day of such month. As a result, a Holder
purchasing Certificates may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Certificateholders.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to reflect
that higher (or lower) basis unless the Trust Fund were to file an election
under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Trust Fund
will not make such election. As a result, Certificateholders might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal
year of the Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust Fund and will report each Certificateholder's allocable
share of items of Trust Fund income and expense to Holders and the IRS on
Schedule K-1. The Trust Fund will provide the Schedule K-l information to
nominees that fail to provide the Trust Fund with the information statement
described below and such nominees will be required to forward such information
to the beneficial owners of the Certificates. Generally, Holders must file tax
returns that are consistent with the information return filed by the Trust
Fund or be subject to penalties unless the Holder notifies the IRS of all such
inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes (i)
the name, address and taxpayer identification number of the nominee and (ii)
as to each beneficial owner (a) the name, address and identification number of
such person, (b) whether such person is a United States person, a tax-exempt
entity or a foreign government, an international organization or any wholly
owned agency or instrumentality of either of the foregoing, and (c) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish directly to
the Trust Fund information as to themselves and their ownership of
Certificates. A clearing agency registered under Section 17A of the Exchange
Act is not required to furnish any such information statement to the Trust
Fund. The information referred to above for any calendar year must be
furnished to the Trust Fund on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust Fund with
the information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is
not expected that the Trust Fund would be engaged in a trade or business in
the United States for such purposes, the Trust Fund will withhold as if it
were so engaged in order to protect the Trust Fund from possible adverse
consequences of a failure to withhold. The Trust Fund expects to withhold on
the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35% for
foreign Holders that are taxable as corporations and 39.6% for all other
foreign Holders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Trust Fund to change
its withholding procedures. In determining a Holder's withholding status, the
Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the Holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign Holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
Holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign Holder generally would be entitled
to file with the IRS a claim for refund with respect to taxes withheld by the
Trust Fund taking the position that no taxes were due because the Trust Fund
was not engaged in a U.S. trade or business. However, interest payments made
(or accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest will not be
considered "portfolio interest." As a result, Certificateholders will be
subject to United States federal income tax and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable treaty. In
such case, a foreign Holder would only be entitled to claim a refund for that
portion of the taxes in excess of the taxes that should be withheld with
respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code. The New Regulations described herein make
certain modifications to the backup withholding and information reporting
rules. The New Regulations will generally be effective for payments made after
December 31, 2000, subject to certain transition rules. Prospective investors
are urged to consult their own tax advisors regarding the New Regulations.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations described in
"Certain Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Securities. State and local income tax law
may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state or locality. Therefore, potential investors should consult their own
tax advisors with respect to the various state and local tax consequences of
an investment in the Securities.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory
vehicle for the issuance of mortgage-backed and asset-backed securities
("FASIT Securities"). Although the FASIT provisions of the Code became
effective on September 1, 1997, no Treasury regulations or other
administrative guidance has been issued with respect to those provisions.
Accordingly, definitive guidance cannot be provided with respect to many
aspects of the tax treatment of Holders of FASIT Securities. Investors also
should note that the FASIT discussions contained herein constitutes only a
summary of the federal income tax consequences to Holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect
to the taxable income or loss of the related Series. The Prospectus Supplement
for each Series of Securities will indicate whether one or more FASIT
elections will be made for such Series, and which Securities of such Series
will be designated as Regular Securities, and which, if any, will be
designated as Ownership Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (a) the composition of the FASIT's assets and (b) the nature
of the Holders' interest in the FASIT are met on a continuing basis and (iii)
the Trust Fund is not a regulated company as defined in Section 851(a) of the
Code.
Asset Composition. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool)
must consist of "permitted assets" as of the close of the third month
beginning after the Closing Date and at all times thereafter (the "FASIT
Qualification Test"). Permitted assets include (i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("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 Federal Income Tax
Considerations--Taxation of Debt Securities--Variable Rate Debt Securities."
If a FASIT Security fails to meet one or more of the requirements set out
in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security consists
of a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the Security, the Security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic corporations that are fully subject to corporate income tax
("Eligible Corporations"), other FASITs and dealers in securities who acquire
such interests as inventory, rather than for investment. In addition, Holders
of High-Yield Interests are subject to limitations on offset of income derived
from such interest. See "Certain Federal Income Tax Considerations--FASIT
Securities--Tax Treatment of FASIT Regular Securities--Treatment of High-Yield
Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost
for that year and thereafter. If FASIT status is lost, the treatment of the
former FASIT and the interests therein for federal income tax purposes is
uncertain. The former FASIT might be treated as a grantor trust, as a separate
association taxed as a corporation, or as a partnership. The FASIT Regular
Securities could be treated as debt instruments for federal income tax
purposes or as equity interests. Although the Code authorizes the Treasury to
issue regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the FASIT's income for a period of time
in which the requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by Holders
of FASIT Regular Securities generally should be accorded the same tax
treatment under the Code as payments received on other taxable corporate debt
instruments and on REMIC Regular Securities. As in the case of Holders of
REMIC Regular Securities, Holders of FASIT Regular Securities must report
income from such Securities under an accrual method of accounting, even if
they otherwise would have used the case receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original issue
discount or acquired with market discount or premium, interest paid or accrued
on a FASIT Regular Security generally will be treated as ordinary income to
the Holder and a principal payment on such Security will be treated as a
return of capital to the extent that the Holder's basis is allocable to that
payment. FASIT Regular Securities issued with original issue discount or
acquired with market discount or premium generally will treat interest and
principal payments on such Securities in the same manner described for REMIC
Regular Securities. See "Certain Federal Income Tax Considerations--Taxation
of Debt Securities," "--Market Discount," and "--Premium" above. High-Yield
Securities may be held only by fully taxable domestic corporations, other
FASITs, and certain securities dealers. Holders of High-Yield Securities are
subject to limitations on their ability to use current losses or net operating
loss carryforwards or carrybacks to offset any income derived from those
Securities.
If a FASIT Regular Security is sold or exchanged, the Holder generally
will recognize gain or loss upon the sale in the manner described above for
REMIC Regular Securities. See "Certain Federal Income Tax Considerations--Sale
or Exchange." In addition, if a FASIT Regular Security becomes wholly or
partially worthless as a result of Default and Delinquencies of the underlying
assets, the Holder of such Security should be allowed to deduct the loss
sustained (or alternatively be able to report a lesser amount of income). See
"Certain Federal Income Tax Considerations--Taxation of Debt
Instruments--Effects of Default and Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, and interest
on such Securities will be considered Qualifying REIT Interest to the same
extent that REMIC Securities would be so considered. FASIT Regular Securities
held by a Thrift Institution taxed as a "domestic building and loan
association" will represent qualifying assets for purposes of the
qualification requirements set forth in Code Section 7701(a)(19) to the same
extent that REMIC Securities would be so considered. See "Certain Federal
Income Tax Considerations--Taxation of Debt Securities--Status as Real
Property Loans." In addition, FASIT Regular Securities held by a financial
institution to which Section 585 of the Code applies will be treated as
evidences of indebtedness for purposes of Section 582(c)(1) of the Code. FASIT
Securities will not qualify as "Government Securities" for either REIT or RIC
qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of Holders of such interests, and the
ability of such Holders to offset income derived from their FASIT Security
with losses. High-Yield Interests may be held only by Eligible Corporations
other FASITs, and dealers in securities who acquire such interests as
inventory. If a securities dealer (other than an Eligible Corporation)
initially acquires a High-Yield Interest as inventory, but later begins to
hold it for investment, the dealer will be subject to an excise tax equal to
the income from the High-Yield Interest multiplied by the highest corporate
income tax rate. In addition, transfers of High-Yield Interests to
disqualified Holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the Holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income derived
from the High-Yield Interest, for either regular federal income tax purposes
or for alternative minimum tax purposes. In addition, the FASIT provisions
contain an anti-abuse rule that imposes corporate income tax on income derived
from a FASIT Regular Security that is held by a pass-through entity (other
than another FASIT) that issues debt or equity securities backed by the FASIT
Regular Security and that have the same features as High-Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the Holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit
of a FASIT. In general, the character of the income to the Holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
Holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the Holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, Holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses
to offset income from their FASIT Security as are the Holders of High-Yield
Interests. See "Certain Federal Income Tax Considerations--Treatment of
High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses
on dispositions of a FASIT Ownership Security generally will be disallowed
where, within six months before or after the disposition, the seller of such
Security acquires any other FASIT Ownership Security or, in the case of a
FASIT holding mortgage assets, any interest in a Taxable Mortgage Pool that is
economically comparable to a FASIT Ownership Security. In addition, if any
security that is sold or contributed to a FASIT by the Holder of the related
FASIT Ownership Security was required to be marked-to-market under Code
section 475 by such Holder, then section 475 will continue to apply to such
securities, except that the amount realized under the mark-to-market rules
will be a greater of the securities' value under present law or the
securities' value after applying special valuation rules contained in the
FASIT provisions. Those special valuation rules generally require that the
value of debt instruments that are not traded on an established securities
market be determined by calculating the present value of the reasonably
expected payments under the instrument using a discount rate of 120% of the
applicable federal rate, compounded semiannually.
The Holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income
derived from assets that are not permitted assets, (ii) certain dispositions
of permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a
FASIT election is made generally will be structured in order to avoid
application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent Holders of
REMIC Securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes
of reporting and tax administration, Holders of record of FASIT Securities
generally will be treated in the same manner as Holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
HOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO MANY
ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into
subclasses. If Securities are divided into subclasses, the related Prospectus
Supplement will contain information concerning considerations relating to
ERISA and the Code that are applicable to such Securities and such subclasses
of Securities.
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including certain individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which such plans, accounts or arrangements are
invested) (collectively "Plans") subject to ERISA and on persons who are
fiduciaries with respect to such Plans. Generally, ERISA applies to
investments made by Plans. Among other things, ERISA requires 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 that is qualified and exempt from taxation under Code Sections 401(a) and
501(a), however, is subject to the prohibited transaction rules set forth in
Code Section 503.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA and Section 4975 of the Code
prohibit a broad range of transactions involving Plan assets and persons
("Parties in Interest") having certain specified relationships to a Plan and
impose additional prohibitions where Parties in Interest are fiduciaries with
respect to such Plan. Certain Parties in Interest that participate in a
prohibited transaction may be subject to an excise tax imposed pursuant to
Section 4975 of the Code, or a penalty imposed pursuant to Section 502(i) of
ERISA, unless a statutory, regulatory or administrative exemption is
available.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations (Labor Reg. Section 2510.3-101) concerning the
definition of what constitutes the assets of a Plan (the "Plan Asset
Regulation"). Under this regulation, the underlying assets and properties of
corporations, partnerships and certain other entities in which a Plan acquires
an "equity" interest could be deemed for purposes of ERISA to be assets of the
investing Plan in certain circumstances.
Under the Plan Asset Regulation, the term "equity" interest is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the Trust Fund issues Notes that are not treated as equity
interests in the Trust Fund for purposes of the Plan Asset Regulation, a
Plan's investment in such Notes would not cause the assets of the Trust to be
deemed Plan assets. However, the Seller, the Servicer, the Special Servicer,
the Backup Servicer, the Indenture Trustee, the Owner Trustee and the
Depositor may be the sponsor of or investment advisor with respect to one or
more Plans. Because such parties may receive certain benefits in connection
with the sale of the Notes, the purchase of Notes using Plan assets over which
any such parties (or any affiliates thereof) has investment authority might be
deemed to be a violation of the prohibited transaction rules of ERISA and the
Code for which no exemption may be available. Accordingly, Notes may not be
purchased using the assets of any Plan if the Seller, the Servicer, the
Special Servicer, the Indenture Trustee, the Owner Trustee, the Depositor or
any of their affiliates (a) has investment or administrative discretion with
respect to such Plan assets; (b) has authority or responsibility to give, or
regularly gives, investment advice with respect to such Plan assets for a fee
and pursuant to an agreement of understanding that such advice (i) will serve
as a primary basis for investment decisions with respect to such Plan assets
and (ii) will be based on the particular investment needs for such Plan; or
(c) is an employer maintaining or contributing to such Plan.
In addition, the Trust Fund, any underwriter, trustee, servicer,
administrator or producer of credit support or their affiliates might be
considered or might become Parties in Interest with respect to a Plan. Also,
any holder of Certificates, because of its activities or the activities of its
respective affiliates, may be deemed to be a Party in Interest with respect to
certain Plans, including but not limited to Plans sponsored by such holder. In
either case, the acquisition or holding of Notes by or on behalf of such a
Plan could be considered to give rise to an indirect prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
exemptions such as: Prohibited Transaction Class Exemption ("PTCE") 84-14,
which exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager"; PTCE 90-1, which exempts certain
transactions involving insurance company pooled separate accounts; PTCE 91-38,
which exempts certain transactions involving bank collective investment funds;
PTCE 95-60, which exempts certain transactions involving insurance company
general accounts; or PTCE 96-23, which exempts certain transactions effected
on behalf of a Plan by certain "in-house asset managers." There can be no
assurance that any of these class exemptions will apply with respect to any
particular Plan investment in Notes, or, even if it did apply, that any
exemption would apply to all prohibited transactions that may occur in
connection with such an investment. Each prospective purchaser or transferee
of a Note that is a Plan or a person acting on behalf or investing the assets
of a Plan shall be required to represent (or, with respect to any transfer of
a beneficial interest in a Global Note, shall be deemed to represent) to the
Indenture Trustee and the Note Registrar that the relevant conditions for
exemptive relief under at least one of the foregoing exemptions have been
satisfied.
The Plan Asset Regulation provides that, generally, the assets of a
corporation or partnership in which a Plan invests will not be deemed for
purposes of ERISA to be assets of such Plan if the equity interest acquired by
the investing Plan is a publicly-offered security. A publicly-offered
security, as defined in the Plan Asset Regulation, is a security that is
widely held, freely transferable and registered under the Exchange Act.
If no exception under the Plan Asset Regulation applies, then if a Plan
(or a person investing Plan assets, such as an insurance company general
account) acquires an equity interest in the Trust Fund, then the assets of the
Trust Fund would be considered to be assets of the Plan. Because the Loans
held by the Trust Fund may be deemed Plan assets of each Plan that purchases
Securities, an investment in the Securities by a Plan might be a prohibited
transaction under ERISA Sections 406 and 407 and subject to an excise tax
under Code Section 4975 and may cause transactions undertaken in the course of
operating the Trust Fund to constitute prohibited transactions, unless a
statutory, regulatory or administrative exemption applies.
In Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), the DOL
exempted from ERISA's prohibited transaction rules certain transactions
relating to the operation of residential mortgage pool investment trusts and
the purchase, sale and holding of "mortgage pool pass-through certificates" in
the initial issuance of such certificates. PTCE 83-1 permits, subject to
certain conditions, transactions that might otherwise be prohibited between
Plans and Parties in Interest with respect to those Plans related to the
origination, maintenance and termination of mortgage pools consisting of
mortgage loans secured by first or second mortgages or deeds of trust on
single-family residential property, and the acquisition and holding of certain
mortgage pool pass-through certificates representing an interest in such
mortgage pools by Plans. If the general conditions (discussed below) of PTCE
83-1 are satisfied, investments by a Plan in Securities that represent
interests in a Pool consisting of Loans conforming to these requirements
("Single Family Securities") will be exempt from the prohibitions of ERISA
Sections 406(a) and 407 (relating generally to transactions with Parties in
Interest who are not fiduciaries) if the Plan purchases the Single Family
Securities at no more than fair market value and will be exempt from the
prohibitions of ERISA Sections 406(b)(1) and (2) (relating generally to
transactions with fiduciaries) if, in addition, the purchase is approved by an
independent fiduciary, no sales commission is paid to the pool sponsor, the
Plan does not purchase more than 25% of all Single Family Securities, and at
least 50% of all Single Family Securities are purchased by persons independent
of the pool sponsor or pool trustee. PTCE 83-1 does not provide an exemption
for transactions involving Subordinated Securities. Accordingly, unless
otherwise provided in the related Prospectus Supplement, no transfer of a
Subordinated Security or a Security that is not a Single Family Security may
be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The Depositor believes that, for purposes of PTCE
83-1, the term "mortgage pass-through certificate" would include: (i)
Securities issued in a Series consisting of only a single Class of Securities;
and (ii) senior Securities issued in a Series in which there is only one Class
of senior Securities; provided, that the Securities in the case of clause (i),
or the senior 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 PTCE 83-1.
PTCE 83-1 sets forth three general conditions that must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Holders against reductions in
pass-through payments due to property damage or defaults in loan payments in
an amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount
of the payment retained by the pool sponsor, together with other funds inuring
to its benefit, to not more than adequate consideration for selling the
mortgage loans plus reasonable compensation for services provided by the pool
sponsor to the Pool. The Depositor believes that the first general condition
referred to above will be satisfied with respect to the Securities in a Series
issued without a subordination feature, or the unsubordinated Securities only
in a Series issued with a subordination feature; provided, that the
subordination and Reserve Account, subordination by shifting of interests, the
pool insurance or other form of credit enhancement described herein (such
subordination, pool insurance or other form of credit enhancement being the
system of insurance or other protection referred to above) with respect to a
Series of Securities is maintained in an amount not less than the greater of
one percent of the aggregate Principal Balance of the Loans or the Principal
Balance of the largest Loan. See "Description of the Securities" herein. In
the absence of a ruling that the system of insurance or other protection with
respect to a Series of Securities satisfies the first general condition
referred to above, there can be no assurance that these features will be so
viewed by the DOL. The Trustee will not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTCE 83-1 have been satisfied, or as to the
availability of any other prohibited transaction exemptions. Each Plan
fiduciary should also determine whether, under the general fiduciary standards
of investment prudence and diversification, an investment in the Securities is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio.
The DOL issued to Bear, Stearns & Co. Inc., an individual exemption
(Prohibited Transaction Exemption 90-30; Exemption Application No. D-8207, 55
Fed. Reg. 21461 (1990)) (the "Underwriter Exemption"), which applies to
certain sales and servicing of "certificates" that are obligations of a
"trust" with respect to which Bear, Stearns & Co. Inc. is the underwriter,
manager or co-manager of an underwriting syndicate. The Underwriter Exemption
provides relief generally similar to that provided by PTCE 83-1, but is
broader in several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTCE 83-l. The Underwriter Exemption contains an expanded
definition of "certificate," which includes an interest that entitles the
Holder to pass-through payments of principal, interest and/or other payments.
The Underwriter Exemption contains an expanded definition of "trust," which
permits the trust corpus to consist of secured consumer receivables. The
definition of "trust," however, does not include any investment pool unless,
inter alia, (i) the investment pool consists only of assets of the type that
have been included in other investment pools, (ii) certificates evidencing
interests in such other investment pools have been purchased by investors
other than Plans for at least one year prior to the Plan's acquisition of
certificates pursuant to the Underwriter Exemption and (iii) certificates in
such other investment pools have been rated in one of the three highest
generic rating categories of the four credit rating agencies noted below.
Generally, the Underwriter Exemption holds that the acquisition of the
certificates by a Plan must be on terms (including the price for the
certificates) that are at least as favorable to the Plan as they would be in
an arm's length transaction with an unrelated party. The Underwriter Exemption
requires that the rights and interests evidenced by the certificates not be
"subordinated" to the rights and interests evidenced by other certificates of
the same trust. The Underwriter Exemption requires that certificates acquired
by a Plan have received a rating at the time of their acquisition that is in
one of the three highest generic rating categories of Standard & Poor's, a
division of The McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. (each, a "Rating Agency").
The Underwriter Exemption specifies that the pool trustee must not be an
affiliate of the pool sponsor, nor an affiliate of the Underwriter, any pool
servicer, any pool insurer, 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. The Underwriter Exemption requires that 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 such certificates; the sum of all payments made to and retained
by the seller pursuant to the sale of the loans to the trust represents not
more than the fair market value of such loans; the sum of all payments made to
and retained by each servicer represent not more than reasonable compensation
for the servicer's services under the related servicing agreement and
reimbursement of the servicer's reasonable expenses in connection therewith.
Finally, the Underwriter Exemption stipulates that any Plan investing in the
certificates must be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act.
On July 21, 1997, the DOL published in the Federal Register an amendment
to the Underwriter Exemption, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans or other secured receivables (the "Obligations")
supporting payments to certificateholders, and having a value equal to no more
than twenty-five percent (25%) of the total principal amount of the
certificates being offered by the trust, to be transferred to the trust within
a 90-day or three-month period following the closing date (the "Specified
Funding Period"), instead of requiring that all such Obligations be either
identified or transferred on or before the Closing Date. The relief is
available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to
the total principal amount of the certificates being offered (the
"Specified Funding Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the
"Additional Obligations") must meet the same terms and conditions for
eligibility as the original Obligations used to create the trust, which
terms and conditions have been approved by an Rating Agency.
(3) The transfer of such Additional Obligations to the trust during
the Specified Funding Period must not result in the certificates to be
covered by the Exemption receiving a lower credit rating from an Rating
Agency upon termination of the Specified Funding Period than the rating
that was obtained at the time of the initial issuance of the certificates
by the trust.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the Obligations in the
trust at the end of the Specified Funding Period must not be more than
100 basis points lower than the average interest rate for the Obligations
transferred to the trust on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations which
were transferred to the Trust Fund:
(i) the characteristics of the Additional Obligations must be
monitored by an insurer or other credit support provider that is
independent of the depositor; or
(ii) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to each
Exemption Rating Agency rating the certificates, the related
underwriter and the related trustee) stating whether or not the
characteristics of the Additional Obligations conform to the
characteristics described in the related prospectus or prospectus
supplement and/or pooling and servicing agreement. In preparing such
letter, the independent accountant must use the same type of
procedures as were applicable to the Obligations transferred to the
trust as of the Closing Date.
(6) The period of pre-funding must end no later than three months or
90 days after the Closing Date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the
pooling and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the pre-funding may
be invested only in certain permitted investments ("Permitted
Investments").
(8) The related prospectus or prospectus supplement must
describe:
(i) any pre-funding account and/or capitalized interest account
used in connection with a pre-funding account;
(ii) the duration of the period of pre-funding;
(iii) the percentage and/or dollar amount of the Specified
Funding Limit for the trust; and
(iv) that the amounts remaining in the pre-funding account at
the end of the Specified Funding Period will be remitted to
certificateholders as repayments of principal.
(9) The related pooling and servicing agreement must describe the
Permitted Investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
Additional Obligations.
Neither PTCE 83-1 nor the Underwriter Exemption applies to a trust which
contains unsecured obligations.
Any Plan fiduciary that proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of PTCE 83-1 and the Underwriter Exemption, and the
potential consequences in their specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL MATTERS
The legality of the Securities of each Series, including certain material
federal income tax consequences with respect thereto, will be passed upon for
the Depositor by Brown & Wood LLP, One World Trade Center, New York, New York
10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed 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
the related Class and will reflect such Rating Agency's assessment solely of
the likelihood that the related Holders will receive payments to which such
Holders are entitled under the related Agreement. Such rating will not
constitute an assessment of the likelihood that principal prepayments on the
related Loans will be made, the degree to which the rate of such prepayments
might differ from that originally anticipated or the likelihood of early
optional termination of the Series of Securities. Such rating should not be
deemed a recommendation to purchase, hold or sell Securities, inasmuch as it
does not address market price or suitability for a particular investor. Such
rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely
by the Rating Agencies in the future if in their judgment circumstances so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn because
of, among other reasons, an adverse change in the financial or other condition
of a credit enhancement provider or a change in the rating of such credit
enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating Classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such Class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future
experience nor any assurance that the data derived from a large pool of
mortgage loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of Loans. No assurance can be given that
values of any Properties have remained or will remain at their levels on the
respective dates of origination of the related Loans. If the residential real
estate markets should experience an overall decline in property values such
that the Principal Balances of the Loans in a particular Trust Fund and any
secondary financing on the related Properties become equal to or greater than
the value of such Properties, the rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry. In additional, adverse economic conditions (which may or may
not affect real property values) may affect the timely payment by mortgagors
of scheduled payments of principal of and interest on the Loans and,
accordingly, the rates of delinquencies, foreclosures and losses with respect
to any Trust Fund. To the extent that such losses are not covered by credit
enhancement, such losses will be borne, at least in part, by the Holders of
one or more Classes of the Securities of the related Series.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage-related securities" within the
meaning of SMMEA. Accordingly, investors whose investment authority is subject
to legal restrictions should consult their own legal advisors to determine
whether and to what extent the Securities constitute legal investments for
them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Bear, Stearns &
Co. Inc. ("Bear Stearns") or one or more other firms that may be designated at
the time of each offering of such Securities. The participation of Bear
Stearns in any offering will comply with Schedule E to the By-Laws of the
National Association of Securities Dealers, Inc. The Prospectus Supplement
relating to each Series of Securities will set forth the specific terms of the
offering of such Series of Securities and of each Class within such Series,
the names of the underwriters, the purchase price of the Securities, the
proceeds to the Depositor from such sale, any securities exchange on which the
Securities may be listed, and, if applicable, the initial public offering
prices, the discounts and commissions to the underwriters and any discounts
and concessions allowed or reallowed to certain dealers. The place and time of
delivery of each Series of Securities will also be set forth in the Prospectus
Supplement relating to such Series. Bear Stearns is an affiliate of the
Depositor.
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. Unless otherwise provided in a "Supplemental
Glossary" in the Prospectus Supplement for a Series, such definitions shall
apply to capitalized terms used in such Prospectus Supplement. The definitions
may vary from those in the related Agreement for a Series and the related
Agreement for a Series generally provides a more complete definition of
certain of the terms. Reference should be made to the related Agreement for a
Series for a more complete definition of such terms.
"Advance" means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Loan, and for any other purposes
specified in the related Prospectus Supplement.
"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.
"Asset Group" means, with respect to the Primary Assets and other assets
comprising the Trust Fund of a Series, a group of such Primary Assets and
other assets having the characteristics described in the related Prospectus
Supplement.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States
Code 101 et seq., and related rules and regulations promulgated thereunder.
"Business Day" means a day that, in the City of New York or in the city
or cities in which the corporate trust office of the applicable Trustee is
located, is neither a legal holiday nor a day on which banking institutions
are authorized or obligated by law, regulations or executive order to be
closed.
"Closing Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series
are first issued.
"Combined Loan-to-Value Ratio" means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement taking into
account the amounts of any related senior mortgage loans on the related
Mortgaged Property.
"Compound Interest Security" means any Security of a Series on which all
or a portion of the interest accrued thereon is added to the principal balance
of such Security on each Distribution Date, through the Accrual Termination
Date, and with respect to which no interest shall be payable until such
Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"Condominium" means a form of ownership of real property wherein each
owner is entitled to the exclusive ownership and possession of his or her
individual Condominium Unit and also owns a proportionate undivided interest
in all parts of the Condominium Building (other than the individual
Condominium Units) and all areas or facilities, if any, for the common use of
the Condominium Units.
"Condominium Building" means a multi-unit building or buildings, or a
group of buildings whether or not attached to each other, located on property
subject to Condominium ownership.
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Cooperative" means a corporation owned by tenant-stockholders who,
through the ownership of stock, shares or membership securities in the
corporation, receives proprietary leases or occupancy agreements that confer
exclusive rights to occupy specific units and that is described in Section 216
of the Code.
"Cooperative Dwelling" means an individual housing unit in a building
owned by a Cooperative.
"Cut-off Date" means the date designated as such in the related
Prospectus Supplement for a Series.
"Deferred Interest" means the excess of the interest accrued on the
Principal Balance of a Loan during a specified period over the amount of
interest required to be paid by an obligor on such Loan on the related Due
Date.
"Deposit Agreement" means a guaranteed investment contract or
reinvestment agreement providing for the investment of funds held in a fund or
account, guaranteeing a minimum or a fixed rate of return on the investment of
moneys deposited therein.
"Disqualified Organization" means the United States, any State or
political subdivision thereof, any possession of the United States, 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.
"Distribution Date" means, with respect to a Series or Class of
Securities, each date specified as a distribution date for such Series or
Class in the related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Default" means an event of default under and as specified in
the related Agreement.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of
Notes of a Series, the date no later than which principal thereof will be
fully paid and with respect to a Class of Certificates of a Series, the date
after which no Certificates of such Class will remain outstanding, in each
case based on the assumptions set forth in the related Prospectus Supplement.
"Holder" means the person or entity in whose name a Security is
registered.
"Insurance Policies" means certain mortgage insurance, hazard insurance
and other insurance policies maintained with respect to the Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled solely or
primarily to distributions of interest and that is identified as such in the
related Prospectus Supplement.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Loan.
"Loan Rate" means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
"Loan-to-Value Ratio" means, with respect to a Loan, the ratio determined
as set forth in the related Prospectus Supplement.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note, as the context may require.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
"Mortgaged Property" means the related property subject to a Mortgage.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
"PAC" ("Planned Amortization Class Securities") means a Class of
Securities of a Series on which payments of principal are made in accordance
with a schedule specified in the related Prospectus Supplement, based on
certain assumptions stated therein.
"Participating Securities" means Securities entitled to receive payments
of principal and interest and an additional return on investment as described
in the related Prospectus Supplement.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Primary Assets" means the Private Securities and/or Loans, as the case
may be, that are included in the Trust Fund for such Series. A Primary Asset
refers to a specific Private Security or Loan, as the case may be.
"Principal Balance" means, with respect to a Primary Asset and as of a
Due Date, the original principal amount of the Primary Asset, plus the amount
of any Deferred Interest added to such principal amount, reduced by all
payments, both scheduled or otherwise, received on such Primary Asset prior to
such Due Date and applied to principal in accordance with the terms of the
Primary Asset.
"Principal Only Securities" means a Class of Securities entitled solely
or primarily to distributions of principal and identified as such in the
Prospectus Supplement.
"Private Security" means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
"Property" means either a Home Improvement or a Mortgaged Property
securing a Loan, as the context requires.
"Regular Interest" means a regular interest in a REMIC.
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to
serve as administrator of the Series.
"REO Property" means real property that secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the amount or
percentage specified in the related Prospectus Supplement that is not included
in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and
interest to be made by the borrower on a Primary Asset.
"Senior Securities" means a Class of Securities as to which the Holders'
rights to receive distributions of principal and interest are senior to the
rights of Subordinated Securityholders, to the extent specified in the related
Prospectus Supplement.
"Series" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
"Servicer" means, with respect to a Series relating to Loans, the Person
if any, designated in the related Prospectus Supplement to service Loans for
that Series, or the successors or assigns of such Person.
"Single Family Property" means property securing a Loan consisting of
one- to four-family attached or detached residential housing, including
Cooperative Dwellings.
"Stripped Securities" means Pass-Through Securities representing
interests in Primary Assets with respect to which all or a portion of the
principal payments have been separated from all or a portion of the interest
payments.
"Subordinated Securityholder" means a Holder of a Subordinated Security.
"Subordinated Securities" means a Class of Securities as to which the
rights of Holders to receive distributions of principal, interest or both is
subordinated to the rights of Holders of Senior Securities, and may be
allocated losses and shortfalls prior to the allocation thereof to other
Classes of Securities, to the extent and under the circumstances specified in
the related Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement, and its
successors.
"Trust Fund" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, held, with respect to a Series of Certificates, for the
benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement or, with respect to a Series of Notes, pledged to
the Indenture Trustee as security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), all amounts in
the Distribution Account(s), Collection Account or Reserve Funds,
distributions on the Primary Assets (net of servicing fees), and reinvestment
earnings on such net distributions and any Enhancement and all other property
and interest held by or pledged to the Trustee pursuant to the related
Agreement for such Series.
"Variable Interest Security" means a Security on which interest accrues
at a rate that is adjusted, based upon a predetermined index, at fixed
periodic intervals, all as set forth in the related Prospectus Supplement.
"Zero Coupon Security" means a Security entitled to receive payments of
principal only.