PROSPECTUS SUPPLEMENT
(To Prospectus dated September 15, 1999)
LOGO
$179,119,000 (Approximate)
C-BASS Mortgage Loan Asset-Backed Certificates,
Series 1999-CB5
$120,539,000 Class A-1 7.47% Pass-Through Rate
$58,580,000 Class A-2 Variable Pass-Through Rate
FINANCIAL ASSET SECURITIES CORP.
Depositor
_____________
CREDIT-BASED ASSET SERVICING AND SECURITIZATION LLC
Seller
______________
LITTON LOAN SERVICING LP
Servicer
______________
Consider carefully the risk factors beginning on page S-10 in this
prospectus supplement and on page 4 in the prospectus. The certificates
represent obligations of the trust only and do not represent an interest in or
obligation of Financial Asset Securities Corp., Credit-Based Asset Servicing
and Securitization LLC or any of their affiliates. This prospectus supplement
may be used to offer and sell the certificates only if accompanied by the
prospectus.
Only the classes of certificates identified above are being offered by
this prospectus supplement and the accompanying prospectus.
The Certificates
o Represent ownership interests in a trust consisting primarily of a pool of
first lien and second lien residential mortgage loans. The mortgage loans
will be segregated into two groups, one consisting of fixed-rate mortgage
loans with conforming balances and one consisting of fixed-rate
non-conforming mortgage loans and adjustable-rate mortgage loans.
o The Class A-2 Certificates will accrue interest at a rate equal to
one-month LIBOR plus a fixed margin, subject to a cap.
[MBIA logo]
Credit Enhancement
o MBIA Insurance Corporation will issue a certificate guaranty insurance
policy guaranteeing payments on the Class A-1 and Class A-2 Certificates.
o Overcollateralization - The aggregate principal balance of the mortgage
loans will exceed the aggregate principal balance of the certificates.
Certain excess interest received from the mortgage loans in the trust will
be applied as payments of principal on the Class A Certificates to
maintain a required level of overcollateralization.
o Crosscollateralization - Certain funds received on the mortgage loans in
one mortgage loan group may be available to pay the certificates related
to the other mortgage loan group.
o Approximately 13.28% of the mortgage loans by aggregate principal balance
will be covered by either insurance from the Federal Housing
Administration or a guaranty by the United States Department of Veterans
Affairs.
Neither the SEC nor any state securities commission has approved these
securities or determined that this prospectus supplement or the prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
The Class A-1 and Class A-2 Certificates are being offered by Greenwich Capital
Markets, Inc. and First Union Securities, Inc. from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the depositor with respect to the Class A-1 and Class A-2
Certificates are expected to be approximately $178,581,643 plus interest
accrued on the Class A-1 Certificates, before deducting issuance expenses,
estimated to be $550,000. See "Method of Distribution" in this prospectus
supplement.
Delivery of the Class A Certificates will be made in book-entry form through
the facilities of The Depository Trust Company, Cedelbank and the Euroclear
System on or about November 23, 1999.
------------------------------------
[Greenwich logo] [First Union logo]
November 22, 1999
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
Summary of Terms............................S-3
Risk Factors................................S-10
The Certificate Insurer.....................S-19
The Mortgage Pool...........................S-21
The Seller..................................S-54
The Servicer................................S-56
The Pooling and Servicing
Agreement.................................S-58
Description of the Certificates.............S-65
Yield, Prepayment and Maturity
Considerations............................S-79
Use of Proceeds.............................S-86
Certain Material Federal Income
Tax Consequences..........................S-86
State Taxes.................................S-89
ERISA Considerations........................S-89
Legal Investment Considerations.............S-91
Experts.....................................S-91
Method of Distribution......................S-91
Legal Matters...............................S-92
Ratings.....................................S-92
Index of Defined Terms......................S-93
PROSPECTUS
Page
Risk Factors................................4
The Trust Fund..............................10
Use of Proceeds.............................15
The Depositor...............................15
Loan Program................................16
Description of The
Securities ..............................18
Credit Enhancement..........................27
Yield and Prepayment
Considerations...........................32
The Agreements..............................35
Certain Legal Aspects
of the Loans.............................47
Certain Material Federal Income
Tax Considerations.......................58
State Tax Considerations....................79
ERISA Considerations........................80
Legal Investment............................83
Method of Distribution......................84
Legal Matters...............................85
Financial Information.......................85
Available Information.......................86
Rating......................................86
Index of Defined Terms......................88
SUMMARY OF TERMS
o This summary highlights selected information from this document and
does not contain all of the information that you need to consider in
making your investment decision. To understand all of the terms of an
offering of the certificates, read carefully this entire document and the
accompanying prospectus.
o This summary provides an overview of certain calculations, cash flow
priorities and other information to aid your understanding and is
qualified by the full description of these calculations, cash flow
priorities and other information in this prospectus supplement and the
accompanying prospectus. Some of the information consists of
forward-looking statements relating to future economic performance or
projections and other financial items. Forward-looking statements are
subject to a variety of risks and uncertainties that could cause actual
results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and business
conditions, regulatory initiatives and compliance with governmental
regulations, and various other matters, all of which are beyond our
control. Accordingly, what actually happens may be very different from
what we predict in our forward-looking statements.
Class A Certificates
On the closing date, the trust will issue four classes of certificates, two of
which are being offered pursuant to this prospectus supplement and the
accompanying prospectus. The assets of the trust will consist of a pool of
2,207 fixed-rate and adjustable-rate mortgage loans with an aggregate principal
balance of approximately $190,917,477 as of November 1, 1999.
The Class A-1 and Class A-2 Certificates will be book-entry securities clearing
through The Depository Trust Company (in the United States) or Cedelbank and
the Euroclear System (in Europe) in minimum denominations of $50,000.
Other Certificates
The trust will issue additional classes of certificates - the Class X and Class
R Certificates - that are not being offered to the public pursuant to this
prospectus supplement and the prospectus. The Class X and Class R Certificates
will not have original principal balances.
Cut-off Date
November 1, 1999.
Closing Date
On or about November 23, 1999.
The Depositor
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700.
Seller
Credit-Based Asset Servicing and Securitization LLC.
We refer you to "The Seller" in this prospectus supplement for additional
information.
Servicer
Litton Loan Servicing LP, an affiliate of the Seller.
We refer you to "The Servicer" in this prospectus supplement for additional
information.
Trustee
The Bank of New York.
We refer you to "The Pooling and Servicing Agreement--The Trustee" in this
prospectus supplement for additional information.
Certificate Insurer
MBIA Insurance Corporation.
We refer you to "The Certificate Insurer" in this prospectus supplement for
additional information.
Designations
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
o Class A Certificates
Class A-1 and Class A-2 Certificates.
o Group 1 Certificates
Class A-1 Certificates. Except under the circumstances described herein under
"Description of the Certificates - Allocation of Available Funds", the Class
A-1 Certificates receive their distributions from Loan Group 1.
o Group 2 Certificates
Class A-2 Certificates. Except under the circumstances described herein under
"Description of the Certificates - Allocation of Available Funds", the Class
A-2 Certificates receive their distributions from Loan Group 2.
o Senior Certificates
Class A Certificates.
o Residual Certificates
Class R Certificates.
o Book-Entry Certificates
Class A Certificates.
o Physical Certificates
Class X and Class R Certificates.
o Loan Group 1
Fixed-rate mortgage loans with conforming balances.
o Loan Group 2
Fixed-rate non-conforming mortgage loans and adjustable-rate mortgage loans.
Loan Group 2 will be divided into two subgroups - Sub-Group 2A and Sub-Group
2B.
o Sub-Group 2A
The fixed-rate Loan Group 2 mortgage loans.
o Sub-Group 2B
The adjustable rate Loan Group 2 mortgage loans.
Mortgage Loans
On the Closing Date the trust will acquire a pool of mortgage loans. Loan Group
1 consists of 1,741 mortgage loans with an aggregate outstanding principal
balance as of the Cut-off Date of approximately $127,554,028. Loan Group 2
consists of 466 mortgage loans with an aggregate outstanding principal balance
as of the Cut-off Date of approximately $63,363,449.
Loan Group 1 will consist of fixed-rate mortgage loans with the following
characteristics as of the Cut-off Date:
Loans With Prepayment
Penalties(1): 34.67%
Range of Remaining Term to Stated
Maturities(1): 13 to 360 months
Weighted Average Remaining Term
to Stated Maturity(1): 313 months
Range of Original Principal
Balances(1): $10,000 to $318,750
Average Original Principal
Balance(1): $74,691
Range of Outstanding Principal
Balances(1): $1,321 to $317,809
Average Outstanding Principal
Balance(1): $73,265
Range of Loan Rates(1): 5.00% to 16.99%
Weighted Average Loan Rate(1): 9.56%
Weighted Average Net Loan Rate(1): 8.87%
Geographic Concentrations in
Excess of 5%(1):
New York 19.67%
California 14.64%
Texas 10.16%
Florida 7.62%
- --------------
(1) Approximate
Loan Group 2 will consist of two sub-groups with the following aggregate
characteristics:
Loans With Prepayment
Penalties(1): 30.04%
Range of Remaining Term to Stated
Maturities(1): 22 to 360 months
Weighted Average Remaining Term
to Stated Maturity (1): 323 months
Range of Original Principal
Balances(1): $19,800 to
$575,000
Average Original Principal
Balance(1): $139,636
Range of Outstanding Principal
Balances(1): $3,533 to $575,000
Average Outstanding Principal
Balance(1): $135,973
Current Range of Loan Rates(1): 5.00% to 16.13%
Current Weighted Average Loan 9.76%
Rate(1):
Current Weighted Average Net Loan 9.22%
Rate(1):
Weighted Average Gross Margin(1): 6.09%
Weighted Average Maximum Loan 16.47%
Rate(1):
Weighted Average Minimum Loan 9.70%
Rate(1):
Weighted Average Initial Rate 2.34%
Adjustment Cap(1):
Weighted Average Periodic Rate 1.25%
Adjustment Cap(1):
Weighted Average Time Until Next
Adjustment Date(1): 13 months
Loans With Negative 0.05%
Amortization(1):
Geographic Concentrations in
Excess of 5%(1):
California 34.72%
New York 15.53%
New Jersey 6.97%
Illinois 5.36%
- --------------
(1) Approximate
Sub-Group 2A will consist of fixed-rate mortgage loans with an aggregate
outstanding balance of $31,245,678 with the following characteristics as of the
Cut-off Date:
Loans With Prepayment 13.52%
Penalties(1):
Range of Remaining Term to Stated
Maturities(1): 157 to 360 months
Weighted Average Remaining Term
to Stated Maturity(1): 314 months
Range of Original Principal
Balances(1): $30,600 to $575,000
Average Original Principal
Balance(1): $235,135
Range of Outstanding Principal
Balances(1): $29,884 to $575,000
Average Outstanding Principal
Balance(1): $226,418
Range of Loan Rates(1): 6.75% to 14.99%
Weighted Average Loan Rate(1): 8.95%
Weighted Average Net Loan Rate(1): 8.38%
Geographic Concentrations in
Excess of 5%(1):
California 45.96%
New York 25.62%
New Jersey 6.23%
- --------------
(1) Approximate
Sub-Group 2B will consist of adjustable-rate mortgage loans with an aggregate
outstanding principal balance of $32,117,771 with the following characteristics
as of the Cut-off Date:
Loans With Prepayment 46.10%
Penalties(1):
Range of Remaining Term to Stated
Maturities(1): 22 to 357 months
Weighted Average Remaining Term
to Stated Maturity (1): 332 months
Range of Original Principal
Balances(1): $19,800 to $400,000
Average Original Principal
Balance(1): $99,456
Range of Outstanding Principal
Balances(1): $3,533 to $398,134
Average Outstanding Principal
Balance(1): $97,920
Current Range of Loan Rates(1): 5.00% to 16.13%
Current Weighted Average Loan 10.54%
Rate(1):
Current Weighted Average Net Loan 10.04%
Rate(1):
Weighted Average Gross Margin(1): 6.09%
Weighted Average Maximum Loan 16.47%
Rate(1):
Weighted Average Minimum Loan 9.70%
Rate(1):
Weighted Average Initial Rate 2.34%
Adjustment Cap(1):
Weighted Average Periodic Rate 1.25%
Adjustment Cap(1):
Weighted Average Time Until Next
Adjustment Date(1): 13 months
Loans With Negative 0.09%
Amortization(1):
Geographic Concentrations in
Excess of 5%(1):
California 23.78%
Illinois 8.98%
New Jersey 7.69%
Michigan 5.93%
New York 5.70%
- --------------
(1) Approximate
Distribution Dates
The Trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in December 1999. If the 25th day of a month is not a
business day, then the distribution will be made on the next business day.
Distributions on the Class A-1 Certificates will be made to the holder of
record as of the last day of the month prior to the Distribution Date.
Distributions on the Class A-2 Certificates will be made to the holder of
record as of the day preceding such date of distribution.
Payments on the Certificates
Interest Payments
The pass-through rate for the Class A-1 and Class A-2 Certificates will be the
per annum rates specified below:
Class A-1 7.47%
Class A-2 One-Month LIBOR + 45 basis points
The Class A-2 pass-through rate is subject to a cap based on the weighted
average of the net mortgage rates of the group 2 mortgage loans.
In addition, if the Seller and the Certificate Insurer each fail to exercise
their option to terminate the trust as described below under "Optional
Termination", the pass-through rates on the Class A Certificates will be the
per annum percentages indicated below:
Class A-1 7.97%
Class A-2 One-Month LIBOR + 90 basis points
Interest payable on the certificates accrues during an accrual period. The
accrual period for the Class A-1 Certificates is the prior calendar month.
Except for the first accrual period, the accrual period for the Class A-2
Certificates is the period from the distribution date in the prior month to the
day prior to the current distribution date. The first accrual period, with
respect to the Class A-2 Certificates, will begin on the Closing Date and end
on December 26, 1999. Interest will be calculated for the Class A-1
Certificates on the basis of a 360-day year consisting of twelve 30-day months.
Interest will be calculated for the Class A-2 Certificates on the basis of the
actual number of days in the accrual period, based on a 360-day year.
Principal Payments
Principal will be distributed to the Class A Certificates on each
Distribution Date in the amounts described herein under "Description of the
Certificates -Allocation of Available Funds."
Payment Priorities
o Class A-1 Certificates
In general, on any distribution date, funds available for distribution from
payments and other amounts received on the mortgage loans in Loan Group 1 will
be distributed in the following order:
first, to interest on the Class A-1 Certificates; and
second, to principal on the Class A-1 Certificates.
o Class A-2 Certificates
In general, on any distribution date, funds available for distribution from
payments and other amounts received on the mortgage loans in Loan Group 2 will
be distributed in the following order:
first, to interest on the Class A-2 Certificates; and
second, to principal on the Class A-2 Certificates.
In certain limited circumstances described herein, payments on the mortgage
loans in one Loan Group may be used to make certain distributions to the Class
A Certificates relating to the other Loan Group.
We refer you to "Description of the Certificates" in this prospectus supplement
for additional information.
Advances
The Servicer will make cash advances with respect to delinquent payments of
principal and interest to the extent the Servicer reasonably believes that the
cash advances are recoverable from future payments on the related mortgage
loans. The Servicer is entitled to be reimbursed for any such advances.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the certificates and are not intended to guarantee or
insure against losses.
We refer you to "The Pooling and Servicing Agreement--Advances" in this
prospectus supplement for additional information.
Optional Termination
The Seller or the Certificate Insurer may purchase all of the mortgage loans
and retire the certificates when the current principal balance of the mortgage
loans in the trust is less than 10% of the principal balance of the mortgage
loans in the trust as of the Cut-off Date.
We refer you to "The Pooling and Servicing Agreement --Termination."
Credit Enhancement
1. The Policy
The policy will guaranty the ultimate payment of principal and timely payment
of interest on the Class A Certificates. If the Certificate Insurer were unable
to pay under the policy, the Class A Certificates could be subject to losses.
We refer you to "The Certificate Insurer" in this prospectus supplement for
additional information.
2. Overcollateralization
Each Class of Class A Certificates is overcollateralized as of the Closing
Date. This means that on the Closing Date, the aggregate principal balance of
the mortgage loans in Loan Group 1 is expected to exceed the aggregate
principal balance of the Class A-1 Certificates by 5.50% and the aggregate
principal balance of the mortgage loans in Loan Group 2 is expected to exceed
the aggregate principal balance of the Class A-2 Certificates by 7.55%. The
overcollateralization will be available to absorb losses on the mortgage loans
in the related loan group. Excess interest collections will be used to pay
principal on the certificates to maintain the level of overcollateralization at
required levels. The required level of overcollateralization may increase or
decrease over time. We cannot assure you that sufficient excess interest
collections will be generated by the mortgage loans to maintain the required
level of overcollateralization.
We refer you to "Description of the Certificates--Overcollateralization" in
this prospectus supplement for additional information.
3. Crosscollateralization
Funds available with respect to one loan group may be used to make certain
distributions to the Class A Certificates relating to the other loan group.
We refer you to "Description of the Certificates--Crosscollateralization" in
this prospectus supplement for additional information.
Ratings
It is a condition of
the issuance of the Class A Certificates that they be assigned the following
ratings by Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. ("S&P"), Moody's Investors Service, Inc. ("Moody's") and Duff &
Phelps Credit Rating Co. ("DCR"):
S&P Moody's DCR
Class Rating Rating Rating
A-1 AAA Aaa AAA
A-2 AAA Aaa AAA
A rating is not a recommendation to buy, sell or hold securities. These ratings
may be lowered or withdrawn at any time by either of the rating agencies.
We refer you to "Ratings" in this prospectus supplement for additional
information.
Tax Status
In the opinion of Brown & Wood llp, for federal income tax purposes the trust,
exclusive of the assets held in the excess reserve fund account, will comprise
several "real estate mortgage investment conduits" ("REMICs") organized in a
tiered REMIC structure. Certain classes of certificates that are designated as
the regular certificates will constitute "regular interests" in the Master
REMIC. The Class R Certificates will represent the sole class of "residual
interests" in the Master REMIC and the sole class of residual interests in each
subsidiary REMIC.
The Class A-2 Certificates will also represent the right to receive payments
from an excess
reserve fund account. This excess reserve fund account will be treated as an
"outside reserve fund" and the right to receive payments from such account will
be treated as an interest rate cap agreement for federal income tax purposes.
Beneficial owners of the Class A-2 Certificates will be treated for federal
income tax purposes as having purchased an undivided beneficial interest in a
regular interest in the Master REMIC and as having acquired rights under an
interest rate cap agreement, both to the extent of the owner's proportionate
interest in the Class A-2 Certificates, as applicable. A certificateholder
generally will recognize ordinary income equal to such certificateholder's
proportionate share of interest and original issue discount, if any, accrued on
the Class A-2 Certificates and beneficial owners of such Certificates will take
into account a proportionate share of any payments received under the interest
rate cap agreement. A certificateholder's income derived from payments received
under the interest rate cap agreement generally must be accounted for under the
notional principal contract regulations.
See "Certain Material Federal Income Tax Consequences" in this prospectus
supplement and "Certain Material Federal Income Tax Considerations" in the
prospectus.
ERISA Considerations
It is expected that the Class A Certificates may be purchased by a pension or
other
employee benefit plan subject to the Employee Retirement Income Security Act of
1974 or Section 4975 of the Internal Revenue Code of 1986, so long as certain
conditions are met. A fiduciary of an employee benefit plan must determine that
the purchase of a certificate is consistent with its fiduciary duties under
applicable law and does not result in a nonexempt prohibited transaction under
applicable law.
See "ERISA Considerations" in this prospectus supplement and in
the prospectus.
Legal Investment
The Class A Certificates will not be "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 because each of Loan Group 1 and Loan Group 2 have second lien
mortgage loans and mortgage loans that were originated by individuals and not
by financial institutions or mortgagees approved by the Secretary of Housing
and Urban Development.
See "Legal Investment Considerations" in this prospectus
supplement and "Legal Investment" in the prospectus.
RISK FACTORS
The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the
certificates. You should also carefully consider the information set forth
under "Risk Factors" in the prospectus.
Unpredictability of Prepayments and Effect on Yields
Borrowers may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which borrowers will repay their mortgage
loans. A prepayment of a mortgage loan generally will result in a prepayment on
the certificates.
o If you purchase your certificates at a discount and
principal is repaid slower than you anticipate, then your
yield may be lower than you anticipate.
o If you purchase your certificates at a premium and
principal is repaid faster than you anticipate, then your
yield may be lower than you anticipate. o The rate of
prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if prevailing
interest rates decline significantly below the interest
rates on the fixed-rate mortgage loans, those mortgage
loans are more likely to prepay than if prevailing rates
remain above the interest rates on such mortgage loans. In
addition, if interest rates decline, adjustable-rate
mortgage loan prepayments may increase due to the
availability of fixed-rate mortgage loans at lower interest
rates. Conversely, if prevailing interest rates rise
significantly, the prepayments on fixed-rate and
adjustable-rate mortgage loans are likely to decrease.
o Approximately 33.13% of the mortgage loans (by aggregate
principal balance as of the Cut-off Date) in the mortgage
pool require the mortgagor to pay a penalty if the
mortgagor prepays the mortgage loan during periods up to
five years after the mortgage loan was originated. A
prepayment penalty may discourage a mortgagor from
prepaying the mortgage loan during the applicable period.
The holder of the Class X Certificates will be entitled to
all prepayment penalties received on the Mortgage Loans,
and such amounts will not be available for distribution on
the Class A Certificates. Under certain circumstances, as
described in the pooling and servicing agreement, the
Servicer may waive the payment of any otherwise applicable
prepayment penalty. You should conduct your own analysis of
the effect, if any, that the prepayment penalties, and
decisions by the Servicer with respect to the waiver of
such penalties, may have on the prepayment performance of
the mortgage loans.
o The Seller may be required to purchase mortgage loans from
the trust in the event certain breaches of representations
and warranties have not been cured. In addition, the Seller
has the option to purchase mortgage loans that become sixty
days or more delinquent. These purchases will have the same
effect on the holders of the Class A Certificates as a
prepayment of the mortgage loans.
o If the rate of default and the amount of losses on the
mortgage loans is higher than you expect, then your yield
may be lower than you expect.
See "Yield, Prepayment and Maturity Considerations" for a description
of factors that may influence the rate and timing of prepayments on the
mortgage loans.
Balloon Loan Risk
Balloon loans pose a risk because a borrower must make a large lump
sum payment of principal at the end of the loan term. If the borrower is unable
to pay the lump sum or refinance such amount, you will suffer a loss if the
Certificate Insurer fails to perform its obligations under the policy.
Approximately 3.39% of the mortgage loans in Loan Group 1 and approximately
2.42% of the mortgage loans in Loan Group 2 are balloon loans (by aggregate
principal balance of the related Loan Group as of the Cut-off Date).
Potential Inadequacy of Credit Enhancement for the Class A Certificates
The credit enhancement features described in the summary are intended
to enhance the likelihood that holders of the Class A Certificates will receive
regular payments of interest and principal.
If delinquencies or defaults occur on the mortgage loans, neither the
Servicer nor any other entity will advance scheduled monthly payments of
interest and principal on delinquent or defaulted mortgage loans if such
advances are not likely to be recovered. We cannot assure you that the
applicable credit enhancement will adequately cover any shortfalls in cash
available to pay your certificates as a result of such delinquencies or
defaults.
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, and the Certificate Insurer were unable to pay
under the certificate guaranty insurance policy, you may suffer losses.
Interest Payments May Be Insufficient to Maintain Overcollateralization
Because the weighted average of the interest rates on the mortgage
loans in each loan group is expected to be higher than the interest rates on
the related Class A Certificates, the mortgage loans are expected to generate
more interest than is needed to pay interest owed on the related class of Class
A Certificates as well as certain fees and expenses of the trust. After certain
expenses of the trust are paid, the available excess interest will be used to
maintain the level of overcollateralization established on the closing date. We
cannot assure you, however, that enough excess interest will be generated to
maintain the overcollateralization level required by the pooling and servicing
agreement. The factors described below will affect the amount of excess
interest that the mortgage loans will generate:
o Every time a mortgage loan is prepaid in full, excess
interest may be reduced because the mortgage loan will no
longer be outstanding and generating interest or, in the
case of a partial prepayment, will be generating less
interest.
o Every time a mortgage loan is liquidated or written off,
excess interest will be reduced because such mortgage loans
will no longer be outstanding and generating interest. o If
the rates of delinquencies, defaults or losses on the
mortgage loans turn out to be higher than expected, excess
interest will be reduced by the amount necessary to
compensate for any shortfalls in cash available on such
date to pay certificateholders.
o Certain of the mortgage loans have rates that are fixed or
that adjust based on an index that is different from the
index used to determine rates on the Class A-2
Certificates. As a result, the interest rate on the Class
A-2 Certificates may increase relative to interest rates on
the mortgage loans in Loan Group 2, requiring that more of
the interest generated by the mortgage loans in Loan Group
2 be applied to cover interest on the Class A-2
Certificates.
Rating of the Class A Certificates Based Primarily on Claims-Paying Ability of
the Certificate Insurer
The ratings on the Class A Certificates depend primarily on the claims
paying ability of the Certificate Insurer. Therefore, a reduction of the rating
assigned to the claims paying ability of the Certificate Insurer may have a
corresponding reduction on the ratings assigned to the Class A Certificates. In
general, the ratings address credit risk and do not address the likelihood of
prepayments.
Effect of Mortgage Loan Rates May Adversely Impact Yield on the Class A-2
Certificates
The Class A-2 Certificates accrue interest at pass-through rates based
on the one-month LIBOR index plus a specified margin, but are subject to a cap.
The cap on interest paid on the Class A-2 Certificates is based on the weighted
average of the interest rates on the mortgage loans in Loan Group 2 net of
certain trust expenses. The mortgage loans in Loan Group 2 have interest rates
that are fixed or that are based on various indices. Substantially all of the
adjustable-rate mortgage loans have periodic and maximum limitations on
adjustments to the mortgage loan rate. As a result, the Class A-2 Certificates
may accrue less interest than they would accrue if their rates were based
solely on the one-month LIBOR index plus the specified margin.
A variety of factors could limit the pass-through rate on the Class
A-2 Certificates adversely affecting the yield on the Class A-2 Certificates.
Some of these factors are described below:
o The pass-through rate on the Class A-2 Certificates adjusts
monthly while the loan rates on the adjustable-rate
mortgage loans adjust less frequently. Consequently, the
cap on the certificates may limit increases in the
pass-through rate for extended periods in a rising interest
rate environment.
o The loan rates on the adjustable-rate mortgage loans may
respond to different economic and market factors than
one-month LIBOR. It is possible that interest rates on
certain of the adjustable-rate mortgage loans may decline
while the pass-through rate on the Class A-2 Certificates
is stable or rising. It is also possible that interest
rates on the adjustable-rate mortgage loans in Loan Group 2
and the pass-through rate on the Class A-2 Certificates may
decline or increase during the same period, but that the
pass-through rate on the Class A-2 Certificates may decline
more slowly or increase more rapidly.
There are Risks Relating to Subordinate Loans
Approximately 1.52% of the mortgage loans in Loan Group 1 and
approximately 0.48% of the mortgage loans in Loan Group 2 (by aggregate
principal balance of the related Loan Group as of the Cut-off Date) evidence a
second lien that is subordinate to the rights of the mortgagee under a first
mortgage. The proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the outstanding principal balance of
such junior mortgage loans only to the extent that the claims of such senior
mortgage loans have been satisfied in full, including any foreclosure costs. In
circumstances where 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 as bad debt.
The foregoing considerations will be particularly applicable to junior mortgage
loans that have high combined loan-to-value ratios because in such cases, the
Servicer is more likely to determine that foreclosure would be uneconomical.
You should consider the risk that to the extent losses on mortgage loans are
not covered by available credit enhancement, such losses will be borne by the
holders of the certificates.
Interest Payments May be Insufficient To Pay Interest on the Certificates
When a mortgage loan is prepaid in full, the borrower is charged
interest only up to the date on which payment is made, rather than for an
entire month, and the amount of such prepayment is remitted in the month
following the calendar month of receipt. This may result in a shortfall in
interest collections available for payment on the next distribution date. The
Servicer is required to cover a portion of the shortfall in interest
collections that are attributable to prepayments in full, but only up to
one-half of the Servicer's servicing fee for the related accrual period. The
Certificate Insurer is not required to cover this shortfall. If the other
credit enhancement is insufficient to cover this shortfall in excess of
one-half of the servicing fee, you may incur a loss.
In addition, certain shortfalls in interest collections arising from
the application of the Soldiers' and Sailors' Civil Relief Act of 1940 will not
be covered by either the Servicer or the certificate insurance policy.
There is a Risk that There May be a Delay in Receipt of Liquidation Proceeds
and Liquidation Proceeds May Be Less than the Mortgage Loan Balance
Substantial delays could be encountered in connection with the
liquidation of delinquent mortgage loans. Further, liquidation expenses such as
legal fees, real estate taxes and maintenance and preservation expenses will
reduce the portion of liquidation proceeds payable to you. If a mortgaged
property fails to provide adequate security for the mortgage loan, you will
incur a loss on your investment if the Certificate Insurer fails to perform its
obligations under the certificate insurance policy and the other credit
enhancements are insufficient to cover the loss.
High Loan-to-Value Ratios Increase Risk of Loss
Mortgage loans with higher loan-to-value ratios may present a greater
risk of loss than mortgage loans with loan-to-value ratios of 80% or below.
Approximately 27.35% of the mortgage loans in Loan Group 1 and 42.99% of the
mortgage loans in Loan Group 2 (in each case, based on the aggregate principal
balance of the mortgage loans in that Loan Group as of the Cut-off Date), had a
loan-to-value ratio in excess of 80% at origination (or, in the case of the
mortgage loans that are secured by second liens, a combined loan-to-value ratio
in excess of 80% at origination) and do not have FHA insurance, a VA guaranty
or, if the mortgage is secured by a first lien, primary mortgage insurance.
Geographic Concentration
The following chart lists the states with the highest concentrations
of mortgage loans for each Loan Group, based on the aggregate principal balance
of the mortgage loans in each Loan Group as of the Cut-off Date.
Loan Group 1 Loan Group 2
New York 19.67% California 34.72%
California 14.64% New York 15.53%
Texas 10.16% New Jersey 6.97%
Florida 7.62% Illinois 5.36%
Property in California may be particularly susceptible to certain
types of uninsurable hazards, such as earthquakes, floods, mudslides and other
natural disasters.
In addition, the conditions below will have a disproportionate impact
on the mortgage loans in general:
o Economic conditions in states listed above which may or may
not affect real property values may affect the ability of
borrowers to repay their loans on time.
o Declines in the residential real estate markets in the
states listed above may reduce the values of properties
located in those states, which would result in an increase
in the loan-to-value ratios or combined loan-to-value
ratios related to the mortgage loans.
o Any increase in the market value of properties located in
the states listed above would reduce the loan-to-value
ratios or combined loan-to-value ratios, as applicable, and
could, therefore, make alternative sources of financing
available to the borrowers at lower interest rates, which
could result in an increased rate of prepayment of the
mortgage loans.
Risks Associated With Year 2000 Compliance
The year 2000 presents potential operational problems for computerized
data files and computer programs that may recognize the year 2000 as the year
1900, resulting in possible system failures or miscalculations. The year 2000
problem can be traced to the early days of computers, when memory and data
storage were very expensive. To conserve these limited resources, computer
programmers decided to use just two digits in date fields to identify a
calendar year. For example, 1999 would be identified as "99." The assumption is
that the date is within the 1900s. In the year 2000 this assumption will be
invalid and some systems will not properly recognize dates. On January 1, 2000,
many computer programs in mainframe, microcomputer, client/server, personal
computer, and embedded systems may recognize the year "00" as 1900 rather than
2000. Because many computer functions are date-sensitive, this error may cause
systems to process data inaccurately or shut down if they do not recognize the
date. If not corrected, many computer applications could fail or create
erroneous results as of or prior to the year 2000. Errors may occur in
chronological sorting, in date comparisons, duration calculations, and other
time and date-sensitive processing.
To the extent any entity related to this transaction (including the
Servicer, any depository and the Trustee) is unable to achieve year 2000
compliance, there could be delays in processing payments on the mortgage loans
and consequently delays in distributions to you.
Lack of Liquidity
The Underwriters intend to make a secondary market in the certificates
purchased by them, but have no obligation to do so. There is no assurance that
such a secondary market will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your certificates readily or at
prices that will enable you to realize your desired yield. The market values of
the certificates are likely to fluctuate; these fluctuations may be significant
and could result in significant losses to you.
The secondary markets for mortgage-backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit, or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
Consequences of Owning Book-Entry Certificates
Limit on Liquidity of Certificates. Issuance of the Class A
Certificates in book-entry form may reduce the liquidity of such certificates
in the secondary trading market since investors may be unwilling to purchase
certificates for which they cannot obtain physical certificates.
Limit on Ability to Transfer or Pledge. Since transactions in the
Class A Certificates can be effected only though certain depositories,
participating organizations, indirect participants and certain banks, your
ability to transfer or pledge a Class A Certificate to persons or entities that
are not affiliated with these organizations or otherwise to take actions in
respect of such certificates, may be limited due to lack of a physical
certificate representing the Class A Certificates.
Delays in Distributions. You may experience some delay in the receipt
of distributions on the Class A Certificates since the distributions will be
forwarded by the Trustee to a depository to credit the accounts of its
participants which will thereafter credit them to your account either directly
or indirectly through indirect participants, as applicable.
Please review "Description of the Certificates -- Book-Entry
Certificates" in this prospectus supplement for more detail.
There are Risks Inherent in the Nature of the Mortgage Loans
Approximately 54.59% of the mortgage loans in Loan Group 1 and
approximately 52.41% of the mortgage loans in Loan Group 2 (by aggregate
principal balance of the mortgage loans in that Loan Group as of the Cut-off
Date) are of sub-prime credit quality. In addition, other mortgage loans have
been severely delinquent or are in bankruptcy or a forbearance period.
Delinquencies and liquidation proceedings are more likely with these mortgage
loans than with mortgage loans that do not have such histories. In the event
these mortgage loans do become delinquent or subject to liquidation, you may
face delays in receiving payment and losses if the Certificate Insurer is
unable to pay on the certificate insurance policy and the other credit
enhancements are insufficient to cover the delays and losses.
The trust also contains some mortgage loans with respect to which the
total amount of scheduled monthly payments due thereon on or before the Cut-off
Date were not received. These past due payments are called "arrearage" and are
not a part of the trust. In the case of any mortgage loan that has an
outstanding arrearage, all payments of principal received with respect to such
mortgage loan will be applied by the Servicer to reduce such arrearage to zero
before being applied to reduce the outstanding principal balance of such
mortgage loan. The Servicer will be required to make advances of delinquent
payments of principal and interest on delinquent mortgage loans, each to the
extent such advances are deemed recoverable, until such mortgage loans become
current. In the event that a mortgage loan is liquidated before the related
arrearage is reduced to zero, the arrearage, together with reimbursements for
advances of principal and interest and servicing advances with respect to such
mortgage loan, will reduce the liquidation proceeds available for distribution
to certificateholders.
Risks Related to Owner-Financed Mortgage Loans
Reduced Underwriting Standards
Approximately 6.02% of the mortgage loans in Loan Group 1 (by the
aggregate principal balance of the mortgage loans in Loan Group 1 as of the
Cut-off Date) and none of the mortgage loans in Loan Group 2 are owner-financed
mortgage loans. These mortgage loans were originated by the individual sellers
of the related mortgaged property who generally are inexperienced in matters
pertaining to mortgage banking. These mortgage loans were originated with less
stringent standards than the other mortgage loans. The borrower under an
owner-financed mortgage loan generally does not complete a mortgage loan
application and the seller of the related property generally does not verify
the income or employment of the related borrower, nor obtain other information
customarily obtained during the mortgage loan origination process. As a result,
certain information concerning the owner-financed mortgage loans that may be of
interest to you is not available. However, the Seller obtained and reviewed the
credit history and payment history of the borrower in connection with an
acquisition of an owner-financed loan, and conducted an assessment of the value
of the property.
Appraisals May Be Inaccurate
In acquiring owner-financed mortgage loans, the Seller assesses the
value of a property, generally using either a prior appraisal, which must be
re-certified if older than six months, or a drive-by appraisal. A drive-by
appraisal is not as accurate as a full real estate appraisal because the
appraiser does not have access to the interior of the mortgaged property and
may not have access to the rear of the mortgaged property. As a result, the
appraisal may reflect assumptions made by the appraiser regarding the interior
or the rear of the mortgaged property which may not be accurate. For
approximately 1.16% of the owner-financed mortgage loans (by aggregate
principal balance of the mortgage loans in Loan Group 1 as of the Cut-off Date)
no full or drive-by appraisal is available and the value of such property was
based upon the sale price for the related mortgaged property. To the extent the
Seller has over-appraised the value of a property, such amount may not be
recovered during a liquidation proceeding.
There are Risks Relating to Alternatives to Foreclosure
Some of the mortgage loans are delinquent as of the Closing Date.
Other mortgage loans may become delinquent after the Closing Date. The Servicer
may either foreclose on any such mortgage loan or work out an agreement with
the mortgagor, which may involve waiving or modifying any term of the mortgage
loan. If the Servicer extends the payment period or accepts a lesser amount
than stated in the mortgage note in satisfaction of the mortgage note, your
yield may be reduced.
Recovery of Defaulted Amounts Under FHA and VA Programs is Uncertain
Approximately 14.15% of the mortgage loans in Loan Group 1 and 11.54%
of the mortgage loans in Loan Group 2, in each case by the respective loan
group principal balance as of the Cut-off Date, are covered by either insurance
from the Federal Housing Administration or a guaranty from the United States
Department of Veterans Affairs. Recovery of insured amounts from these agencies
is dependent upon material compliance by the originator and the Servicer to
applicable regulations. These regulations are subject to interpretative
uncertainties. If upon filing a claim for recovery of a defaulted amount, it is
discovered that the mortgage loan did not comply with a regulation, the
Servicer may not be able to fully recover the insured amounts. See "The
Mortgage Pool - FHA Mortgage Loans and VA Mortgage Loans" herein.
THE CERTIFICATE INSURER
The following information has been supplied by MBIA Insurance
Corporation, the Certificate Insurer, for inclusion in this prospectus
supplement. The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this prospectus supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to
the accuracy of the information regarding the Policy and the Certificate
Insurer set forth under the headings, "DESCRIPTION OF THE CERTIFICATES--the
Policy" and "THE CERTIFICATE INSURER" herein. Additionally, the Certificate
Insurer makes no representation regarding the certificates or the advisability
of investing in the Certificates.
The Insurer
MBIA Insurance Corporation, the Certificate Insurer, is the principal
operating subsidiary of MBIA Inc., a New York Stock Exchange listed company.
MBIA Inc. is not obligated to pay the debts of or claims against the
Certificate Insurer. The Certificate Insurer is domiciled in the State of New
York and licensed to do business in and subject to regulation under the laws of
all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. The Certificate Insurer has two European
branches, one in the Republic of France and the other in the Kingdom of Spain.
New York has laws prescribing minimum capital requirements, limiting classes
and concentrations of investments and requiring the approval of policy rates
and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by the
Certificate Insurer, changes in control and transactions among affiliates.
Additionally, the Certificate Insurer is required to maintain contingency
reserves on its liabilities in specified amounts and for specified periods of
time.
Financial Information about the Certificate Insurer
The consolidated financial statements of the Certificate Insurer, a
wholly owned subsidiary of MBIA, Inc. and its subsidiaries as of December 31,
1998 and December 31, 1997 and for each of the three years in the period ended
December 31, 1998, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of MBIA Inc. for the
year ended December 31, 1998 and the consolidated financial statements of the
Certificate Insurer and its subsidiaries as of September 30, 1999 and for the
nine month periods ended September 30, 1999 and September 30, 1998 included in
the Quarterly Report on Form 10-Q of MBIA Inc. for the period ended September
30, 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 by reference herein shall be modified or superseded for purposes
of this prospectus supplement to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this prospectus supplement.
All financial statements of the Certificate Insurer and its
subsidiaries included in documents filed by MBIA Inc. pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this prospectus supplement and prior to the
termination of the offering of the Class A-1 Certificates and Class A-2
Certificates shall be deemed to be incorporated by reference into this
prospectus supplement and to be a part hereof from the respective dates of
filing such documents.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities and
generally accepted accounting principles:
Statutory Accounting Practices
------------------------------------------------------
December 31, 1998 September 30, 1999
(Audited) (Unaudited)
(In millions)
Admitted Assets........................................ $6,521 $6,930
Liabilities............................................ 4,231 4,571
Capital and Surplus.................................... 2,290 2,359
Generally Accepted Accounting Principles
------------------------------------------------------
December 31, 1998 September 30, 1999
(Audited) (Unaudited)
(In millions)
Assets................................................. $7,488 $7,422
Liabilities............................................ 3,211 3,234
Shareholder's Equity................................... 4,277 4,188
Where You Can Obtain Additional Information About the Certificate Insurer
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's 1998
year-end audited financial statements prepared in accordance with statutory
accounting practices are available, without charge, from the Certificate
Insurer. The address of the Certificate Insurer is 113 King Street, Armonk, New
York 10504. The telephone number of the Certificate Insurer is (914) 273-4545.
Year 2000 Readiness Disclosure
MBIA Inc. is actively managing a high-priority Year 2000 (Y2K) program
addressing the issue of whether its computer systems can correctly distinguish
between the years 1900 and 2000. MBIA Inc. has established an independent Y2K
testing lab in its Armonk office, with a committee of business unit managers
overseeing the project. MBIA Inc. has a budget of $1.13 million for its
1998-2000 Y2K efforts. As of September 30, 1999, MBIA Inc. has spent $949,000
on the project. A recent review of efforts at certain subsidiaries has
indicated the need to spend an additional $1.3 million this year on
remediation. As of September 30, 1999, MBIA Inc. has spent $568,000 of this
additional amount. However, this increase will not have a material effect on
MBIA Inc.'s financial results.
MBIA Inc. has initiated a comprehensive Y2K plan which includes the
following phases: assessment -- completed in the second quarter of 1998;
remediation -- completed in the fourth quarter of 1998; testing -- completed in
the second quarter of 1999; and contingency planning -- completed in the third
quarter of 1999, subject to final approval by senior management and any need
for revision that might arise in the future. This plan covers
"mission-critical" internally developed systems, vendor software, hardware and
certain third-party entities through which MBIA Inc. conducts its business.
Testing to date indicates that functions critical to the financial guarantee
business, both domestic and international, were Y2K-ready as of December 31,
1998. Additional testing is being carried out throughout 1999.
Financial Strength Ratings of the Certificate Insurer
Moody's Investors Service, Inc. rates the financial strength of the
Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the financial strength of the Certificate Insurer "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)
rates the financial strength of the Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability
to pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
securities, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the securities.
The Certificate Insurer does not guaranty the market price of the securities
nor does it guaranty that the ratings on the securities will not be revised or
withdrawn.
THE MORTGAGE POOL
The information set forth in the following paragraphs has been
provided by the Seller. None of the Depositor, the Underwriters, the Servicer,
the Trustee or any of their respective affiliates have made or will make any
representation as to the accuracy or completeness of such information.
Certain information with respect to the mortgage loans to be included
in each Loan Group is set forth herein. Prior to the Closing Date, mortgage
loans may be removed from a Loan Group and other Mortgage Loans may be
substituted therefor. The Seller believes that the information set forth herein
with respect to each Loan Group as presently constituted is representative of
the characteristics of each Loan Group as it will be constituted at the Closing
Date, although certain characteristics of the Mortgage Loans in a Loan Group
may vary.
General
The assets included in the trust (the "Trust Fund") will consist of a
pool of 2,207 closed-end, fixed-rate and adjustable-rate mortgage loans (the
"Mortgage Pool") having original terms to maturity ranging from 36 to 361
months (the "Mortgage Loans") and an aggregate principal balance as of November
1, 1999 (the "Cut-off Date") of approximately $190,917,477, net of scheduled
payments due on such date, whether or not received. All Mortgage Loan
statistics set forth herein are based on principal balances, interest rates,
terms to maturity, mortgage loan counts and similar statistics as of the
Cut-off Date. All weighted averages specified herein are based on the principal
balances of the Mortgage Loans in the related Loan Group as of the Cut-off Date
(each, a "Cut-off Date Principal Balance"). The "Principal Balance" of a
Mortgage Loan, as of any date, is equal to the principal balance of such
Mortgage Loan at its origination, less the sum of scheduled and unscheduled
payments in respect of principal made on such Mortgage Loan as of such date,
plus Deferred Interest, if applicable. References to percentages of the
Mortgage Loans mean percentages based on the aggregate of the Cut-off Date
Principal Balances of the Mortgage Loans in the related Loan Group, unless
otherwise specified. The "Pool Balance" is equal to the aggregate Principal
Balances of the Mortgage Loans in both Loan Groups.
The Depositor will purchase the Mortgage Loans from the Seller
pursuant to the Mortgage Loan Purchase Agreement (the "Mortgage Loan Purchase
Agreement") dated as of the Cut-off Date between the Seller and the Depositor.
Pursuant to the Pooling and Servicing Agreement, the Depositor will cause the
Mortgage Loans to be assigned to the Trustee for the benefit of the
Certificateholders. See "The Pooling and Servicing Agreement" herein.
Each of the Mortgage Loans in the Mortgage Pool was selected from the
Seller's portfolio of mortgage loans. The Mortgage Loans were acquired by the
Seller in the secondary market in the ordinary course of its business and
re-underwritten by the Seller in accordance with its underwriting standards as
described in "The Seller - Underwriting Standards". The Mortgage Loans in the
Mortgage Pool were originated by various mortgage loan originators. Originators
representing more than five percent of the Mortgage Loans by Pool Balance as of
the Cut-off Date include: Aames Financial Corporation, 31.90%, Golden National
Mortgage Bank Corp., 11.45%, PacificAmerica Money Center, Inc. (or its
affiliate, Pacific Thrift & Loan Company), 9.90%, The Prudential Home Mortgage
Company, 6.19%, and Ocwen Federal Bank FSB, 5.27%.
Under the Pooling and Servicing Agreement, the Seller will make
certain representations and covenants to the Trustee relating to, among other
things, the due execution and enforceability of the Pooling and Servicing
Agreement and certain characteristics of the Mortgage Loans and, subject to
certain limitations, will be obligated to repurchase or substitute a similar
mortgage loan for any Mortgage Loan as to which there exists deficient
documentation or an uncured breach of any such representation, warranty or
covenant, if such breach of any such representation, warranty or covenant
materially and adversely affects the Certificateholders' interests in such
Mortgage Loan. The Depositor will make no representations or warranties with
respect to the Mortgage Loans and will have no obligation to repurchase or
substitute Mortgage Loans with deficient documentation or that are otherwise
defective. The Seller is selling the Mortgage Loans without recourse and will
have no obligation with respect to the Certificates in its capacity as Seller
other than the repurchase or substitution obligations described above.
The Mortgage Pool will consist of two loan groups ("Loan Group 1" and
"Loan Group 2", respectively and each a "Loan Group"). The Mortgage Loans in
Loan Group 1 (the "Group 1 Mortgage Loans") consist of 1,741 fixed-rate
Mortgage Loans with an aggregate principal balance (the "Group 1 Loan Balance")
of approximately $127,554,028 as of the Cut-off Date. The Mortgage Loans in
Loan Group 2 (the "Group 2 Mortgage Loans") consist of 466 fixed-rate and
adjustable-rate Mortgage Loans with an aggregate principal balance (the "Group
2 Loan Balance"), of approximately $63,363,449 as of the Cut-off Date. Loan
Group 2 is divided into two sub-groups - "Sub-Group 2A" and "Sub-Group 2B". The
Mortgage Loans in Sub-Group 2A (the "Sub-Group 2A Mortgage Loans") consist of
138 fixed-rate Mortgage Loans with an aggregate principal balance (the
"Sub-Group 2A Loan Balance") of $31,245,678 as of the Cut-off Date. The
Mortgage Loans in Sub-Group 2B (the "Sub-Group 2B Mortgage Loans") consist of
328 adjustable-rate Mortgage Loans with an aggregate principal balance (the
"Sub-group 2B Loan Balance") of $32,117,771 as of the Cut-off Date.
Each of Loan Group 1 and Loan Group 2 consists of Performing Mortgage
Loans, Sub-Performing Mortgage Loans and Re-Performing Mortgage Loans, each as
defined below:
o A "Performing Mortgage Loan" is a Mortgage Loan pursuant to which no
payment due under the related mortgage note (or any modification
thereto) is 30 or more days Delinquent as of the Cut-off Date.
o A "Sub-Performing Mortgage Loan" is a Mortgage Loan pursuant to which
a payment due prior to the Cut-off Date under the terms of the related
mortgage note (or any modification thereto), is at least 30 but not
more than 89 days Delinquent. Certain Sub-Performing Mortgage Loans
have been modified in writing and are also characterized as follows:
(i) If a Sub-Performing Mortgage Loan is a "Forbearance Plan
Mortgage Loan", the related mortgagor must make monthly
payments ("Modified Scheduled Payments") in an amount at
least equal to the sum of (i) the amount of the monthly
scheduled payment of principal and interest determined in
accordance with such mortgage loan's original amortization
schedule ("Regular Scheduled Payments") plus (ii) an
additional amount to be applied to pay down the total amount
of scheduled monthly payments due thereon on or before the
Cut-off Date but not received prior to the Cut-off Date plus
the aggregate amount of tax and insurance advances made with
respect to such Mortgage Loan to the extent remaining
outstanding as of the Cut-off Date.
(ii) If a Sub-Performing Mortgage Loan is a "Bankruptcy Plan
Mortgage Loan", the related mortgagor defaulted and, after
default, became the subject of a case under Title 11 of the
United States Code (the "Bankruptcy Code") and, as of the
Cut-off Date, had a confirmed bankruptcy plan. Each such
bankruptcy plan generally requires the related mortgagor to
make Modified Scheduled Payments in an amount at least equal
to (i) the Regular Scheduled Payment plus (ii) an additional
amount sufficient to pay down overdue amounts resulting from
the period of default, generally over a period of three to
five years from the commencement of such bankruptcy plan.
o A "Re-Performing Mortgage Loan" is a mortgage loan (that might be a
Forbearance Plan Mortgage Loan or a Bankruptcy Plan Mortgage Loan)
which had defaulted in the past and which is currently at least 90
days Delinquent with respect to certain Regular Scheduled Payments but
which satisfies one of the following criteria (the "Re-Performance
Test"):
(i) the mortgagor has made at least three aggregate Regular
Scheduled Payments in the three calendar months preceding
the Cut-off Date (regardless of either the timing of receipt
of such payments or the payment history of such mortgage
loans prior to August 1, 1999), or
(ii) the mortgagor has made at least four aggregate Regular
Scheduled Payments in the four calendar months preceding the
Cut-off Date (regardless of either the timing of receipt of
such payments or the payment history of such mortgage loans
prior to July 1, 1999), or
(iii) the mortgagor has made at least five aggregate Regular
Scheduled Payments in the five calendar months preceding the
Cut-off Date (regardless of either the timing of receipt of
such payments or the payment history of such mortgage loans
prior to June 1, 1999).
A Mortgage Loan is "Delinquent" if any monthly payment due on a Due
Date is not made by the close of business on the next scheduled Due Date for
such Mortgage Loan.
With respect to certain Delinquent Mortgage Loans, the total amount of
scheduled monthly payments due thereon on or before the Cut-off Date but not
received prior to the Cut-off Date, together with any outstanding servicing
advances on such Mortgage Loans, is referred to as the "Arrearage." The
Servicer has previously made advances in respect of the Arrearages. Any
Arrearage shall not be included as part of the Trust Fund and, accordingly,
payments with respect to Arrearage will not be payable to the
Certificateholders as and when received. However, the Servicer shall be
required to make servicing advances on Delinquent Mortgage Loans and make
advances of delinquent payments of principal and interest on Delinquent
Mortgage Loans, each to the extent such advances are deemed recoverable, until
such Mortgage Loans become current.
The "Loan-to-Value Ratio" for any Mortgage Loan as of any date of
determination, is equal to:
o the sum of the balance of the Mortgage on the Mortgaged Property
plus, with respect to any second lien Mortgage Loan, the balance
of the lien, if any, on the Mortgaged Property that is senior to
the Mortgage,
o divided by the lesser of (a) the value of the related Mortgaged
Property or (b) the purchase price of the Mortgaged Property if
the proceeds of the Mortgage Loan are used to purchase the
Mortgaged Property.
Group 1 Mortgage Loans Statistics
Loan Group 1 consists of 1,741 fixed-rate Mortgage Loans with
conforming balances. The Group 1 Loan Balance as of the Cut-off Date is equal
to approximately $127,554,028. The Group 1 Mortgage Loans have original terms
to maturity ranging from 36 months to 361 months. The following statistical
information, unless otherwise specified, is based upon the Group 1 Loan Balance
as of the Cut-off Date.
The Group 1 Mortgage Loans are secured by first or second mortgages or
deeds of trust or other similar security instruments (each, a "Mortgage")
creating first or second liens on one- to four-family residential properties
consisting of detached or semi-detached one- to four-family dwelling units,
including manufactured housing, and individual condominium units (each, a
"Mortgaged Property"). The Group 1 Mortgaged Properties also include
proprietary leases or occupancy agreements relating to specific dwellings
within a cooperative and the related shares issued by such cooperative.
Approximately 27.35% of the Group 1 Mortgage Loans had a Loan-to-Value
Ratio at origination in excess of 80.00% and do not have FHA insurance, a VA
guaranty or primary mortgage insurance. Approximately 20.61% of the Group 1
Mortgage Loans had a Loan-to-Value Ratio at origination exceeding 90.00% and do
not have FHA insurance, a VA guaranty or primary mortgage insurance. There can
be no assurance that the Loan-to-Value Ratio of any Group 1 Mortgage Loan
determined at any time after origination is less than or equal to its original
Loan-to-Value Ratio. Except for 10.17% of the Group 1 Mortgage Loans, all of
the Group 1 Mortgage Loans have scheduled monthly payments due on the first day
of the month (with respect to each Mortgage Loan, a "Due Date"). Approximately
98.48% of the Group 1 Mortgage Loans are secured by first liens, and
approximately 1.52% of the Group 1 Mortgage Loans are secured by second liens.
Approximately 10.95% of the Group 1 Mortgage Loans are FHA Mortgage
Loans. Approximately 3.20% of the Group 1 Mortgage Loans are VA Mortgage Loans.
See "--FHA Mortgage Loans and VA Mortgage Loans." Approximately 19.57% of the
Group 1 Mortgage Loans are covered by primary mortgage insurance.
Approximately 80.32% of the Group 1 Mortgage Loans are Performing
Mortgage Loans. Approximately 9.58% of the Group 1 Mortgage Loans are
Sub-Performing Mortgage Loans, including 0.55% (by Group 1 Loan Balance) that
are Forbearance Plan Mortgage Loans and 0.24% (by Group 1 Loan Balance) that
are Bankruptcy Plan Mortgage Loans. Approximately 10.10% of the Group 1
Mortgage Loans are Re-Performing Mortgage Loans including 1.03% (by Group 1
Loan Balance) that are Forbearance Plan Mortgage Loans and 6.61% (by Group 1
Loan Balance) that are Bankruptcy Plan Mortgage Loans.
Approximately 34.67% of the Group 1 Mortgage Loans provide for payment
by the mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Group 1 Mortgage Loan provides for payment of
a prepayment charge on certain partial prepayments and all prepayments in full
made for the period specified in the related mortgage note which generally does
not exceed five years from the date of origination of such Group 1 Mortgage
Loan. The amount of the prepayment charge is provided in the related mortgage
note.
There are 61 Group 1 Mortgage Loans (representing approximately 3.39%
of the Group 1 Loan Balance) that are balloon payment mortgage loans (each, a
"Balloon Loan"). The monthly payment for each Balloon Loan is based on an
amortization schedule ranging from 120 months to 510 months, except for the
final payment (the "Balloon Payment") which is due and payable between the 18th
month and the 216th month following origination of such Mortgage Loan,
depending on the terms of the related Mortgage Note. With respect to the
majority of these Balloon Loans, the monthly payments for such Balloon Loans
amortize over 360 months, but the Balloon Payment is due on the 180th month.
The amount of the Balloon Payment on each Balloon Loan is substantially in
excess of the amount of the scheduled monthly payment for such Mortgage Loan.
There are 192 Group 1 Mortgage Loans (representing approximately 6.02%
of the Group 1 Loan Balance) that were originated by the individual seller of
the related mortgaged property (each, an "Owner-Financed Mortgage Loan").
Each Group 1 Mortgage Loan accrues interest at a rate (each, a "Loan
Rate") of not less than 5.00% per annum and not more than 16.99% per annum and
as of the Cut-off Date the weighted average Loan Rate of the Group 1 Mortgage
Loans was approximately 9.56% per annum.
The weighted average remaining term to maturity of the Group 1
Mortgage Loans is approximately 313 months as of the Cut-off Date. None of the
Group 1 Mortgage Loans had a first Due Date prior to March 1971 or after
December 1999 or a remaining term to maturity of less than 13 months or greater
than 360 months as of the Cut-off Date. The month of the latest maturity date
of any Group 1 Mortgage Loan is December 2029.
The average Principal Balance of the Group 1 Mortgage Loans at
origination was approximately $74,691. The average Cut-off Date Principal
Balance of the Group 1 Mortgage Loans was approximately $73,265.
No Group 1 Mortgage Loan had a Cut-off Date Principal Balance of
greater than approximately $317,809 or less than approximately $1,321. The
Group 1 Mortgage Loans are expected to have the following characteristics as of
the Cut-off Date (the sum in any column may not equal the total indicated due
to rounding):
Cut-off Date Principal Balances of the Group 1 Mortgage Loans(1)
% of Aggregate
Principal Balance
Number of Principal Balance of Loan Group
Mortgage Outstanding as of Outstanding as of
Principal Balance ($) Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
1,321 - 50,000.................... 733 $ 24,071,967.68 18.87%
50,001 - 100,000.................... 615 43,659,441.62 34.23
100,001 - 150,000.................... 233 28,626,085.07 22.44
150,001 - 200,000.................... 100 17,631,879.82 13.82
200,001 - 250,000.................... 51 11,066,905.68 8.68
250,001 - 300,000.................... 6 1,570,495.72 1.23
300,001 - 317,809.................... 3 927,252.09 0.73
================== ======================= =====================
Total.............................. 1,741 $ 127,554,027.68 100.00%
================== ======================= =====================
- --------------
(1) The average Cut-off Date Principal Balance of the Group 1 Mortgage Loans was approximately $73,265.
Original Terms to Maturity of the Group 1 Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Original Term (months) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
36 - 60.......................... 10 $ 377,303.67 0.30%
61 - 120.......................... 71 2,421,880.62 1.90
121 - 180.......................... 361 16,100,625.36 12.62
181 - 240.......................... 82 3,929,936.50 3.08
241 - 300.......................... 26 1,782,305.55 1.40
301 - 360.......................... 1,190 102,870,203.05 80.65
Greater than 360........................ 1 71,772.93 0.06
================== ======================= =====================
Total.............................. 1,741 $ 127,554,027.68 100.00%
================== ======================= =====================
- --------------
(1) The weighted average original term of the Group 1 Mortgage Loans was approximately 327 months.
Property Types of the Group 1 Mortgage Loans
% of Aggregate
Principal Balance
Number Principal Balance of Loan Group
of Mortgage Outstanding as of Outstanding as of
Property Type Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
Single Family........................... 1,504 $107,862,024.22 84.56%
Two Family.............................. 63 5,933,371.07 4.65
Other................................... 23 4,246,984.10 3.33
PUD(1).................................. 38 2,861,006.73 2.24
Condo................................... 40 2,052,988.03 1.61
Three Family............................ 17 1,941,838.17 1.52
Townhouse............................... 39 1,414,257.46 1.11
Four Family............................. 2 446,717.15 0.35
Manufactured Home....................... 10 380,883.98 0.30
Cooperative............................. 4 255,818.18 0.20
Mixed Use............................... 1 158,138.59 0.12
================== ======================= =====================
Total.............................. 1,741 $127,554,027.68 100.00%
================== ======================= =====================
- --------------
(1) PUD refers to a Planned Unit Development.
Occupancy Status of the Group 1 Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Occupancy Status of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
Primary................................. 1,617 $120,003,794.55 94.08%
Investor................................ 112 6,436,725.50 5.05
Second Home............................. 12 1,113,507.63 0.87
================== ======================= =====================
Total.............................. 1,741 $127,554,027.68 100.00%
================== ======================= =====================
- --------------
(1) Based on representations made by the mortgagors at the time of origination.
Purpose of the Group 1 Mortgage Loans
% of Aggregate
Principal Balance
Number Principal Balance of Loan Group
of Mortgage Outstanding as of Outstanding as of
Purpose Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
Purchase................................ 700 $ 58,385,515.95 45.77%
Cash Out Refinance...................... 842 52,998,137.35 41.55
Refinance............................... 199 16,170,374.38 12.68
------------------ ----------------------- ---------------------
================== ======================= =====================
Total.............................. 1,741 $127,554,027.68 100.00%
================== ======================= =====================
Loan Rates of the Group 1 Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Loan Rate (%) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
5.00 - 5.50........................ 1 $ 78,650.05 0.06%
5.51 - 6.00........................ 4 162,987.12 0.13
6.01 - 6.50........................ 2 96,261.46 0.08
6.51 - 7.00........................ 19 1,435,696.72 1.13
7.01 - 7.50........................ 48 4,315,523.85 3.38
7.51 - 8.00........................ 152 12,350,310.57 9.68
8.01 - 8.50........................ 198 17,132,679.69 13.43
8.51 - 9.00........................ 268 24,761,766.41 19.41
9.01 - 9.50........................ 218 19,883,439.13 15.59
9.51 - 10.00........................ 191 12,534,140.44 9.83
10.01 - 10.50........................ 123 7,911,723.10 6.20
10.51 - 11.00........................ 131 8,977,752.56 7.04
11.01 - 11.50........................ 75 4,141,732.45 3.25
11.51 - 12.00........................ 83 4,614,215.92 3.62
12.01 - 12.50........................ 53 2,029,297.74 1.59
12.51 - 13.00........................ 37 1,719,692.81 1.35
13.01 - 13.50........................ 26 1,019,813.32 0.80
13.51 - 14.00........................ 33 1,324,407.91 1.04
14.01 - 14.50........................ 22 1,058,480.42 0.83
14.51 - 15.00........................ 30 979,665.71 0.77
15.01 - 15.50........................ 14 622,143.63 0.49
15.51 - 16.00........................ 6 171,366.47 0.13
16.01 - 16.50........................ 6 198,437.10 0.16
16.51 - 16.99........................ 1 33,843.10 0.03
------------------ ----------------------- ---------------------
================== ======================= =====================
Total.............................. 1,741 $127,554,027.68 100.00%
================== ======================= =====================
- --------------
(1) The weighted average Loan Rate of the Group 1 Mortgage Loans as of the Cut-off Date was approximately
9.56% per annum.
Current Loan-to-Value Ratios of the Group 1 Mortgage Loans(1)
% of Aggregate
Principal Balance
Number Principal Balance of Loan Group
of Mortgage Outstanding as of Outstanding as of
Current Loan-to-Value Ratio (%) Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
Unknown............................. 43 $ 2,688,851.67 2.11%
0.01 - 10.00........................ 1 1,321.23 0.00
10.01 - 20.00........................ 16 330,926.12 0.26
20.01 - 30.00........................ 31 829,293.58 0.65
30.01 - 40.00........................ 47 1,776,701.47 1.39
40.01 - 50.00........................ 64 2,905,490.75 2.28
50.01 - 60.00........................ 107 4,996,789.73 3.92
60.01 - 70.00........................ 296 17,417,144.80 13.65
70.01 - 80.00........................ 474 36,420,688.87 28.55
80.01 - 90.00........................ 287 22,719,716.88 17.81
90.01 - 99.99........................ 375 37,467,102.58 29.37
================== ======================= =====================
Total.............................. 1,741 $127,554,027.68 100.00%
================== ======================= =====================
- ---------------
(1)The weighted average current Loan-to-Value Ratio of the Group 1 Mortgage
Loans as of the Cut-off Date was approximately 80.45%.
Original Loan-to-Value Ratios of the Group 1 Mortgage Loans(1)
% of Aggregate
Principal Balance
Number Principal Balance of Loan Group
of Mortgage Outstanding as of Outstanding as of
Original Loan-to-Value Ratio (%) Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
Unknown............................ 43 $ 2,688,851.67 2.11%
10.01 - 20.00....................... 14 314,913.22 0.25
20.01 - 30.00....................... 28 779,400.07 0.61
30.01 - 40.00....................... 44 1,730,060.38 1.36
40.01 - 50.00....................... 60 2,837,505.65 2.22
50.01 - 60.00....................... 94 4,632,081.09 3.63
60.01 - 70.00....................... 281 16,956,576.67 13.29
70.01 - 80.00....................... 450 35,452,474.98 27.79
80.01 - 90.00....................... 270 21,054,064.75 16.51
90.01 - 100.00....................... 377 35,883,526.81 28.13
100.01 - 110.00....................... 79 5,193,919.78 4.07
110.01 - 110.40....................... 1 30,652.61 0.02
------------------ ----------------------- ---------------------
Total.............................. 1,741 $127,554,027.68 100.00%
================== ======================= =====================
- --------------
(1) The weighted average original Loan-to-Value Ratio of the Group 1 Mortgage
Loans as of the Cut-off Date was approximately 81.55%.
Geographic Distribution of the Group 1 Mortgaged Properties(1)
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Location of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
Alabama................................ 14 $ 609,883.65 0.48%
Alaska................................. 1 174,351.88 0.14
Arizona................................ 43 2,181,558.67 1.71
Arkansas............................... 5 185,366.80 0.15
California............................. 203 18,675,792.45 14.64
Colorado............................... 12 866,093.57 0.68
Connecticut............................ 7 493,719.74 0.39
Delaware............................... 1 57,616.46 0.05
District of Columbia................... 2 144,142.54 0.11
Florida................................ 157 9,723,797.53 7.62
Georgia................................ 32 1,755,469.63 1.38
Hawaii................................. 10 1,344,501.14 1.05
Idaho.................................. 15 1,251,841.16 0.98
Illinois............................... 56 3,640,498.18 2.85
Indiana................................ 43 2,016,508.50 1.58
Iowa................................... 39 2,721,929.99 2.13
Kansas................................. 14 759,822.10 0.60
Kentucky............................... 10 524,198.16 0.41
Louisiana.............................. 27 1,448,381.98 1.14
Maine.................................. 3 252,777.04 0.20
Maryland............................... 31 2,518,696.76 1.97
Massachusetts.......................... 11 1,025,712.50 0.80
Michigan............................... 85 4,253,577.32 3.33
Minnesota.............................. 18 1,331,872.64 1.04
Mississippi............................ 17 817,553.80 0.64
Missouri............................... 39 2,168,583.96 1.70
Montana................................ 18 1,778,619.55 1.39
Nebraska............................... 6 539,507.50 0.42
Nevada................................. 15 1,422,790.05 1.12
New Hampshire.......................... 1 78,206.95 0.06
New Jersey............................. 53 5,122,506.73 4.02
New Mexico............................. 8 439,134.56 0.34
New York............................... 184 25,084,438.35 19.67
North Carolina......................... 37 1,628,614.20 1.28
North Dakota........................... 1 52,596.05 0.04
Ohio................................... 49 2,948,871.01 2.31
Oklahoma............................... 18 675,023.40 0.53
Oregon................................. 9 854,516.82 0.67
Pennsylvania........................... 54 3,173,182.09 2.49
Rhode Island........................... 1 148,043.94 0.12
South Carolina......................... 29 1,421,344.74 1.11
Tennessee.............................. 43 2,474,354.41 1.94
Texas.................................. 253 12,964,152.42 10.16
Utah................................... 15 1,491,004.28 1.17
Vermont................................ 1 60,800.19 0.05
Virgin Islands......................... 1 79,657.04 0.06
Virginia............................... 16 1,434,360.15 1.12
Washington............................. 30 2,529,953.71 1.98
West Virginia.......................... 1 27,916.61 0.02
Wisconsin.............................. 3 180,184.78 0.14
------------------ ----------------------- ---------------------
Total.............................. 1,741 $127,554,027.68 100.00%
================== ======================= =====================
- --------------
(1)The greatest ZIP Code geographic concentration of Group 1 Mortgage Loans,
by aggregate Cut-off Date Principal Balance, was approximately 1.05% in the
11580 ZIP Code.
Documentation Level of the Group 1 Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Documentation Level of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
Full.................................... 976 $ 72,210,121.99 56.61%
Limited................................. 186 19,870,366.15 15.58
Stated.................................. 169 12,708,625.05 9.96
Alternative............................. 154 9,836,381.19 7.71
Unknown................................. 214 9,716,337.04 7.62
Streamlined............................. 42 3,212,196.26 2.52
================== ======================= =====================
Total.............................. 1,741 $127,554,027.68 100.00%
================== ======================= =====================
- --------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
Sub-Group 2A Mortgage Loans Statistics
Sub-Group 2A consists of 138 fixed-rate Mortgage Loans with
non-conforming balances. The Sub-Group 2A Loan Balance as of the Cut-off Date
is equal to approximately $31,245,678. The Sub-Group 2A Mortgage Loans have
original terms to maturity ranging from 180 months to 360 months. The following
statistical information, unless otherwise specified, is based upon the
Sub-Group 2A Loan Balance as of the Cut-off Date.
The Sub-Group 2A Mortgage Loans are secured by first or second
Mortgages creating a first or second lien on the related Mortgaged Property.
None of the Sub-Group 2A Mortgaged Properties are manufactured homes.
Approximately 56.29% of the Sub-Group 2A Mortgage Loans had a Loan-to-Value
Ratio at origination in excess of 80.00% and do not have FHA insurance, a VA
guaranty or primary mortgage insurance. Approximately 50.78% of the Sub-Group
2A Mortgage Loans had a Loan-to-Value Ratio at origination in excess of 90.00%
and do not have FHA insurance, a VA guaranty or primary mortgage insurance.
There can be no assurance that the Loan-to-Value Ratio of any Sub-Group 2A
Mortgage Loan determined at any time after origination is less than or equal to
its original Loan-to-Value Ratio. Except for 4.37% of the Sub-Group 2A Mortgage
Loans, all of the Sub-Group 2A Mortgage Loans have Due Dates on the first day
of the month. Approximately 99.18% of the Sub-Group 2A Mortgage Loans are
secured by first liens and approximately 0.82% of the Sub-Group 2A Mortgage
Loans are secured by second liens.
Approximately 7.75% of the Sub-Group 2A Mortgage Loans are FHA
Mortgage Loans. Approximately 4.47% of the Sub-Group 2A Mortgage Loans are VA
Mortgage Loans. See "--FHA Mortgage Loans and VA Mortgage Loans." Approximately
10.32% of the Sub-Group 2A Mortgage Loans are covered by primary mortgage
insurance.
Approximately 88.10% of the Sub-Group 2A Mortgage Loans are Performing
Mortgage Loans. Approximately 5.93% of the Sub-Group 2A Mortgage Loans are
Sub-Performing Mortgage Loans, including 0.62% (by Sub-Group 2A Loan Balance)
that are Forbearance Plan Mortgage Loans and 0.10% (by Sub-Group 2A Loan
Balance) that are Bankruptcy Plan Mortgage Loans. Approximately 5.97% by
Sub-Group 2A Mortgage Loans are Re-Performing Mortgage Loans including 0.52%
(by Sub-Group 2A Loan Balance) that are Forbearance Plan Mortgage Loans and
4.00% (by Sub-Group 2A Loan Balance) that are Bankruptcy Plan Mortgage Loans.
Approximately 13.52% of the Sub-Group 2A Mortgage Loans provide for
payment by the mortgagor of a prepayment charge in limited circumstances on
certain prepayments. Generally, each such Sub-Group 2A Mortgage Loan provides
for payment of a prepayment charge on certain partial prepayments and all
prepayments in full made for the period specified in the related mortgage note
which generally does not exceed five years from the date of origination of such
Sub-Group 2A Mortgage Loan. The amount of the prepayment charge is provided in
the related mortgage note.
There are three Sub-Group 2A Mortgage Loans (representing
approximately 2.44% of the Sub-Group 2A Loan Balance) that are Balloon Loans.
The monthly payment for each Balloon Loan is based on an amortization schedule
ranging from 120 months to 510 months, except for the final payment (the
"Balloon Payment") which is due and payable between the 18th month and the
216th month following origination of such Mortgage Loan, depending on the terms
of the related Mortgage Note. With respect to the majority of these Balloon
Loans, the monthly payments for such Balloon Loans amortize over 360 months,
but the Balloon Payment is due on the 180th month. The amount of the Balloon
Payment on each Balloon Loan is substantially in excess of the amount of the
scheduled monthly payment for such Mortgage Loan.
There are no Sub-Group 2A Mortgage Loans that are Owner-Financed
Mortgage Loans.
Each Sub-Group 2A Mortgage Loan accrues interest at a Loan Rate of not
less than 6.75% per annum and not more than 14.99% per annum and as of the
Cut-off Date the weighted average Loan Rate of the Sub-Group 2A Mortgage Loans
was approximately 8.95% per annum.
The weighted average remaining term to maturity of the Sub-Group 2A
Mortgage Loans will be approximately 314 months as of the Cut-off Date. None of
the Sub-Group 2A Mortgage Loans had a first Due Date prior to January 1992 or
after December 1999 or will have a remaining term to maturity of less than 157
months or greater than 360 months as of the Cut-off Date. The month of the
latest maturity date of any Sub-Group 2A Mortgage Loan is December 2029.
The average Principal Balance of the Sub-Group 2A Mortgage Loans at
origination was approximately $235,135. The average Cut-off Date Principal
Balance of the Sub-Group 2A Mortgage Loans was approximately $226,418.
No Sub-Group 2A Mortgage Loan had a Cut-off Date Principal Balance of
greater than approximately $575,000 or less than approximately $29,884. The
Sub-Group 2A Mortgage Loans are expected to have the following characteristics
as of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
Cut-off Date Principal Balances of the Sub-Group 2A Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Sub-Group
Number of Outstanding as of Outstanding as of
Principal Balance ($) Mortgage Loans the Cut-off Date the Cut-off Date
------------------------------------------- ------------------ ---------------------- ---------------------
29,884 - 50,000.................... 6 $ 256,060.21 0.82%
50,001 - 100,000.................... 33 2,479,535.04 7.94
100,001 - 150,000.................... 5 602,647.86 1.93
150,001 - 200,000.................... 3 481,118.10 1.54
200,001 - 250,000.................... 13 3,170,223.64 10.15
250,001 - 300,000.................... 40 10,816,293.85 34.62
300,001 - 350,000.................... 24 7,739,294.89 24.77
350,001 - 400,000.................... 8 2,950,229.68 9.44
400,001 - 450,000.................... 3 1,253,242.21 4.01
450,001 - 500,000.................... 2 922,032.67 2.95
550,001 - 575,000.................... 1 575,000.00 1.84
================== ====================== =====================
Total.............................. 138 $31,245,678.15 100.00%
================== ====================== =====================
- --------------
(1) The average Cut-off Date Principal Balance of the Sub-Group 2A Mortgage Loans was approximately $226,418.
Original Terms to Maturity of the Sub-Group 2A Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Sub-Group
Number Outstanding as of Outstanding as of
Original Term (months) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
180 ................................. 2 $ 339,146.35 1.09%
181 - 240........................... 1 58,655.38 0.19
241 - 300........................... 8 2,137,601.75 6.84
301 - 360........................... 127 28,710,274.67 91.89
------------------ ----------------------- ---------------------
================== ======================= =====================
Total.............................. 138 $31,245,678.15 100.00%
================== ======================= =====================
- --------------
(1) The weighted average original term of the Sub-Group 2A Mortgage Loans was approximately 352 months.
Property Types of the Sub-Group 2A Mortgage Loans
% of Aggregate
Principal Balance
Number Principal Balance of Sub-Group
of Mortgage Outstanding as of Outstanding as of
Property Type Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
Single Family............... 126 $28,320,564.14 90.64%
Two Family.................. 4 1,377,022.11 4.41
Condo....................... 4 733,974.89 2.35
Other....................... 2 656,414.99 2.10
PUD(1)...................... 1 86,193.73 0.28
Townhouse................... 1 71,508.29 0.23
================== ======================= =====================
Total.................. 138 $31,245,678.15 100.00%
================== ======================= =====================
- --------------
(1) PUD refers to a Planned Unit Development.
Occupancy Status of the Sub-Group 2A Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Sub-Group
Number Outstanding as of Outstanding as of
Occupancy Status of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
Primary..................... 133 $30,524,429.18 97.69%
Investor.................... 4 490,460.62 1.57
Second Home................. 1 230,788.35 0.74
================== ======================= =====================
Total.................. 138 $31,245,678.15 100.00%
================== ======================= =====================
- --------------
(1) Based on representations made by the mortgagors at the time of origination.
Purpose of the Sub-Group 2A Mortgage Loans
% of Aggregate
Principal Balance
Number Principal Balance of Sub-Group
of Mortgage Outstanding as of Outstanding as of
Purpose Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
Purchase................................ 75 $13,677,103.26 43.77%
Cash Out Refinance...................... 33 9,061,255.31 29.00
Refinance............................... 30 8,507,319.58 27.23
================== ======================= =====================
Total.............................. 138 $31,245,678.15 100.00%
================== ======================= =====================
Loan Rates of the Sub-Group 2A Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Sub-Group
Number Outstanding as of Outstanding as of
Loan Rate (%) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
6.75 - 7.00........................ 4 $ 424,811.51 1.36%
7.01 - 7.50........................ 3 408,120.33 1.31
7.51 - 8.00........................ 11 1,376,063.26 4.40
8.01 - 8.50........................ 35 6,875,920.23 22.01
8.51 - 9.00........................ 48 13,371,904.51 42.80
9.01 - 9.50........................ 22 5,294,573.11 16.94
9.51 - 10.00........................ 8 2,307,549.62 7.39
10.51 - 11.00........................ 1 267,638.06 0.86
11.01 - 11.50........................ 2 375,935.60 1.20
11.51 - 12.00........................ 1 71,508.29 0.23
13.51 - 14.00........................ 2 402,225.67 1.29
14.51 - 14.99........................ 1 69,427.96 0.22
================== ======================= =====================
Total.............................. 138 $ 31,245,678.15 100.00%
================== ======================= =====================
- --------------
(1)The weighted average Loan Rate of the Sub-Group 2A Mortgage Loans as of the
Cut-off Date was approximately 8.95% per annum.
Current Loan-to-Value Ratios of the Sub-Group 2A Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Sub-Group
Number Outstanding as of Outstanding as of
Current Loan-to-Value Ratio (%) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
51.80 - 60.00...................... 1 $ 248,325.02 0.79%
60.01 - 70.00...................... 9 3,123,566.49 10.00
70.01 - 80.00...................... 16 4,786,201.49 15.32
80.01 - 90.00...................... 13 3,510,677.81 11.24
90.01 - 100.00...................... 56 16,012,565.18 51.25
100.01 - 110.00...................... 38 3,100,743.57 9.92
110.01 - 120.00...................... 4 387,748.26 1.24
120.01 - 124.53...................... 1 75,850.33 0.24
================== ======================= =====================
Total.............................. 138 $31,245,678.15 100.00%
================== ======================= =====================
- --------------
(1)The weighted average current Loan-to-Value Ratio of the Sub-Group 2A
Mortgage Loans as of the Cut-off Date was approximately 88.22%.
Original Loan-to-Value Ratios of the Sub-Group 2A Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Sub-Group
Number Outstanding as of Outstanding as of
Original Loan-to-Value Ratio (%) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
51.88 - 60.00..................... 1 $ 248,325.02 0.79%
60.01 - 70.00..................... 7 2,614,548.89 8.37
70.01 - 80.00..................... 18 5,295,219.09 16.95
80.01 - 90.00..................... 9 2,481,694.29 7.94
90.01 - 100.00..................... 27 7,406,893.10 23.71
100.01 - 110.00..................... 67 12,374,199.87 39.60
110.01 - 120.00..................... 7 678,670.12 2.17
120.01 - 125.00..................... 1 70,277.44 0.22
Greater than 125.00..................... 1 75,850.33 0.24
================== ======================= =====================
Total.............................. 138 $31,245,678.15 100.00%
================== ======================= =====================
- --------------
(1)The weighted average original Loan-to-Value Ratio of the Sub-Group 2A
Mortgage Loans as of the Cut-off Date was approximately 91.48%.
Geographic Distribution of the Sub-Group 2A Mortgaged Properties(1)
% of Aggregate
Principal Balance
Principal Balance of Sub-Group
Number Outstanding as of Outstanding as of
Location of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
California.............................. 54 $14,360,509.87 45.96%
Colorado................................ 1 249,617.90 0.80
Connecticut............................. 1 317,280.22 1.02
District of Columbia.................... 2 320,227.12 1.02
Florida................................. 8 1,050,801.99 3.36
Hawaii.................................. 1 165,255.94 0.53
Idaho................................... 1 89,884.36 0.29
Illinois................................ 2 510,221.35 1.63
Louisiana............................... 1 29,884.16 0.10
Maine................................... 1 73,322.18 0.23
Maryland................................ 4 422,668.59 1.35
Massachusetts........................... 3 297,068.25 0.95
Nevada.................................. 1 246,689.47 0.79
New Jersey.............................. 8 1,947,863.97 6.23
New York................................ 29 8,005,980.77 25.62
Ohio.................................... 2 152,840.69 0.49
Pennsylvania............................ 3 333,645.00 1.07
Tennessee............................... 2 98,893.68 0.32
Texas................................... 8 1,055,594.18 3.38
Virginia................................ 3 757,659.44 2.42
Washington.............................. 3 759,769.02 2.43
------------------ ----------------------- ---------------------
Total.................................. 138 $31,245,678.15 100.00%
================== ======================= =====================
- --------------
(1)The greatest ZIP Code geographic concentration of Sub-Group 2A Mortgage
Loans, by aggregate Cut-off Date Principal Balance, was approximately 2.27%
in the 92672 ZIP Code.
Documentation Level of the Sub-Group 2A Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Sub-Group
Number Outstanding as of Outstanding as of
Documentation Level of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
Full.................................... 86 $16,719,819.94 53.51%
Limited................................. 24 6,771,782.03 21.67
Alternative............................. 18 5,257,165.99 16.83
Stated.................................. 4 1,149,644.93 3.68
Streamlined............................. 5 1,029,985.04 3.30
Unknown................................. 1 317,280.22 1.02
================== ======================= =====================
Total.............................. 138 $31,245,678.15 100.00%
================== ======================= =====================
- --------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
Sub-Group 2B Mortgage Loans Statistics
Sub-Group 2B consists of 328 adjustable-rate Mortgage Loans that may
have conforming or non-conforming balances. The Sub-Group 2B Loan Balance as of
the Cut-off Date is equal to approximately $32,117,771. The Sub-Group 2B
Mortgage Loans have original terms to maturity ranging from 84 months to 360
months. The following statistical information, unless otherwise specified, is
based upon the Sub-Group 2B Loan Balance as of the Cut-off Date.
The Sub-Group 2B Mortgage Loans are secured by first or second
Mortgages creating a first or second lien on the related Mortgaged Property.
None of the Mortgaged Properties in Sub-Group 2B are manufactured homes.
Approximately 30.05% of the Sub-Group 2B Mortgage Loans had a Loan-to-Value
Ratio at origination in excess of 80.00% and do not have FHA insurance, a VA
guaranty or primary mortgage insurance. Approximately 1.99% of the Sub-Group 2B
Mortgage Loans had a Loan-to-Value Ratio at origination in excess of 90.00% and
do not have FHA insurance, a VA guaranty or primary mortgage insurance. There
can be no assurance that the Loan-to-Value Ratio of any Sub-Group 2B Mortgage
Loan determined at any time after origination is less than or equal to its
original Loan-to-Value Ratio. Except for 7.19% of the Sub-Group 2B Mortgage
Loans, all of the Sub-Group 2B Mortgage Loans have Due Dates on the first day
of the month. Approximately 99.85% of the Sub-Group 2B Mortgage Loans are
secured by first liens, and approximately 0.15% of the Sub-Group 2B Mortgage
Loans are secured by second liens.
Approximately 9.75% of the Sub-Group 2B Mortgage Loans are FHA
Mortgage Loans. Approximately 1.11% of the Sub-Group 2B Mortgage Loans are VA
Mortgage Loans. See "--FHA Mortgage Loans and VA Mortgage Loans." Approximately
1.31% of the Sub-Group 2B Mortgage Loans are covered by primary mortgage
insurance.
There are five Sub-Group 2B Mortgage Loans (representing approximately
2.40% of the Sub-Group 2B Loan Balance) that are Balloon Loans. The monthly
payment for each Balloon Loan is based on an amortization schedule ranging from
120 months to 510 months, except for the Balloon Payment which is due and
payable between the 18th month and the 216th month following origination of
such Mortgage Loan, depending on the terms of the related Mortgage Note. With
respect to the majority of the Balloon Loans, the monthly payments for such
Balloon Loans amortize over 360 months, but the Balloon Payment is due on the
180th month. The amount of the Balloon Payment on each Balloon Loan is
substantially in excess of the amount of the scheduled monthly payment for such
Mortgage Loan.
Approximately 53.14% of the Sub-Group 2B Mortgage Loans are Performing
Mortgage Loans. Approximately 33.56% of the Sub-Group 2B Mortgage Loans are
Sub-Performing Mortgage Loans, including 2.38% (of the Sub-Group 2B Loan
Balance) that are Forbearance Plan Mortgage Loans and 0.84% (by Sub-Group 2B
Loan Balance) that are Bankruptcy Plan Mortgage Loans. Approximately 13.30% of
the Sub-Group 2B Mortgage Loans are Re-Performing Mortgage Loans including
3.37% (by Sub-Group 2B Loan Balance) that are Forbearance Plan Mortgage Loans
and 6.89% (by Sub-Group 2B Loan Balance) that are Bankruptcy Plan Mortgage
Loans.
Approximately 46.10% of the Sub-Group 2B Mortgage Loans provide for
payment by the Mortgagor of a prepayment charge in limited circumstances on
certain prepayments. Generally, each such Sub-Group 2B Mortgage Loan provides
for payment of a prepayment charge on certain partial prepayments and all
prepayments in full made for the period specified in the related mortgage note
which generally does not exceed five years from the date of origination of such
Sub-Group 2B Mortgage Loan. The amount of the prepayment charge is provided in
the related mortgage note.
The weighted average remaining term to maturity of the Sub-Group 2B
Mortgage Loans will be approximately 332 months as of the Cut-off Date. None of
the Sub-Group 2B Mortgage Loans had a first Due Date prior to October 1981 or
after September 1999 or will have a remaining term to maturity of less than 22
months or greater than 357 months as of the Cut-off Date. The month of the
latest maturity date of any Sub-Group 2B Mortgage Loan is August 2029.
The average Principal Balance of the Sub-Group 2B Mortgage Loans at
origination was approximately $99,456. The average Cut-off Date Principal
Balance of the Sub-Group 2B Mortgage Loans was approximately $97,920.
Generally, the Sub-Group 2B Mortgage Loans provide for semi-annual
adjustment to the Loan Rate thereon and (except for the one Sub-Group 2B
Mortgage Loan that is a Negative Amortization Mortgage Loan) for corresponding
adjustments to the monthly payment amount due thereon, in each case on each
adjustment date applicable thereto (each such date, an "Adjustment Date");
provided, that the first adjustment for such Mortgage Loans will occur after an
initial period of one year, in the case of 1.93% of the Sub-Group 2B Mortgage
Loans, two years, in the case of 47.76% of the Sub-Group 2B Mortgage Loans,
three years, in the case of 17.67% of the Sub-Group 2B Mortgage Loans, and five
years, in the case of 2.20% of the Sub-Group 2B Mortgage Loans (each such
Mortgage Loan, a "Delayed First Adjustment Mortgage Loan"). On each Adjustment
Date for each Sub-Group 2B Mortgage Loan, the Loan Rate thereon will be
adjusted to equal the sum, rounded to the nearest multiple of 0.125%, of the
index applicable to determining the Loan Rate on each Mortgage Loan (the
"Index") and a fixed percentage amount (the "Gross Margin"). The Loan Rate on
each such Sub-Group 2B Mortgage Loan will not increase or decrease by more than
3.00% per annum on the first related Adjustment Date (the "Initial Periodic
Rate Cap") and 3.00% on any Adjustment Date thereafter (the "Periodic Rate
Cap"). The Sub-Group 2B Mortgage Loans have a weighted average Initial Periodic
Rate Cap of approximately 2.34% per annum and a weighted average Periodic Rate
Cap of approximately 1.25% per annum thereafter (excluding those mortgage loans
without periodic rate caps). Each Loan Rate on each such Sub-Group 2B Mortgage
Loan will not exceed a specified maximum Loan Rate over the life of such
Sub-Group 2B Mortgage Loan (the "Maximum Loan Rate") or be less than a
specified minimum Loan Rate over the life of such Sub-Group 2B Mortgage Loan
(the "Minimum Loan Rate"), except that 6.47% of the Sub-Group 2B Mortgage Loans
do not have Minimum Loan Rates. Effective with the first monthly payment due on
each Sub-Group 2B Mortgage Loan (other than the Negative Amortization Mortgage
Loan) after each related Adjustment Date, the monthly payment amount will be
adjusted to an amount that will amortize fully the outstanding Principal
Balance of the related Mortgage Loan over its remaining term, and pay interest
at the Loan Rate as so adjusted. Due to the application of the Initial Periodic
Rate Caps, the Periodic Rate Caps and the Maximum Loan Rates, the Loan Rate on
each such Mortgage Loan, as adjusted on any related Adjustment Date, may be
less than the sum of the Index and the related Gross Margin, rounded as
described herein. See "--The Index" herein. None of the Sub-Group 2B Mortgage
Loans permit the related mortgagor to convert the adjustable Loan Rate thereon
to a fixed Loan Rate.
The Sub-Group 2B Mortgage Loans had Loan Rates as of the Cut-off Date
of not less than 5.00% per annum and not more than 16.13% per annum and the
weighted average Loan Rate was approximately 10.54% per annum. As of the
Cut-off Date, the Sub-Group 2B Mortgage Loans had Gross Margins ranging from
0.00% to 9.99%, Minimum Loan Rates ranging from no minimum rate to 16.12% per
annum and Maximum Loan Rates ranging from 9.50% per annum to 23.00% per annum.
As of the Cut-off Date, the weighted average Gross Margin was approximately
6.09%, the weighted average Minimum Loan Rate was approximately 9.70% per annum
(exclusive of the Mortgage Loans that do not have a Minimum Loan Rate) and the
weighted average Maximum Loan Rate was approximately 16.47% per annum
(exclusive of the Mortgage Loans that do not have a Maximum Loan Rate). The
latest next Adjustment Date following the Cut-off Date on any Sub-Group 2B
Mortgage Loan occurs in April 2004 and the weighted average next Adjustment
Date for all of the Sub-Group 2B Mortgage Loans following the Cut-off Date is
December 2000.
There are no Sub-Group 2B Mortgage Loans that are Owner-Financed
Mortgage Loans.
With respect to one Sub-Group 2B Mortgage Loan, constituting
approximately 0.09% of the Sub-Group 2B Mortgage Loans (the "Negative
Amortization Mortgage Loan"), the Loan Rate thereon adjusts on a date which is
different than the date on which monthly payments are adjusted and/or any
increase or decrease in the amount of the monthly payment on the date of
adjustment is generally limited to an amount not greater than 125% of the
monthly payment due on the immediately preceding Due Date (a "Payment Cap").
Such provisions may result in accelerated or negative amortization with respect
to the Negative Amortization Mortgage Loan. If interest accrued during the
related accrual period at the applicable Loan Rate is greater than the entire
monthly payment due on the Due Date, such excess (the "Deferred Interest") will
be added to the principal balance of the Negative Amortization Mortgage Loan.
The Negative Amortization Mortgage Loan does not apply the Payment Cap in
setting the monthly payment on each five year anniversary of the Mortgage
Loan's origination date or if the principal balance of the Mortgage Loan
exceeds the initial principal balance by a particular percentage. In such event
a monthly payment is established that will fully amortize the principal balance
over its then remaining term at the current Loan Rate.
No Sub-Group 2B Mortgage Loan had a Cut-off Date Principal Balance of
greater than approximately $398,134 or less than approximately $3,533. The
Sub-Group 2B Mortgage Loans are expected to have the following characteristics
as of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
Cut-off Date Principal Balances of the Sub-Group 2B Mortgage Loans(1)
% of Aggregate Principal
Number of Principal Balance Balance of Sub-Group
Mortgage Outstanding as of Outstanding as of
Principal Balance ($) Loans the Cut-off Date the Cut-off Date
------------------------------------------ -------------- --------------------- ---------------------------
3,534 - 50,000.................. 75 $ 2,850,143.97 8.87%
50,001 - 100,000.................. 135 9,993,856.72 31.12
100,001 - 150,000.................. 75 9,007,060.52 28.04
150,001 - 200,000.................. 17 2,927,499.93 9.11
200,001 - 250,000.................. 8 1,736,485.50 5.41
250,001 - 300,000.................. 9 2,532,499.90 7.89
300,001 - 350,000.................. 6 1,940,606.82 6.04
350,001 - 398,134.................. 3 1,129,617.68 3.52
============== ===================== ===========================
Total................................ 328 $32,117,771.04 100.00%
============== ===================== ===========================
- --------------
(1) The average Cut-off Date Principal Balance of the Sub-Group 2B Mortgage Loans was approximately $97,920.
Original Terms to Maturity of the Sub-Group 2B Mortgage Loans(1)
% of Aggregate
Principal Balance of
Principal Balance Sub-Group Outstanding
Number Outstanding as of as of
Original Term (months) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -----------------------
84 - 120................... 4 $ 708,402.00 2.21%
121 - 180................... 1 47,113.00 0.15
181 - 240................... 1 3,533.59 0.01
241 - 300................... 1 84,584.89 0.26
301 - 360................... 321 31,274,137.56 97.37
=================== ======================= =======================
Total..................... 328 $32,117,771.04 100.00%
=================== ======================== =======================
- --------------
(1) The weighted average original term of the Sub-Group 2B Mortgage Loans was approximately 353 months.
Property Types of the Sub-Group 2B Mortgage Loans
% of Aggregate
Principal Balance of
Number Principal Balance Sub-Group Outstanding
of Mortgage Outstanding as of as of
Property Type Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -----------------------
Single Family.................. 287 $27,988,536.27 87.14%
Two Family .................... 14 1,343,635.05 4.18
Condo.......................... 14 1,284,181.54 4.00
PUD(1)......................... 5 734,438.48 2.29
Three Family................... 3 364,564.33 1.14
Townhouse...................... 4 340,119.47 1.06
Four Family.................... 1 62,295.90 0.19
=================== ======================== =======================
Total..................... 328 $32,117,771.04 100.00%
=================== ======================== =======================
- --------------
(1) PUD refers to a Planned Unit Development.
Occupancy Status of the Sub-Group 2B Mortgage Loans (1)
% of Aggregate
Principal Balance of
Principal Balance Sub-Group Outstanding
Number Outstanding as of as of
Occupancy Status of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -----------------------
Primary........................ 303 $30,139,348.89 93.84%
Investor....................... 21 1,372,758.30 4.27
Second Home.................... 4 605,663.85 1.89
=================== ======================== =======================
Total..................... 328 $32,117,771.04 100.00%
=================== ======================== =======================
- --------------
(1) Based on representations made by the mortgagors at the time of origination.
Purpose of the Sub-Group 2B Mortgage Loans
% of Aggregate
Principal Balance of
Number Principal Balance Sub-Group Outstanding
of Mortgage Outstanding as of as of
Purpose Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -----------------------
Refinance.................. 134 $13,269,836.30 41.32%
Purchase................... 107 10,253,240.55 31.92
Cash Out Refinance......... 87 8,594,694.19 26.76
=================== ======================== =======================
Total..................... 328 $32,117,771.04 100.00%
=================== ======================== =======================
Current Loan Rates of the Sub-Group 2B Mortgage Loans (1)
% of Aggregate
Principal Balance of
Principal Balance Sub-Group Outstanding
Number Outstanding as of as of
Current Loan Rate (%) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -----------------------
5.00 ..................... 2 $ 158,300.91 0.49%
5.01 - 5.50.............. 1 97,592.02 0.30
5.51 - 6.00.............. 2 258,974.05 0.81
6.01 - 6.50.............. 1 86,926.45 0.27
6.51 - 7.00.............. 6 524,454.12 1.63
7.01 - 7.50.............. 14 1,278,867.00 3.98
7.51 - 8.00.............. 19 1,972,543.85 6.14
8.01 - 8.50.............. 7 795,559.21 2.48
8.51 - 9.00.............. 22 2,906,625.34 9.05
9.01 - 9.50.............. 25 3,229,660.31 10.06
9.51 - 10.00.............. 18 2,840,627.46 8.84
10.01 - 10.50.............. 30 2,774,444.14 8.64
10.51 - 11.00.............. 34 3,655,600.34 11.38
11.01 - 11.50.............. 19 1,865,339.40 5.81
11.51 - 12.00.............. 26 2,568,873.18 8.00
12.01 - 12.50.............. 17 1,153,811.19 3.59
12.51 - 13.00.............. 22 1,527,182.12 4.75
13.01 - 13.50.............. 12 854,496.84 2.66
13.51 - 14.00.............. 20 1,564,700.77 4.87
14.01 - 14.50.............. 15 1,021,673.16 3.18
14.51 - 15.00.............. 8 520,537.18 1.62
15.01 - 15.50.............. 1 66,159.83 0.21
15.51 - 16.00.............. 5 333,112.01 1.04
16.01 - 16.12.............. 2 61,710.16 0.19
=================== ======================== =======================
Total................................ 328 $32,117,771.04 100.00%
=================== ======================== =======================
- --------------
(1)The weighted average Current Loan Rate of the Sub-Group 2B Mortgage Loans
as of the Cut-off Date was approximately 10.54% per annum.
Current Loan-to-Value Ratios of the Sub-Group 2B Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Sub-Group
Number Outstanding as of Outstanding as of
Current Loan-to-Value Ratio (%) Of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------- ------------------ ---------------------- --------------------
15.03 - 20.00......................... 2 $ 35,851.53 0.11%
20.01 - 30.00......................... 3 110,865.86 0.35
30.01 - 40.00......................... 3 136,503.25 0.43
40.01 - 50.00......................... 4 171,124.05 0.53
50.01 - 60.00......................... 13 748,134.45 2.33
60.01 - 70.00......................... 108 9,121,048.43 28.40
70.01 - 80.00......................... 81 8,443,797.80 26.29
80.01 - 90.00......................... 77 9,733,872.82 30.31
90.01 - 100.00........................ 35 3,460,125.47 10.77
100.01 - 105.34........................ 2 156,447.38 0.49
================== ====================== ====================
Total................................ 328 $32,117,771.04 100.00%
================== ====================== ====================
- --------------
(1)The weighted average current Loan-to-Value Ratio of the Sub-Group 2B
Mortgage Loans as of the Cut-off Date was approximately 78.41%.
Original Loan-to-Value Ratios of the Sub-Group 2B Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Sub-Group
Number Outstanding as of Outstanding as of
Original Loan-to-Value Ratio (%) Of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------- ------------------ ---------------------- --------------------
15.12 - 20.00......................... 1 $ 32,317.94 0.10%
20.01 - 30.00......................... 3 110,865.86 0.35
30.01 - 40.00......................... 3 136,503.25 0.43
40.01 - 50.00......................... 3 129,104.80 0.40
50.01 - 60.00......................... 12 724,209.08 2.25
60.01 - 70.00......................... 105 8,733,413.50 27.19
70.01 - 80.00......................... 84 8,782,659.87 27.35
80.01 - 90.00......................... 75 9,410,070.30 29.30
90.01 - 100.00......................... 30 3,090,332.06 9.62
100.01 - 107.91......................... 12 968,294.38 3.01
================== ====================== ====================
Total................................ 328 $32,117,771.04 100.00%
================== ====================== ====================
- --------------
(1)The weighted average original Loan-to-Value Ratio of the Sub-Group 2B
Mortgage Loans as of the Cut-off Date was approximately 79.45%.
Geographic Distribution of the Sub-Group 2B Mortgaged Properties(1)
% of Aggregate
Principal Balance
Principal Balance of Sub-Group
Number Outstanding as of Outstanding as of
Location of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------- ------------------ ---------------------- --------------------
Alabama.................................. 2 $ 122,048.82 0.38%
Arizona ................................. 7 655,810.86 2.04
California............................... 52 7,637,386.72 23.78
Colorado................................. 6 845,934.36 2.63
Connecticut.............................. 5 443,845.89 1.38
Florida.................................. 19 1,474,792.91 4.59
Georgia.................................. 5 328,425.71 1.02
Hawaii................................... 2 251,109.64 0.78
Idaho.................................... 2 141,826.82 0.44
Illinois................................. 31 2,883,863.76 8.98
Indiana.................................. 8 466,047.95 1.45
Kansas................................... 2 84,714.00 0.26
Kentucky................................. 2 495,940.60 1.54
Maine.................................... 2 141,557.08 0.44
Maryland................................. 6 712,094.42 2.22
Massachusetts............................ 10 1,048,355.45 3.26
Michigan................................. 26 1,904,635.51 5.93
Minnesota................................ 2 141,378.65 0.44
Mississippi.............................. 1 32,626.64 0.10
Missouri................................. 4 244,261.56 0.76
Nevada................................... 2 199,173.07 0.62
New Hampshire............................ 2 108,642.66 0.34
New Jersey............................... 24 2,468,533.14 7.69
New Mexico............................... 2 151,481.38 0.47
New York................................. 20 1,831,231.18 5.70
North Carolina........................... 3 243,916.81 0.76
Ohio..................................... 17 1,081,492.98 3.37
Oklahoma................................. 1 50,615.30 0.16
Oregon................................... 5 698,225.79 2.17
Pennsylvania............................. 19 1,523,143.40 4.74
Rhode Island............................. 1 78,312.98 0.24
Tennessee................................ 5 515,973.59 1.61
Texas.................................... 13 676,386.99 2.11
Utah..................................... 7 764,804.61 2.38
Virginia................................. 2 390,004.02 1.21
Washington............................... 10 1,229,443.74 3.83
Wisconsin................................ 1 49,732.05 0.15
------------------ ---------------------- --------------------
Total................................ 328 $32,117,771.04 100.00%
================== ====================== ====================
- --------------
(1)The greatest ZIP Code geographic concentration of Sub-Group 2B Mortgage
Loans, by aggregate Sub-Group 2B Loan Balance as of the Cut-off Date, was
approximately 1.28% in the 90002 ZIP Code.
Documentation Levels of the Sub-Group 2B Mortgage Loans(1)
% of Aggregate
Principal Balance
Principal Balance of Sub-Group
Number Outstanding as of Outstanding as of
Documentation Level of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------- ------------------ ---------------------- --------------------
Full..................................... 230 $21,601,757.41 67.26%
Stated................................... 37 3,970,480.53 12.36
Limited.................................. 26 2,427,210.24 7.56
Alternative.............................. 18 2,314,890.18 7.21
Unknown.................................. 15 1,618,892.08 5.04
Streamlined.............................. 2 184,540.60 0.57
================== ====================== ====================
Total................................ 328 $32,117,771.04 100.00%
================== ====================== ====================
- --------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
Maximum Loan Rates of the Sub-Group 2B Mortgage Loans(1)
% of Aggregate
Principal Balance of
Principal Balance Sub-Group
Number of Outstanding as of Outstanding as of
Maximum Loan Rate (%) Mortgage Loans the Cut-off Date the Cut-off Date
------------------------------------ ----------------- ------------------------- ----------------------
9.50....................... 1 $ 123,629.40 0.38%
9.51 - 10.00............. 4 387,384.94 1.21
10.01 - 10.50............. 4 332,758.93 1.04
10.51 - 11.00............. 4 378,825.87 1.18
11.01 - 11.50............. 12 1,132,909.72 3.53
11.51 - 12.00............. 7 629,992.73 1.96
12.01 - 12.50............. 8 723,377.41 2.25
12.51 - 13.00............. 1 67,880.90 0.21
13.01 - 13.50............. 3 328,344.48 1.02
13.51 - 14.00............. 5 547,761.01 1.71
14.01 - 14.50............. 2 241,511.83 0.75
14.51 - 15.00............. 10 2,231,757.03 6.95
15.01 - 15.50............. 27 3,744,765.66 11.66
15.51 - 16.00............. 30 3,654,538.48 11.38
16.01 - 16.50............. 24 2,534,630.75 7.89
16.51 - 17.00............. 28 2,775,570.40 8.64
17.01 - 17.50............. 22 2,075,982.36 6.46
17.51 - 18.00............. 22 2,191,723.41 6.82
18.01 - 18.50............. 17 1,194,258.34 3.72
18.51 - 19.00............. 16 1,063,921.58 3.31
19.01 - 19.50............. 21 1,659,965.86 5.17
19.51 - 20.00............. 11 741,380.21 2.31
20.01 - 20.50............. 18 1,416,561.13 4.41
20.51 - 21.00............. 15 1,021,673.16 3.18
21.01 - 21.50............. 6 397,378.03 1.24
21.51 - 22.00............. 2 120,931.66 0.38
22.01 - 22.50............. 4 266,759.47 0.83
22.51 - 23.00............. 4 131,596.29 0.41
================= ========================= ======================
Total........................... 328 $32,117,771.04 100.00%
(1)The weighted average Maximum Loan Rate of the Sub-Group 2B Mortgage Loans
as of the Cut-off Date was approximately 16.47% per annum (excluding those
Sub-Group 2B Mortgage Loans with no Maximum Loan Rate).
Minimum Loan Rates of the Sub-Group 2B Mortgage Loans(1)
% of Aggregate
Principal Balance of
Principal Balance Sub-Group
Number of Outstanding as of Outstanding as of
Minimum Loan Rate (%) Mortgage Loans the Cut-off Date the Cut-off Date
------------------------------------ ----------------- ------------------------- ----------------------
No Minimum.......................... 20 $2,078,184.92 6.47%
0.01 - 0.50...................... 5 384,479.42 1.20
0.51 - 1.00...................... 4 378,825.87 1.18
1.01 - 1.50...................... 11 1,081,189.23 3.37
1.51 - 2.00...................... 9 756,042.21 2.35
2.01 - 2.50...................... 8 723,377.41 2.25
2.51 - 3.00...................... 2 146,193.88 0.46
3.01 - 3.50...................... 1 42,134.66 0.13
7.51 - 8.00...................... 1 129,467.81 0.40
8.01 - 8.50...................... 6 1,087,761.38 3.39
8.51 - 9.00...................... 29 4,269,728.51 13.29
9.01 - 9.50...................... 29 3,596,108.23 11.20
9.51 - 10.00...................... 22 3,070,989.25 9.56
10.01 - 10.50...................... 31 3,054,363.42 9.51
10.51 - 11.00...................... 29 2,461,543.00 7.66
11.01 - 11.50...................... 12 993,669.47 3.09
11.51 - 12.00...................... 14 1,173,043.92 3.65
12.01 - 12.50...................... 16 1,163,164.28 3.62
12.51 - 13.00...................... 22 1,549,698.51 4.83
13.01 - 13.50...................... 9 599,424.24 1.87
13.51 - 14.00...................... 20 1,564,700.77 4.87
14.01 - 14.50...................... 15 1,021,673.16 3.18
14.51 - 15.00...................... 6 397,378.03 1.24
15.01 - 15.50...................... 1 66,159.83 0.21
15.51 - 16.00...................... 4 266,759.47 0.83
16.01 - 16.12...................... 2 61,710.16 0.19
================= ========================= ======================
Total.......................... 328 $32,117,771.04 100.00%
================= ========================= ======================
- --------------
(1)The weighted average Minimum Loan Rate of the Sub-Group 2B Mortgage Loans
as of the Cut-off Date was approximately 9.70% per annum (excluding those
Sub-Group 2B Mortgage Loans with no Minimum Loan Rate).
Gross Margins of the Sub-Group 2B Mortgage Loans(1)
% of Aggregate
Principal Balance of
Number Principal Balance Sub-Group Outstanding
of Mortgage Outstanding as of as of
Gross Margins (%) Loans the Cut-off Date the Cut-off Date
- ----------------------------- ----------------- ------------------------ ------------------------
No Margin................... 1 $ 3,533.59 0.01%
1.51 - 2.00................ 13 1,074,110.72 3.34
2.01 - 2.50................ 4 292,664.17 0.91
2.51 - 3.00................ 33 3,287,720.70 10.24
3.01 - 3.50................ 3 260,352.35 0.81
4.01 - 4.50................ 2 205,256.14 0.64
4.51 - 5.00................ 6 685,419.83 2.13
5.01 - 5.50................ 21 2,317,007.39 7.21
5.51 - 6.00................ 30 3,814,175.61 11.88
6.01 - 6.50................ 51 5,738,859.75 17.87
6.51 - 7.00................ 82 7,089,220.58 22.07
7.01 - 7.50................ 33 2,484,736.80 7.74
7.51 - 8.00................ 19 1,813,513.94 5.65
8.01 - 8.50................ 11 1,156,404.24 3.60
8.51 - 9.00................ 8 895,374.88 2.79
9.01 - 9.50................ 8 819,083.76 2.55
9.51 - 9.99................ 3 180,336.59 0.56
================= ======================== ========================
Total.................. 328 $32,117,771.04 100.00%
================= ======================== ========================
- --------------
(1)The weighted average Gross Margin of the Sub-Group 2B Mortgage Loans as of
the Cut-off Date was approximately 6.09%.
Next Adjustment Date for the Sub-Group 2B Mortgage Loans
% of Aggregate Principal
Principal Balance Balance of Sub-Group
Number of Outstanding as of Outstanding as of
Next Adjustment Date Mortgage Loans the Cut-off Date the Cut-off Date
- ----------------------------- ----------------- ----------------------- --------------------------------
12/01/99.................... 6 $ 619,175.38 1.93%
12/05/99.................... 1 291,795.70 0.91
01/01/00.................... 28 2,912,225.39 9.07
01/28/00.................... 1 31,377.27 0.10
02/01/00.................... 7 684,150.70 2.13
02/13/00.................... 1 23,925.37 0.07
03/01/00.................... 8 615,229.38 1.92
03/17/00.................... 1 95,327.86 0.30
04/01/00.................... 18 1,868,936.54 5.82
04/12/00.................... 1 49,634.27 0.15
04/25/00.................... 1 100,647.46 0.31
05/01/00.................... 8 794,036.17 2.47
06/01/00.................... 9 868,911.97 2.71
07/01/00................... 39 4,210,727.96 13.11
08/01/00................... 19 2,109,962.24 6.57
09/01/00................... 20 1,673,012.21 5.21
09/21/00................... 1 59,607.01 0.19
10/01/00................... 22 1,862,838.10 5.80
11/01/00................... 2 207,460.43 0.65
12/01/00................... 5 321,255.96 1.00
12/14/00................... 1 20,913.13 0.07
01/01/01................... 6 593,177.45 1.85
01/05/01................... 1 198,903.34 0.62
02/01/01................... 6 1,461,857.23 4.55
02/28/01................... 1 64,264.71 0.20
03/01/01................... 12 962,229.02 3.00
03/12/01................... 1 186,573.50 0.58
04/01/01................... 10 1,027,861.28 3.20
04/13/01................... 1 71,849.06 0.22
05/01/01................... 18 1,316,850.08 4.10
06/01/01................... 9 634,441.13 1.98
07/01/01................... 7 947,098.24 2.95
08/01/01................... 4 331,255.79 1.03
12/01/01................... 5 381,766.84 1.19
01/01/02................... 1 326,490.19 1.02
02/01/02................... 4 539,559.56 1.68
03/01/02................... 13 1,220,302.85 3.80
04/01/02................... 8 579,618.38 1.80
05/01/02................... 8 628,797.48 1.96
06/01/02................... 2 140,881.71 0.44
10/01/02................... 1 120,834.50 0.38
07/01/03................... 1 84,584.89 0.26
08/01/03................... 1 336,517.87 1.05
01/01/04................... 1 254,405.87 0.79
04/01/04................... 1 286,499.57 0.89
================= ======================= ================================
Total...................... 328 $32,117,771.04 100.00%
================= ======================= ================================
Indices of the Sub-Group 2B Mortgage Loans
% of Aggregate
Principal Balance of
Number of Principal Balance Sub-Group Outstanding
Mortgage Outstanding as of as of
Index(1) Loans the Cut-off Date the Cut-off Date
- -------------------------------------- ------------- ----------------------- ---------------------
Six Month LIBOR(2)............... 270 $26,713,166.66 83.17%
One Year CMT..................... 55 5,321,303.93 16.57
Other(3)......................... 3 83,300.45 0.26
============= ======================= =====================
Total......................... 328 $32,117,771.04 100.00%
============= ======================= =====================
- --------------
(1)Each of these Indices are described under "--The Index."
(2)Of the Sub-Group 2B Mortgage Loans with an Index of Six Month LIBOR,
approximately 1.93%, 47.76%, 17.67%, and 2.20% (in each case by Sub-Group 2B
Loan Balance as of the Cut-off Date) have initial fixed Loan Rates for one
year, two years, three years and five years, respectively.
(3)Includes three other Indices.
Initial Periodic Rate Caps of the Sub-Group 2B Mortgage Loans(1)
% of Aggregate
Principal Balance of
Principal Balance Sub-Group Outstanding
Number of Outstanding as of as of
Initial Periodic Rate Cap (%) Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------ ----------------- ----------------------- ------------------------
1.00.................................. 72 $7,046,269.22 21.94%
1.50.................................. 20 1,742,131.02 5.42
2.00.................................. 61 4,521,621.23 14.08
3.00.................................. 175 18,807,749.57 58.56
--------------- ------------------------- ------------------------
=============== ========================= ========================
Total................................ 328 $32,117,771.04 100.00%
=============== ========================= ========================
- --------------
(1) Relates solely to initial rate adjustments.
Subsequent Periodic Rate Caps of the Sub-Group 2B Mortgage Loans(1)
% of Aggregate
Principal Balance of
Principal Balance Sub-Group Outstanding
Number of Outstanding as of as of
Periodic Rate Cap (%) Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------ --------------- ------------------------- ------------------------
1.00.................................. 190 $17,671,734.62 55.02%
1.50.................................. 125 13,052,954.27 40.64
2.00.................................. 12 1,224,332.94 3.81
3.00.................................. 1 168,749.21 0.53
=============== ========================= ========================
Total................................ 328 $32,117,771.04 100.00%
=============== ========================= ========================
- --------------
(1) Relates to all rate adjustments subsequent to initial rate adjustments.
The Index
With respect to approximately 16.57% of the Sub-Group 2B Mortgage
Loans, the Index is the weekly average yield on United States Treasury
securities adjusted to a constant maturity of one year as published by the
Federal Reserve Board in Statistical Release H.15(519) and most recently
available as of a day specified in the related note ("One Year CMT"); with
respect to approximately 83.17% of the Sub-Group 2B Mortgage Loans, the Index
is the average of interbank offered rates for six-month U.S. dollar deposits in
the London market based on quotations of major banks, and most recently
available as of a day and pursuant to a calculation as specified in the related
mortgage note ("Six Month LIBOR"); and with respect to approximately 0.25% of
the Sub-Group 2B Mortgage Loans, the Index is an index other than Six Month
LIBOR or One Year CMT. Listed below are some historical values for the months
indicated for two of the indices.
One Year CMT
Year
---------------------------------------------------------------
Month 1999 1998 1997 1996 1995 1994
January.................................. 4.51% 5.24% 5.61% 5.09% 7.05% 3.54%
February................................. 4.70% 5.31% 5.53% 4.94% 6.70% 3.87%
March.................................... 4.78% 5.39% 5.80% 5.34% 6.43% 4.32%
April.................................... 4.69% 5.38% 5.99% 5.54% 6.27% 4.82%
May...................................... 4.85% 5.44% 5.87% 5.64% 6.00% 5.31%
June..................................... 5.10% 5.41% 5.69% 5.81% 5.64% 5.27%
July..................................... 5.03% 5.36% 5.54% 5.85% 5.59% 5.48%
August................................... 5.20% 5.21% 5.56% 5.67% 5.75% 5.56%
September................................ 5.25% 4.71% 5.52% 5.83% 5.62% 5.76%
October.................................. 5.43% 4.12% 5.46% 5.55% 5.59% 6.11%
November................................. N/A 4.53% 5.46% 5.42% 5.43% 6.54%
December................................. N/A 4.52% 5.53% 5.47% 5.31% 7.14%
Six Month LIBOR
Year
---------------------------------------------------------------
Month 1999 1998 1997 1996 1995 1994
January.................................. 4.97% 5.63% 5.69% 5.27% 6.69% 3.38%
February................................. 5.13% 5.70% 5.69% 5.30% 6.44% 4.00%
March.................................... 5.06% 5.75% 5.94% 5.50% 6.50% 4.25%
April.................................... 5.04% 5.81% 6.00% 5.56% 6.38% 4.69%
May...................................... 5.25% 5.75% 6.00% 5.63% 6.00% 5.00%
June..................................... 5.65% 5.78% 5.91% 5.79% 6.00% 5.25%
July..................................... 5.71% 5.75% 5.80% 5.88% 5.88% 5.31%
August................................... 5.92% 5.59% 5.84% 5.77% 5.91% 5.31%
September................................ 5.96% 5.25% 5.84% 5.73% 5.95% 5.75%
October.................................. 6.12% 4.98% 5.79% 5.57% 5.88% 5.94%
November................................. N/A 5.15% 5.91% 5.54% 5.69% 6.56%
December................................. N/A 5.07% 5.84% 5.60% 5.51% 7.00%
If any Index becomes unpublished or is otherwise unavailable, the
Servicer will select an alternative index which is based upon comparable
information.
FHA Mortgage Loans and VA Mortgage Loans
As noted above, (i) 14.15% of the Group 1 Mortgage Loans are subject
to either FHA insurance as described herein (the "FHA Mortgage Loans") or are
subject to a VA guarantee as described herein (the "VA Mortgage Loans") and
(ii) 11.54% of the Group 2 Mortgage Loans are FHA Mortgage Loans or VA Mortgage
Loans. All FHA Mortgage Loans and VA Mortgage Loans must conform to HUD or VA
origination guidelines, as the case may be, at the time of origination. The FHA
Mortgage Loans will be insured by the Federal Housing Administration ("FHA") of
the United States Department of Housing and Urban Development ("HUD") as
authorized under the National Housing Act of 1934, as amended (the "National
Housing Act"), and the United States Housing Act of 1937, as amended (the
"United States Housing Act"). No FHA Mortgage Loan may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of such FHA Mortgage Loan.
The VA Mortgage Loans will be partially guaranteed by The United
States Department of Veterans Affairs (the "VA") under the Servicemen's
Readjustment Act of 1944, as amended. The Servicemen's Readjustment Act of
1944, as amended, permits a veteran (or in certain instances the spouse of a
veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has a current mortgage loan limit of
$203,000, requires no down payment from the purchaser and permits the guarantee
of mortgage loans of generally up to 30 years' duration. However, no VA
Mortgage Loan will have an original principal amount greater than five times
the amount of the related guarantee.
Insurance premiums for the FHA Mortgage Loans are collected by the
Servicer and are paid to the FHA. The regulations governing FHA-insured
single-family mortgage insurance programs generally provide that insurance
benefits are payable upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD. With respect to a defaulted FHA
Mortgage Loan, the Servicer may be limited in its ability to initiate
foreclosure proceedings. Historically, pursuant to an assignment program (the
"Assignment Program"), HUD in certain circumstances offered qualified
mortgagors who had defaulted on an FHA insured mortgage loan an opportunity to
avoid foreclosure and retain their homes. Under the Assignment Program, the FHA
serviced FHA-insured mortgage loans that had defaulted and been assigned to HUD
under the Assignment Program. In addition, HUD gave forbearance for a period of
no longer than 36 months to mortgagors who had demonstrated a temporary
inability to make full payments due to circumstances beyond the mortgagor's
control such as a reduction in income or increase in expenses. The Assignment
Program was terminated and replaced with mandatory loss mitigation procedures
in April 1996 whereby servicers of defaulted FHA-insured mortgage loans must
choose from a variety of tools to cure a default prior to filing an FHA
insurance claim.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims for most programs are being paid
in cash and, for the most part, 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 amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted FHA Mortgage Loan, adjusted
to reimburse the Servicer of that FHA Mortgage Loan 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
generally compensated for no more than two-thirds of its foreclosure costs and
attorneys' fees (which costs are evaluated based upon Fannie Mae guidelines
(which are state specific)), and is compensated for accrued and unpaid mortgage
interest for a limited period prior to the institution of foreclosure or other
acquisition in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD, and the Servicer is otherwise in material
compliance with FHA regulations. Provided that the Servicer is in material
compliance with FHA regulations, the Servicer will generally be entitled to the
debenture interest which would have been earned, as of the date the cash
payment is received, had the benefits been paid in debentures. Except where
unpaid mortgage interest is recoverable pursuant to an approved special
forbearance plan, such debenture interest is generally payable from a date 60
days after the mortgagor's first uncorrected failure to perform any obligation
or make any payment due under the mortgage loan, which results in no recovery
of interest accrued during the first two months of delinquency.
Under certain circumstances, as set forth in the regulations, HUD is
authorized to request or require the Servicer to pursue a deficiency judgment
against any defaulting mortgagor. In this regard, HUD may request or require
the Servicer (as the case may be under the regulations) to pursue a deficiency
judgment in connection with the foreclosure. Under neither case would the
Servicer be responsible for collecting on the judgment. Further, in all cases,
HUD may reimburse the Servicer for all additional costs of seeking the
judgment.
As of the date hereof, the maximum guarantees that may be issued by
the VA under a VA Mortgage Loan are generally (a) as to mortgage loans with an
original principal amount of $45,000 or less, 50% of such mortgage loan, (b) as
to mortgage loans with an original principal amount of greater than $45,000,
but not more than $56,250, $22,500; (c) as to mortgage loans with an original
principal amount of more than $56,250, but not more than $144,000, the lesser
of $36,000 or 40% of the mortgage loan, and (d) as to mortgage loans with an
original principal amount of more than $144,000 (for an owner-occupied,
single-family home or condominium unit), the lesser of $50,750 or 25% of the
mortgage loan. 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 Mortgage Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. However, notwithstanding
the foregoing, the regulations require the Servicer to take immediate action if
it determines that the property to be foreclosed upon has been abandoned by the
debtor or has been or may be subject to extraordinary waste or if there exist
conditions justifying the appointment of a receiver for the property.
Generally, a claim for the guaranty is submitted after liquidation of the
mortgaged property. Upon default and subsequent termination of a VA-guaranteed
mortgage loan by a servicer, the VA makes a determination, using a formula,
whether it will reduce its maximum claim liability by acquiring and reselling
the property or by paying the claim on its guaranty without such acquisition.
If the VA determines it will acquire the mortgaged property, it will establish
a maximum price, known as the specified amount, which the Servicer may bid at
the foreclosure sale in order for the Servicer to subsequently convey the
mortgaged property to the VA. If the Servicer purchases the mortgaged property
at the sale for no more than such specified amount, it may convey the mortgaged
property to the VA in return for the payment of such amount. The VA also pays,
up to the maximum amount of the loan guaranty, the claim for the difference
between the price paid for the mortgaged property and any balance remaining on
the mortgage loan. If, however, the VA determines that acquiring and disposing
of the mortgaged property would increase rather than reduce the government's
loss, it will not establish a maximum bid price for the holder to bid at the
foreclosure sale (thus, a "no-bid"), but rather will solely pay the guaranty
claim up to the maximum amount of the guaranty, once the loss on the mortgage
loan has been established. In the event of a no-bid, the Servicer must
foreclose on the defaulted VA Mortgage Loan and thus a loss may be incurred on
such mortgage loan in an amount equal to the difference between (a) the total
indebtedness and (b) the sum of (i) the guaranteed amount and (ii) the proceeds
of any foreclosure.
The amount payable under the guaranty will be the percentage of the VA
Mortgage Loan originally guaranteed applied to the indebtedness outstanding as
of the applicable date of computation specified in the VA regulations. Payments
under the guaranty will be equal to the unpaid principal amount of the VA
Mortgage Loan, interest accrued on the unpaid balance thereof 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 SELLER
General
Credit-Based Asset Servicing and Securitization LLC is a Delaware
limited liability company with its principal place of business in New York, New
York. The information set forth in the following paragraphs has been provided
by the Seller and neither the Depositor nor any other party makes any
representation as to the accuracy or completeness of such information.
The Seller was established in July 1996 as a venture of Mortgage
Guaranty Insurance Corporation ("MGIC"), Enhance Financial Services Group, Inc.
("EFSG") and certain members of management of the Seller. Each of MGIC and EFSG
has approximately a 48% interest in the Seller with the remainder owned by
management of the Seller. EFSG is rated "A2" by Moody's, "A+" by S&P and "AA-"
by DCR. The insurer financial strength rating of MGIC is AA+, Aa2 and AA+ by
S&P, Moody's and Fitch IBCA, Inc., respectively. EFSG and MGIC are publicly
traded companies which file periodic reports with the Securities and Exchange
Commission (the "Commission") as are required by the Securities Exchange Act of
1934, as amended, and the rules and regulations of the Commission thereunder,
as interpreted by the staff of the Commission thereunder.
At September 30, 1999, the Seller had approximately $875.7 million in
assets, approximately $687.7 million in liabilities and approximately $188.0
million in equity.
The Seller's principal business is the purchasing of performing,
sub-performing and non-performing residential mortgage loans from banks and
other financial institutions and individuals and mortgage-related securities,
including non-investment grade subordinated securities, for investment and
securitization. All mortgage loans owned by the Seller are serviced by its
affiliate, Litton Loan Servicing LP. The Seller does not originate mortgages.
The Seller is a HUD-approved investing mortgagee.
Underwriting Standards
Each Mortgage Loan included in the Trust Fund has satisfied the
credit, appraisal and underwriting guidelines established by the Seller that
are described below. To determine satisfaction of such guidelines, the Seller
or a loan reviewer reviewed the files related to the Mortgage Loans in
connection with the acquisition of the Mortgage Loans by the Seller. These
files include the documentation pursuant to which the mortgage loan was
originally underwritten, as well as the mortgagor's payment history on the
mortgage loan. The Seller's underwriting guidelines when reunderwriting
mortgage loans are intended to evaluate the mortgagor's credit standing,
repayment ability and willingness to repay debt, as well as the value and
adequacy of the mortgaged property as collateral. In general, to establish the
adequacy of the mortgaged property as collateral, the Seller will obtain a
current appraisal, broker's price opinion, and/or drive-by or desk review of
such mortgaged property, prepared within six months of the Seller's purchase. A
mortgagor's ability and willingness to repay debts (including the mortgage
loan) in a timely fashion must be demonstrated by the quality, quantity and
durability of income history, history of debt management, history of debt
repayment, and net worth accumulation. Accordingly, the Seller also obtains and
reviews a current credit report for the mortgagor.
The Seller purchases mortgage loans that were originated pursuant to
one of the following documentation programs:
Full Documentation. Mortgage loans originally underwritten with "Full
Documentation" include a detailed application designed to provide pertinent
credit information. As part of the description of the mortgagor's financial
condition, the mortgagor was required to fill out a detailed application
designed to provide pertinent credit information. As part of the description of
the mortgagor's financial condition, the mortgagor provided a balance sheet,
current as of the origination of the mortgage loan, describing assets and
liabilities and a statement of income and expenses, as well as authorizing the
originator to obtain a credit report which summarizes the mortgagor's credit
history with local merchants and lenders and any record of bankruptcy. In
addition, an employment verification was obtained wherein the employer reported
the length of employment with that organization, the mortgagor's salary as of
the mortgage loan's origination, and an indication as to whether it is expected
that the mortgagor will continue such employment after the mortgage loan's
origination. If a mortgagor was self-employed when such mortgagor's loan was
originated, the mortgagor submitted copies of signed tax returns. The
originator was also provided with deposit verification at all financial
institutions where the mortgagor had demand or savings accounts.
In determining the adequacy of the property as collateral at
origination, an independent appraisal was made of each property considered for
financing. The appraiser inspected the property and verified that it was in
good condition and that construction, if new, had been completed at the time of
the mortgage loan's origination. Such appraisal was based on the appraiser's
judgment of values, giving appropriate weight to both the then market value of
comparable homes and the cost of replacing the property.
Other Levels of Documentation. Other mortgage loans purchased and
reunderwritten by the Seller were originally underwritten pursuant to
alternative documentation programs that require less documentation and
verification than do traditional "full documentation" programs, including "No
Documentation," "Limited Documentation" and "Alternative Documentation"
programs for certain qualifying mortgage loans. Under a "No Documentation"
program, no verification of a mortgagor's income or assets is undertaken by the
originator. Under a "Limited Documentation" program, certain underwriting
documentation concerning income and employment verification is waived.
"Alternative Documentation" programs allow a mortgagor to provide W-2 forms
instead of tax returns, permits bank statements in lieu of verification of
deposits and permits alternative methods of employment verification. These are
underwriting programs designed to streamline the underwriting process by
eliminating the requirement for income verification. Depending on the facts and
circumstances of a particular case, the originator of the mortgage loan may
have accepted other mortgage loans based on limited documentation that
eliminated the need for either income verification and/or asset verification.
The objective use of limited documentation is to shift the emphasis of the
underwriting process from the credit standing of the mortgagor to the value and
adequacy of the mortgaged property as collateral.
Owner-Financed Mortgage Loans
The Seller routinely purchases mortgage loans which are owner-financed
mortgage loans. Owner-financed mortgage loans are originated by the individual
sellers of the related mortgaged properties who generally are inexperienced in
matters pertaining to mortgage banking. These mortgage loans were originated
with less stringent standards than the other mortgage loans typically purchased
by the Seller. The mortgagor under an owner-financed mortgage loan generally
does not complete a mortgage loan application and the seller of the related
property generally does not verify the income or employment of the related
mortgagor. In connection with the Seller's acquisition of an owner-financed
mortgage loan, the Seller obtained and reviewed the credit history and payment
history of the mortgager. In deciding to purchase owner-financed mortgage
loans, the Seller generally places considerable emphasis on the value of the
mortgaged property. The Seller, in connection with its underwriting of an
owner-financed mortgage loan, calculates the loan-to-value ratio of the
mortgage loan at the time of acquisition for underwriting purposes to determine
the mortgagor's equity in the related mortgaged property. The Seller generally
obtains a drive-by appraisal of the market value of each mortgaged property
relating to an owner-financed mortgage loan within 90 days prior to the
purchase by the Seller of such mortgage loan. However, in certain instances,
the Seller may have utilized a previous appraisal if it was completed within
one year prior to the purchase by the Seller, in which case the Seller will
generally require the appraiser to recertify the value in such appraisal. The
Seller may have acquired an owner-financed mortgage loan based upon a
statistical valuation provided by independent data providers of the mortgaged
property and subsequently obtained a drive-by appraisal, generally within three
months of acquisition.
For a discussion of the certain risks related to owner-financed
mortgage loans that a Certificateholder should consider prior to purchase, see
"Risk Factors - Risks Related to Owner-Financed Mortgage Loans."
THE SERVICER
The information set forth in the following paragraphs has been
provided by Litton Loan Servicing LP. None of the Depositor, the Seller, the
Trustee, the Underwriters or any of their respective affiliates have made or
will make any representation as to the accuracy or completeness of such
information.
Litton Loan Servicing LP (the "Servicer") a Delaware limited
partnership, and an affiliate of the Seller, will act as the servicer of the
Mortgage Loans pursuant to the Pooling and Servicing Agreement. Litton Loan
Servicing, Inc. was formed in July 1996, with all of the general and limited
partnership interests owned by EFSG, MGIC and C-BASS Holding LLC. On October 1,
1998 Litton Loan Servicing, Inc., a wholly-owned subsidiary of EFSG,
transferred its business to Litton Loan Servicing LP. From and after October 1,
1998 all activities formerly conducted by Litton Loan Servicing, Inc. are being
conducted by Litton Loan Servicing LP. The Servicer currently employs
approximately 196 individuals. The main office of the Servicer is located at
5373 W. Alabama, Houston, Texas 77056. The Servicer is currently a Fannie Mae
and Freddie Mac approved servicer and an approved FHA and VA lender with a
servicing portfolio in excess of $3.546 billion. The Servicer specializes in
servicing sub-performing mortgage loans and entering into workouts with the
related mortgagors. Other transactions for which the Servicer acts as servicer
include Housing Securities, Inc. 1995-RP1, C-BASS ABS, LLC 1997-1, C-BASS ABS,
LLC 1997-3, C-BASS ABS, LLC 1998-1, C-BASS ABS LLC 1998-3, Merrill Lynch
Mortgage Investors, Inc., Series 1998-FF2, Series 1998-FF3, Series 1998-GN3,
Series 1999-H1, Series 1999-H2, Series 1999-CB1, Series 1999-CB2, Series
1999-CB4 and Series 1999-NC1, New Century Mortgage Securities, Inc.,
Series1999-NCC and The Prudential Home Mortgage Securities Company, Inc.,
Series 1990-09, Series 1990-14, Series 1991-05, Series 1991-10, Series 1991-14,
Series 1991-20, Series 1991-20, Series 1992-06, Series 1992-12, Series 1992-16,
Series 1992-23, Series 1992-31, Series 1992-36, Series 1992-44 and Series
1993-5.
Fitch IBCA, Inc. ("Fitch") assigned the Servicer its RSS1 residential
special servicer rating. The rating is based on the Servicer's ability to
manage and liquidate nonperforming residential mortgage loans and real estate
owned assets. This RSS1 rating is the highest special servicer rating
attainable from Fitch which reflects the Servicer's sophisticated proprietary
default management technology, the financial strength of its well-capitalized
parent and its highly experienced management and staff.
Fitch assigned the Servicer its RPS2 primary servicer rating for
sub-prime and high loan-to-value ratio product. The RPS2 rating is currently
the highest subprime primary servicer rating attainable from Fitch for any
subprime servicer, which is based on the strength of the Servicer's loan
administration processes including new loan set-up procedures and related
technology, loan accounting/cash management and loan reporting. The RPS2 rating
for high loan-to-value ratio product is based on the Servicer's intensive focus
on early collection and loss mitigation.
It is anticipated that, subject to regulatory approval, on or before
December 31, 1999, the Servicer will become a wholly-owned subsidiary of the
Seller.
Delinquency and Foreclosure Experience. The following table sets forth
the delinquency and foreclosure experience of the mortgage loans serviced by
the Servicer, as of the dates indicated. The Servicer's portfolio of mortgage
loans may differ significantly from the Mortgage Loans in the Trust Fund in
terms of interest rates, principal balances, geographic distribution, types of
properties and other possibly relevant characteristics. There can be no
assurance, and no representation is made, that the delinquency and foreclosure
experience with respect to the Mortgage Loans in the Trust Fund will be similar
to that reflected in the table below, nor is any representation made as to the
rate at which losses may be experienced on liquidation of defaulted mortgage
loans. The actual delinquency experience on the Mortgage Loans in the Trust
Fund will depend, among other things, upon the value of the real estate
securing the Mortgage Loans in the Trust Fund and the ability of the related
mortgagor to make required payments. It should be noted that the Servicer's
business emphasizes to a certain degree the acquisition of servicing rights
with respect to non-performing and subperforming mortgage loans and the
Servicer has been an active participant in the market for these servicing
rights during 1999. The acquisition of these servicing rights may have affected
the delinquency and foreclosure experience of the Servicer in the period ending
on September 30, 1999 as compared with the annual periods ending on December
31, 1998 and December 31, 1997.
Delinquency and Foreclosure Experience(1)
As of September 30, 1999 As of December 31, 1998 As of December 31, 1997
----------------------- ----------------------- --------------------------
No. % by No. % by No. % by
of Principal Principal of Principal Principal of Principal Principal
Loans Balance(2) Balance Loans Balance(2) Balance Loans Balance(2) Balance
------ ----------- -------- ------ --------- --------- ----- -------- ---------
Current Loans 34,737 $2,350,607,315 68.14% 39,063 $2,489,678,138 78.01% 28,982 $1,360,468,860 80.48%
Period of
Delinquency(3)
30 Days 4,791 $ 322,318,003 9.34% 3,689 $233,734,152 7.32% 2,534 $111,026,184 6.57%
60-89 2,064 $ 139,639,557 4.05% 1,497 $ 87,944,51 2.76% 728 $ 29,739,192 1.76%
90 Days or more 2,321 $ 152,763,942 4.43% 2,578 $121,504,523 3.81% 1,348 $ 50,772,586 3.00%
Total Delinquency 9,176 $ 614,721,502 17.82% 7,764 $443,183,187 13.89% 4,610 $191,537,962 11.33%
Foreclosures/Bankrupt 5,493 $ 423,664,890 12.28% 2,780 $197,668,255 6.19% 1,344 $ 98,380,747 5.82%
Real Estate Owned 818 60,817,983 1.76% 1,009 $ 60,867,15 1.91% 427 $ 39,978,357 2.37%
Total
Portfolio 50,224 $3,449,811,690 100.00% 50,616 $3,191,396,734 100.00% 35,363 $1,690,365,926 100.00%
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(1)The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2)For the REO Properties, the principal balance is at the time of
foreclosure.
(3)No mortgage loan is included in this section of the table as delinquent
until it is 30 days past due.
(4)Exclusive of the number of loans and principal balance shown in Period of
Delinquency.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the Servicer's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for the Servicer's
mortgage servicing portfolio only for the periods presented, whereas the
aggregate delinquency experience on the Mortgage Loans comprising the Mortgage
Pool will depend on the results obtained over the life of the Mortgage Pool.
The Servicer does not have significant historical delinquency, bankruptcy,
foreclosure or default experience that may be referred to for purposes of
estimating the future delinquency and loss experience of Mortgage Loans. There
can be no assurance that the Mortgage Loans comprising the Mortgage Pool will
perform consistent with the delinquency or foreclosure experience described
herein. It should be noted that if the residential real estate market should
experience an overall decline in property values, the actual rates of
delinquencies and foreclosures could be higher than those previously
experienced by the Servicer. In addition, adverse economic conditions may
affect the timely payment by Mortgagors of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies and foreclosures with respect to the Mortgage Pool.
The Servicer is faced with the task of completing its goals for
compliance in connection with the year 2000 issue. Although the Servicer
believes its computer systems are year 2000 compliant, it is presently engaged
in various procedures to determine if the computer systems and software of its
suppliers, customers, brokers and agents will be year 2000 compliant. In the
event that the Servicer, any subservicer or any of their suppliers, customers,
brokers or agents do not successfully and timely achieve year 2000 compliance,
the Servicer's performance of its obligations under the Pooling and Servicing
Agreement could be adversely affected.
THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of November 1, 1999 (the "Pooling and Servicing
Agreement"), among the Depositor, the Seller, the Servicer and the Trustee. The
Trust Fund created under the Pooling and Servicing Agreement will consist of:
o all of the Depositor's right, title and interest in the Mortgage
Loans, the related mortgage notes, mortgages and other related
documents,
o all payments on or collections in respect of the Mortgage
Loans due after the Cut-off Date, together with any proceeds
thereof,
o any Mortgaged Properties acquired on behalf of Certificateholders
by foreclosure or by deed in lieu of foreclosure, and any
revenues received thereon,
o the rights of the Trustee under all insurance policies required
to be maintained pursuant to the Pooling and Servicing Agreement
and
o the rights of the Depositor under the Mortgage Loan Purchase
Agreement between the Depositor and the Seller.
The Class A Certificates will be transferable and exchangeable at the corporate
trust offices of the Trustee.
Assignment of the Mortgage Loans
On the Closing Date, the Depositor will transfer to the Trust Fund all
of its right, title and interest in and to each Mortgage Loan, the related
mortgage notes, mortgages and other related documents (collectively, the
"Related Documents"), including all scheduled payments with respect to each
such Mortgage Loan due after the Cut-off Date. The Trustee, concurrently with
such transfer, will deliver the Certificates to the Depositor. Each Mortgage
Loan transferred to the Trust Fund will be identified on a schedule (the
"Mortgage Loan Schedule") delivered to the Trustee pursuant to the Pooling and
Servicing Agreement. Such schedule will include information such as the
Principal Balance of each Mortgage Loan as of the Cut-off Date, its Loan Rate
as well as other information.
The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Seller will deliver or cause to be delivered to
the Trustee (or a custodian, as the Trustee's agent for such purpose) the
mortgage notes endorsed to the Trustee on behalf of the Certificateholders or
in blank and the Related Documents. In lieu of delivery of original mortgages
or mortgage notes, if such original is not available or lost, the Seller may
deliver or cause to be delivered true and correct copies thereof, or, with
respect to a lost mortgage note, a lost note affidavit executed by the Seller.
Within 45 days of the Closing Date, the Trustee (or a custodian, as
the Trustee's agent for such purpose) will review the Mortgage Loans and the
Related Documents pursuant to the Pooling and Servicing Agreement and if any
Mortgage Loan or Related Document is found to be defective in any material
respect and such defect is not cured within 90 days following notification
thereof to the Seller by the Trustee, the Seller will be obligated to either
(i) substitute for such Mortgage Loan an Eligible Substitute Mortgage Loan;
however, such substitution is permitted only within two years of the Closing
Date and may not be made unless an opinion of counsel is provided to the effect
that such substitution will not disqualify the Trust Fund as a REMIC or result
in a prohibited transaction tax under the Code or (ii) purchase such Mortgage
Loan at a price (the "Purchase Price") equal to the outstanding Principal
Balance of such Mortgage Loan as of the date of purchase, plus all accrued and
unpaid interest thereon, computed at the Loan Rate through the end of the
calendar month in which the purchase is effected, plus the amount of any
unreimbursed Advances and Servicing Advances made by the Servicer. The Purchase
Price will be deposited in the Collection Account on or prior to the next
succeeding Determination Date after such obligation arises. The obligation of
the Seller to repurchase or substitute for a Defective Mortgage Loan is the
sole remedy regarding any defects in the Mortgage Loans and Related Documents
available to the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan, together with one month's interest
thereon at the applicable Loan Rate.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted
by the Seller for a Defective Mortgage Loan which must, on the date of such
substitution:
o have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective
Mortgage Loan, an aggregate Principal Balance), not in excess of,
and not more than 5% less than, the Principal Balance of the
Defective Mortgage Loan;
o have a Loan Rate, with respect to a Group 1 Mortgage Loan or a
Sub-Group 2A Mortgage Loan, not less than the Loan Rate of the
Defective Mortgage Loan and not more than 1% in excess of the
Loan Rate of such Defective Mortgage Loan or, with respect to a
Sub-Group 2B Mortgage Loan, have a Maximum Loan Rate and Minimum
Loan Rate not less than the respective rate for the Defective
Mortgage Loan and have the same Index as the Defective Mortgage
Loan and a Gross Margin equal to or greater than the Defective
Mortgage Loan;
o have the same Due Date as the Defective Mortgage Loan;
o have a remaining term to maturity not more than one year earlier
and not later than the remaining term to maturity of the
Defective Mortgage Loan;
o comply with each representation and warranty as to the Mortgage
Loans set forth in the Pooling and Servicing Agreement (deemed to
be made as of the date of substitution);
o have been reunderwritten by the Seller in accordance with the
same underwriting criteria and guidelines as the Mortgage Loan
being replaced;
o must be of the same or better credit quality as the Mortgage
Loan being replaced; and
o satisfy certain other conditions specified in the Pooling and
Servicing Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal
Balance and the Loan Rate). In addition, the Seller will represent and warrant,
on the Closing Date, that, among other things: (i) at the time of transfer to
the Depositor, the Seller has transferred or assigned all of its right, title
and interest in each Mortgage Loan and the Related Documents, free of any lien;
and (ii) each Mortgage Loan complied, at the time of origination, in all
material respects with applicable state and federal laws. Upon discovery of a
breach of any such representation and warranty which materially and adversely
affects the interests of the Certificate Insurer or the Certificateholders in
the related Mortgage Loan and Related Documents, the Seller will have a period
of 90 days after discovery or notice of the breach to effect a cure. If the
breach cannot be cured within the 90-day period, the Seller will be obligated
to (i) substitute for such Defective Mortgage Loan an Eligible Substitute
Mortgage Loan or (ii) purchase such Defective Mortgage Loan from the Trust
Fund. The same procedure and limitations that are set forth above for the
substitution or purchase of Defective Mortgage Loans as a result of deficient
documentation relating thereto will apply to the substitution or purchase of a
Defective Mortgage Loan as a result of a breach of a representation or warranty
in the Pooling and Servicing Agreement that materially and adversely affects
the interests of the Certificate Insurer or the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described
in the preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Pooling and Servicing Agreement, the Servicer will
service and administer the Mortgage Loans as more fully set forth therein.
Payments on Mortgage Loans; Deposits to Collection Account and Distribution
Account
The Servicer shall establish and maintain or cause to be maintained a
separate trust account (the "Collection Account") for the benefit of the
holders of the Certificates. The Collection Account will be an Eligible Account
(as defined herein). Upon receipt by the Servicer of amounts in respect of the
Mortgage Loans (excluding amounts representing the Servicing Fee, reimbursement
for Advances and Servicing Advances and insurance proceeds to be applied to the
restoration or repair of a Mortgaged Property or similar items), the Servicer
will deposit such amounts in the Collection Account. Amounts so deposited may
be invested in Eligible Investments (as described in the Pooling and Servicing
Agreement) maturing no later than one Business Day prior to the date on which
the amount on deposit therein is required to be deposited in the Distribution
Account. The Trustee will establish an account (the "Distribution Account")
into which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date. The Distribution
Account will be an Eligible Account. Amounts on deposit therein may be invested
in Eligible Investments maturing on or before the Business Day prior to the
related Distribution Date unless such Eligible Investments are invested in
investments managed or advised by the Trustee or an affiliate thereof, in which
case such Eligible Investments may mature on the related Distribution Date.
An "Eligible Account" is a segregated account that is
o an account or accounts maintained with a federal or state
chartered depository institution or trust company the short-term
unsecured debt obligations of which (or, in the case of a
depository institution or trust company that is the principal
subsidiary of a holding company, the short-term unsecured debt
obligations of such holding company) are rated P-1 by Moody's and
A-1 by S&P (or comparable ratings if Moody's and S&P are not the
rating agencies) at the time any amounts are held on deposit
therein,
o an account or accounts the deposits in which are fully
insured by the Federal Deposit Insurance Corporation
(to the limits established by such corporation), the
uninsured deposits in which account are otherwise secured
such that, as evidenced by an opinion of counsel delivered to
the Trustee and to each Rating Agency, the Certificateholders
will have a claim with respect to the funds in such account
or a perfected first priority security interest against
such collateral (which shall be limited to Eligible Investments)
securing such funds that is superior to claims of any other
depositors or creditors of the depository institution with
which such account is maintained,
o a trust account or accounts maintained with the trust department
of a federal or state chartered depository institution, national
banking association or trust company acting in its fiduciary
capacity or
o otherwise acceptable to each Rating Agency and the Certificate
Insurer without reduction or withdrawal of their then current
ratings of the Certificates as evidenced by a letter from each
Rating Agency to the Trustee.
Eligible Investments are specified in the Pooling and Servicing Agreement and
are limited to investments which meet the criteria of the Rating Agencies and
the Certificate Insurer from time to time as being consistent with their then
current ratings of the Certificates.
Advances
Subject to the limitations in the paragraph below, the Servicer will
be obligated to advance or cause to be advanced on or before each Distribution
Date its own funds, or funds in the Collection Account that are not included in
the Amount Available for such Distribution Date, (any such advance, an
"Advance") in an amount equal to the aggregate of:
o all payments of principal and interest, net of the Servicing Fee
that was due during the related Prepayment Period on the Mortgage
Loans, other than Balloon Payments, and that were delinquent on
the related Determination Date,
o plus certain amounts representing assumed payments not covered by
any current net income on the Mortgaged Properties acquired by
foreclosure or deed in lieu of foreclosure, and,
o plus, with respect to Balloon Loans, with respect to which the
Balloon Payment is not made when due, an assumed monthly payment
that would have been due on the related Due Date based on the
original principal amortization schedule for such Balloon Loan.
Advances are required to be made only to the extent they are deemed by
the Servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making such Advances is to
maintain a regular cash flow to the Certificateholders, rather than to
guarantee or insure against losses. The Servicer will not be required, however,
to make any Advances with respect to reductions in the amount of the monthly
payments on the Mortgage Loans due to bankruptcy proceedings or the application
of the Relief Act. Subject to the recoverability standard above, the Servicer's
obligation to make Advances as to any Mortgage Loan will continue until the
Mortgage Loan is paid in full or until the recovery of all Liquidation Proceeds
thereon.
All Advances will be reimbursable to the Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed Advance was made. In addition, any Advances
previously made in respect of any Mortgage Loan that are deemed by the Servicer
to be nonrecoverable from related late collections, insurance proceeds or
liquidation proceeds may be reimbursed to the Servicer out of any funds in the
Collection Account prior to the distributions on the Certificates. In the event
the Servicer fails in its obligation to make any such advance, the Trustee, in
its capacity as successor Servicer, will be obligated to make any such advance,
to the extent required in the Pooling and Servicing Agreement.
In the course of performing its servicing obligations, the Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (1) the preservation, restoration and protection of the
Mortgaged Properties, (2) any enforcement or judicial proceedings, including
foreclosures, and (3) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage. Each such expenditure will
constitute a "Servicing Advance."
The Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds and such
other amounts as may be collected by the Servicer from the related Mortgagor or
otherwise relating to the Mortgage Loan in respect of which such unreimbursed
amounts are owed, unless such amounts are deemed to be nonrecoverable by the
Servicer, in which event reimbursement will be made to the Servicer from funds
in the Collection Account.
The Trustee
The Bank of New York, a New York banking corporation, will be named
Trustee pursuant to the Pooling and Servicing Agreement. The Trustee may make
available each month, to any interested party, the monthly statement to
Certificateholders via the Trustee's website which can be accessed at
"http://www.bnymbs.com". The Trustee will also distribute to Certificateholders
hard copies of such reports.
The principal compensation (the "Trustee Fee") to be paid to the
Trustee in respect of its obligations under the Pooling and Servicing Agreement
will be equal to accrued interest at the "Trustee Fee Rate" of 0.0125% (1.25
basis points) per annum on the Principal Balance of each Mortgage Loan. In
addition, as compensation for its services the Trustee will receive certain
investment earnings on the amounts on deposit in the Distribution Account. The
Pooling and Servicing Agreement will provide that the Trustee and any director,
officer, employee or agent of the Trustee will be indemnified by the Trust Fund
and will be held harmless against any loss, liability or expense (not including
expenses, disbursements and advances incurred or made by the Trustee, including
the compensation and the expenses and disbursements of its agents and counsel,
in the ordinary course of the Trustee's performance in accordance with the
provisions of the Pooling and Servicing Agreement) incurred by the Trustee
arising out of or in connection with the acceptance or administration of its
obligations and duties under the Pooling and Servicing Agreement, other than
any loss, liability or expense (i) that constitutes a specific liability of the
Trustee under the Pooling and Servicing Agreement or (ii) incurred by reason of
willful misfeasance, bad faith or negligence in the performance of the
Trustee's duties under the Pooling and Servicing Agreement or as a result of a
breach, or by reason of reckless disregard, of the Trustee's obligations and
duties under the Pooling and Servicing Agreement.
The Trustee has established a year 2000 compliance program consisting
of, among other things, updating major proprietary application systems and
evaluating the year 2000 compliance efforts of vendors of major vendor-supplied
systems and certain other business partners. The Trustee believes that its year
2000 compliance program is currently on schedule to meet the needs of its
customers and the compliance deadlines defined by its regulators. As of
December 31, 1998, testing and renovation of the proprietary application
systems that the Trustee deems "mission critical" were substantially completed
and these systems are currently being used by the Trustee. In addition, all
vendor supplied software systems that the Trustee deems mission critical have
been tested and, based upon such testing, the Trustee believes that such
systems will not be adversely affected in a material way by the date change to
the year 2000.
Due to the general uncertainty inherent in the year 2000 problem,
resulting in part from the uncertainty of the year 2000 readiness of suppliers,
customers and other business partners, the Trustee is unable to determine at
this time whether the consequences of year 2000 failures will have a material
impact on the Trustee and its ability to perform its obligations under the
Pooling and Servicing Agreement. The year 2000 compliance program is intended
to reduce significantly the Trustee's level of uncertainty about the year 2000
problem and, in particular, the year 2000 compliance and readiness of the
Trustee and its material business partners. The Trustee believes that, with
completion of its year 2000-compliance program as scheduled, the possibility of
significant interruptions of normal operations should be reduced. However,
because of the unprecedented nature of the year 2000 problem, there can be no
certainty as to its impact.
Servicing and Other Compensation and Payment of Expenses
The principal compensation (the "Servicing Fee") to be paid to the
Servicer in respect of its servicing activities for the Certificates will be at
the "Servicing Fee Rate" of 0.50% (50 basis points) per annum on the Principal
Balance of each Mortgage Loan. As additional servicing compensation, the
Servicer is entitled to retain all service-related fees (other than prepayment
penalties), including assumption fees, modification fees, extension fees and
late payment charges, to the extent collected from mortgagors, together with
any interest or other income earned on funds held in the Collection Account and
any escrow accounts. The Servicer is obligated to offset any Prepayment
Interest Shortfall on any Distribution Date (payments made by the Servicer in
satisfaction of such obligation, "Compensating Interest") by an amount not in
excess of one-half of its Servicing Fee for such Distribution Date. With
respect to any Determination Date and each Mortgage Loan as to which a
principal prepayment in full was applied during the prior calendar month, the
"Prepayment Interest Shortfall" is an amount equal to the interest at the
applicable Loan Rate (net of the Servicing Fee) on the amount of such principal
prepayment for the number of days commencing on the date on which the principal
prepayment is applied and ending on the last day of the prior calendar month.
The Servicer is obligated to pay certain insurance premiums and certain ongoing
expenses associated with the Mortgage Pool and incurred by the Servicer in
connection with its responsibilities under the Pooling and Servicing Agreement
and is entitled to reimbursement therefor as provided in the Pooling and
Servicing Agreement.
The Servicer, in its capacity as a special servicer is also entitled
to an additional servicing fee (the "Special Servicing Fee"), in connection
with Mortgage Loans that are 90 or more days delinquent. As more fully
described in the Pooling and Servicing Agreement, the Special Servicing Fee is
equal to $150 per month for each Mortgage Loan which is 90 or more days
delinquent, payable monthly for eighteen consecutive months commencing in the
first month after the Cut-off Date in which payments on such Mortgage Loan are
90 or more days delinquent, unless such Mortgage Loan becomes less than 90 days
delinquent. The Servicer shall remain entitled to receive any Special Servicing
Fees owed, but not paid, from previous Distribution Dates.
The "Determination Date" with respect to any Distribution Date will be
the 15th day of the calendar month in which such Distribution Date occurs or,
if such 15th day is not a Business Day, the Business Day immediately preceding
such 15th day.
Voting Rights
With respect to any date of determination, the percentage of all the
Voting Rights allocated among holders of the Class A Certificates shall be 98%
and shall be allocated among the Classes of such Certificates in the proportion
that the aggregate Certificate Principal Balance of all the Certificates of
such Class then outstanding bear to the aggregate Certificate Principal Balance
of all Class A Certificates then outstanding. With respect to any date of
determination, the percentage of all the Voting Rights allocated among holders
of the Class X Certificates shall be 2%. If no Insurer Default exists and is
continuing and the Class A Certificates are outstanding or any amounts are owed
to the Certificate Insurer under the Insurance Agreement, all of the Voting
Rights allocated to the Class A Certificateholders shall be vested in the
Certificate Insurer. However, if an Insurer Default does exist and is
continuing, the Voting Rights shall be allocated among holders of the Class A
Certificates as described above. The Voting Rights allocated to a Class of
Certificates shall be allocated among all holders of each such Class in
proportion to the outstanding certificate balances (or percentage interests) of
such Certificates. The Class R Certificates will not have any Voting Rights.
Amendment
The Pooling and Servicing Agreement may be amended by the Seller, the
Depositor, the Servicer and the Trustee, without the consent of the holders of
the Certificates but with the consent of the Certificate Insurer (if no Insurer
Default exists and is continuing and the Class A Certificates are outstanding
or any amounts are owed to the Certificate Insurer under the Insurance
Agreement), for any of the purposes set forth under "The Agreements--Amendment"
in the Prospectus. In addition, the Pooling and Servicing Agreement may with
the written consent of the Certificate Insurer (if no Insurer Default exists
and is continuing and the Class A Certificates are outstanding or any amounts
are owed to the Certificate Insurer) be amended by the Seller, the Depositor,
the Servicer and the Trustee and the holders of a majority in interest of any
Class of Class A Certificates affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Pooling and Servicing Agreement or of modifying in any manner the rights of
the holders of any Class of Class A Certificates; provided, however, that no
such amendment may (i) reduce in any manner the amount of, or delay the timing
of, distributions required to be made on any Class of Class A Certificates
without the consent of the holders of such Certificates; (ii) adversely affect
in any material respect the interests of the holders of any Class of Class A
Certificates in a manner other than as described in clause (i) above, without
the consent of the holders of such Class evidencing percentage interests
aggregating at least 66%; or (iii) reduce the aforesaid percentage of Voting
Rights required by a Class of Certificate to consent to any such amendment,
without the consent of the holders of all such Certificates.
Pledge and Assignment of Servicer's Rights
On the Closing Date, the Servicer will pledge and assign all of its
right, title and interest in, to and under the rights granted to it in the
Pooling and Servicing Agreement to First Union National Bank, as the
representative of certain lenders. In the event that an Event of Servicing
Termination (as defined below) occurs, the Trustee and the Depositor have
agreed to the appointment of First Union National Bank or its designee as the
successor servicer, provided that at the time of such appointment First Union
National Bank or such designee meets the requirements of a successor servicer
described in the Pooling and Servicing Agreement (including being acceptable to
the Rating Agencies and the Certificate Insurer) and that First Union National
Bank or such designee agrees to be subject to the terms of the Pooling and
Servicing Agreement.
Termination
The Seller, or if the Seller does not exercise such option, the
Certificate Insurer, will have the right to purchase all of the Mortgage Loans
and Mortgaged Properties acquired by the Trust Fund ("REO Property") and
thereby effect the early retirement of the Certificates, on any Distribution
Date on which the aggregate Principal Balance of the Mortgage Loans and REO
Properties in the Trust Fund is less than 10% of the aggregate Principal
Balance of the Mortgage Loans in the Trust Fund as of the Cut-off Date. The
first Distribution Date on which such option could be exercised is referred to
herein as the "Optional Termination Date". In the event that the option is
exercised, the purchase will be made at a price (the "Termination Price")
generally equal to par plus accrued interest for each Mortgage Loan at the
related Loan Rate to but not including the first day of the month in which such
purchase price is distributed plus the amount of any unreimbursed Advances and
Servicing Advances made by the Servicer plus any amounts due to the Certificate
Insurer under the Insurance Agreement. Proceeds from such purchase will be
included in the Total Amount Available and will be distributed to the holders
of the Certificates in accordance with the Pooling and Servicing Agreement. Any
such purchase of the Mortgage Loans and REO Properties will result in the early
retirement of the Certificates.
Optional Purchase of Defaulted Loans
As to any Mortgage Loan which is delinquent in payment by 60 days or
more, the Seller may, at its option, purchase such Mortgage Loan from the Trust
Fund at the Purchase Price for such Mortgage Loan.
Events of Servicing Termination
Events of Servicing Termination will consist, among other things, of:
(1) (a) any failure by the Servicer to make an Advance and (b) any
other failure by the Servicer to deposit in the Collection
Account or Distribution Account the required amounts or remit to
the Trustee any payment which continues unremedied for one
Business Day following written notice to the Servicer;
(2) any failure of the Servicer to make any Advance or to cover any
Prepayment Interest Shortfalls, as described herein, which
failure continues unremedied for one Business Day;
(3) any failure by the Servicer to observe or perform in any material
respect any other of its covenants or agreements in the Pooling
and Servicing Agreement, which continues unremedied for 30 days
after the first date on which (x) the Servicer has knowledge of
such failure or (y) written notice of such failure is given to
the Servicer;
(4) insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, and certain actions by or on
behalf of the Servicer indicating its insolvency or inability to
pay its obligations; or
(5) cumulative Realized Losses or Delinquencies as of any
Distribution Date exceed the amount specified in the Pooling and
Servicing Agreement.
Rights upon Event of Servicing Termination
So long as an Event of Servicing Termination under the Pooling and
Servicing Agreement remains unremedied, the Trustee at the direction of the
Certificate Insurer (so long as (i) no Insurer Default exists and is continuing
and (ii) the Class A Certificates are outstanding or any amounts are owed to
the Certificate Insurer under the Insurance Agreement) or the holders of Class
A Certificates (if an Insurer Default exists and is continuing or the Class A
Certificates are no longer outstanding and no amounts are owed to the
Certificate Insurer under the Insurance Agreement) evidencing not less than 51%
of the Voting Rights may terminate all of the rights and obligations of the
Servicer in its capacity as servicer with respect to the Mortgage Loans, as
provided in the Pooling and Servicing Agreement, whereupon the Trustee will
succeed to all of the responsibilities and duties of the Servicer under the
Pooling and Servicing Agreement, including the obligation to make Advances,
subject to the pledge and assignment to First Union National Bank described
above. No assurance can be given that termination of the rights and obligations
of the Servicer under the Pooling and Servicing Agreement would not adversely
affect the servicing of the related Mortgage Loans, including the delinquency
experience of such Mortgage Loans.
No holder of a Class A Certificate, solely by virtue of such holder's
status as a holder of a Class A Certificate, will have any right under the
Pooling and Servicing Agreement to institute any proceeding with respect
thereto, unless such holder previously has given to the Trustee written notice
of default and unless (i) if no Insurer Default exists and is continuing, the
Certificate Insurer so agrees or (ii) if an Insurer Default exists and is
continuing, the holders of Class A Certificates having not less than 51% of the
Voting Rights evidenced by the Class A Certificates so agree and have offered
reasonable indemnity to the Trustee.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. Set forth below are summaries of the specific terms and provisions
pursuant to which the Class A Certificates will be issued. The following
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, the provisions of the Pooling and Servicing
Agreement. When particular provisions or terms used in the Pooling and
Servicing Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated by reference.
The trust will issue the Class A-1 and Class A-2 Certificates
(together, the "Class A Certificates"), the Class X Certificates and the Class
R Certificates (the "Residual Certificates"). The Class A Certificates, Class X
Certificates and the Residual Certificates are collectively referred to herein
as the "Certificates." Only the Class A Certificates are offered hereby.
The Class A Certificates will be covered by an irrevocable and
unconditional certificate guaranty insurance policy (the "Policy") issued by
MBIA Insurance Corporation (the "Certificate Insurer") for the benefit of the
holders of the Class A Certificates, pursuant to which the Certificate Insurer
will guarantee payments to such Certificateholders as described herein.
The Class A Certificates will have the respective Original Certificate
Principal Balances specified on the cover hereof, subject to a permitted
variance of plus or minus one percent. The Class X and the Class R Certificates
will not have an Original Certificate Principal Balance and will not bear
interest.
The Class A Certificates will be issued in book-entry form as
described below. The Class A Certificates will be issued in minimum dollar
denominations of $50,000 and integral multiples of $1,000 in excess thereof
(except that one certificate of each Class may be issued in a denomination
which is not an integral multiple thereof). The assumed final maturity date
(each, an "Assumed Final Distribution Date") for the Class A-1 Certificates is
January 25, 2031 and for the Class A-2 Certificates is January 25, 2031.
Distributions on the Class A Certificates will be made by the Trustee
on the 25th day of each month, or if such day is not a Business Day, on the
first Business Day thereafter, commencing in December 1999 (each, a
"Distribution Date"), to the persons in whose names such Certificates are
registered at the close of business on the Record Date. With respect to the
Class A-1 Certificates, the "Record Date" is the last day of the month
immediately preceding the month in which the related Distribution Date occurs.
With respect to the Class A-2 Certificates, the "Record Date" is the day
immediately preceding such Distribution Date; provided, however, that if any
Class A-2 Certificate becomes a Definitive Certificate (as defined herein), the
Record Date for such Certificate will be the last day of the month immediately
preceding the month in which the related Distribution Date occurs.
Book-Entry Certificates
The Class A Certificates will be book-entry certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Class A Certificates ("Certificate Owners") will hold such Certificates
through DTC in the United States, or Cedelbank or Euroclear (in Europe) if they
are participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate Certificate Principal Balance of
such Certificates 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
Cedelbank's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank will act as depositary for
Cedelbank and The Chase Manhattan Bank will act as depositary for Euroclear (in
such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations of $50,000. Except as
described below, no person acquiring a Book-Entry Certificate (each, a
"beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Class A Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Pooling and Servicing Agreement. Certificate Owners are only permitted
to exercise their rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Cedelbank or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless
and until Definitive Certificates are issued, Certificateholders who are not
Participants may transfer ownership of Book-Entry Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Book-Entry Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Certificateholders.
Because of time zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedelbank Participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank Participant (as defined below) or Euroclear Participant (as defined
below) to a DTC Participant will be received with value on the DTC settlement
date but will be available in the relevant Cedelbank or Euroclear cash account
only as of the business day following settlement in DTC. For information with
respect to tax documentation procedures relating to the Certificates, see
"Certain Material Federal Income Tax Considerations--Tax Treatment of Foreign
Investors" and "--Backup Withholding" in the Prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures--Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC
rules. Transfers between Cedelbank Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedelbank Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the Rules, as in effect from time to time.
Cedelbank ("Cedelbank"), 67 Bd Grande-Duchesse Charlotte, L-1331
Luxembourg, was incorporated in 1970 as a limited company under Luxembourg law.
Cedelbank is owned by banks, securities dealers and financial institutions, and
currently has about 100 shareholders, including U.S. financial institutions or
their subsidiaries. No single entity may own more than five percent of
Cedelbank's stock.
Cedelbank is registered as a bank in Luxembourg, and as such is
subject to regulation by the Institute Monetaire Luxembourgeois, "IML", the
Luxembourg Monetary Authority, which supervises Luxembourg banks.
Cedelbank holds securities for its customers ("Cedelbank
Participants") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Cedelbank provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedelbank also deals with domestic securities markets in
several countries through established depository and custodial relationships.
Cedelbank has established an electronic bridge with Morgan Guaranty Trust as
the Euroclear Operator in Brussels to facilitate settlement of trades between
systems. Cedelbank currently accepts over 70,000 securities issues on its
books.
Cedelbank's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Cedelbank's United States customers are limited to
securities brokers and dealers and banks. Currently, Cedelbank has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to Cedelbank
is available to other institutions which clear through or maintain a custodial
relationship with an account holder of Cedelbank.
The Euroclear System ("Euroclear") was created in 1968 to hold
securities for its participants ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need
for physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 29
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Remittance Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be
responsible for disbursing funds to the beneficial owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to Certificates 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 Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Certain Material Federal Income Tax Considerations--Tax Treatment of
Foreign Investors" and "--Miscellaneous Tax Aspects--Backup Withholding" in the
Prospectus. Because DTC can only act on behalf of Financial Intermediaries, the
ability of a beneficial owner to pledge Book-Entry Certificates to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Certificates, may be limited due to the
lack of physical certificates for such Book-Entry Certificates. In addition,
issuance of the Book-Entry Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market since certain potential
investors may be unwilling to purchase Certificates for which they cannot
obtain physical certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede
& Co., as nominee of DTC, and may be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Cedelbank or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Certificateholder under the
Agreement on behalf of a Cedelbank Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Book-Entry Certificates which conflict with actions taken with respect to
other Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor is
unable to locate a qualified successor, (b) the Depositor, at its sole option,
elects to terminate a book-entry system through DTC or (c) after the occurrence
of an Event of Default, beneficial owners having Percentage Interests
aggregating not less than 51% of the Book-Entry Certificates advise the Trustee
and DTC through the Financial Intermediaries and the DTC participants in
writing that the continuation of a book-entry system through DTC (or a
successor thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Pooling and Servicing Agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among
participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
Neither the Depositor, the Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held
by Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
DTC management is aware that some computer applications, systems, and
the like for processing date ("Systems") that are dependent upon calendar
dates, including dates before, on, and after January 1, 2000, may encounter
"Year 2000 problems." DTC has informed its Participants and other members of
the financial community that it has developed and is implementing a program so
that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC, continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information of the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting (and will continue to contact) third party vendors from whom DTC
acquires services to: (i) impress upon them the importance of such services
being year 2000 compliant; and (ii) determine the extent of their efforts for
Year 2000 remediation (and, as appropriate, testing) of their services. In
addition, DTC is in the process of developing such contingency plans as it
deems appropriate.
According to DTC, the foregoing information with respect to DTC has
been provided to the Industry for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of
any kind.
Allocation of Available Funds
On each Distribution Date the Trustee shall withdraw from the Distribution
Account the Total Amount Available, and make the following disbursements and
transfers as described below and to the extent of the Total Amount Available.
(A) From Group 1 Available Funds in the following order of priority:
first, to the Trustee, the Trustee fee for Loan Group 1 for such
Distribution Date and to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for the premium payable
in respect of the Class A-1 Certificates;
second, to the Class A-1 Certificates, the related Interest
Distributable Amount for the Class A-1 Certificates for such Distribution
Date;
third, to the Class A-1 Certificates, the Principal Distribution
Amount for the Class A-1 Certificates for such Distribution Date;
provided, that if the Overcollateralization Target Amount for the Class
A-1 Certificates is reduced below the then existing amount of
overcollateralization, the amount of the Principal Distribution Amount on
any Distribution Date will be correspondingly reduced by the amount of
such reduction or by the amount necessary such that the
overcollateralization will not exceed the Overcollateralization Target
Amount for the Class A-1 Certificates for that Distribution Date;
fourth, to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for reimbursement for
prior draws made on the Policy in respect of the Class A-1 Certificates
and any other amounts owing to the Certificate Insurer under the Insurance
Agreement with respect to the Class A-1 Certificates; and
fifth, to the Servicer, current and due and owing Special Servicing
Fees in respect of Loan Group 1.
(B) From Group 2 Available Funds in the following order of priority:
first, to the Trustee, the Trustee fee for Loan Group 2 for such
Distribution Date and to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for the premium payable
in respect of the Class A-2 Certificates;
second, to the Class A-2 Certificates, the related Interest
Distributable Amount for the Class A-2 Certificates for such Distribution
Date;
third, to the Class A-2 Certificates, the Principal Distribution
Amount for the Class A-2 Certificates for such Distribution Date; provided
that if the Overcollateralization Target Amount for the Class A-2
Certificates is reduced below the then existing amount of
overcollateralization, the amount of the Principal Distribution Amount on
any Distribution Date will be correspondingly reduced by the amount of
such reduction or by the amount necessary such that the
overcollateralization will not exceed the Overcollateralization Target
Amount for the Class A-2 Certificates for that Distribution Date;
fourth, to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for reimbursement for
prior draws made on the Policy in respect of the Class A-2 Certificates
and any other amounts owing to the Certificate Insurer under the Insurance
Agreement with respect to the Class A-2 Certificates; and
fifth, to the Servicer, current and due and owing Special Servicing
Fees in respect of Loan Group 2.
(C) On any Distribution Date, to the extent the Available Funds for the
related Class of Class A Certificates are insufficient to make the
distributions above pursuant to the first through fourth subclauses of (A) or
(B) above, the Available Funds relating to the other Class of Class A
Certificates remaining after making the distributions required to be made
pursuant to the first through fourth subclauses of (A) or (B) above with
respect to that other Class of Class A Certificates shall be distributed to the
extent of such insufficiency in accordance with the first through fourth
subclauses of (A) or (B) above with respect to the Class of Class A
Certificates experiencing the insufficiency.
(D) Concurrently, to each Class of Class A Certificates, to the extent of
the related Available Funds remaining, the related Distributable Excess Spread
for such Distribution Date, until their respective Certificate Principal
Balances are reduced to zero.
(E) After making the distributions referred to in (A) through (D) above,
the Trustee shall make distributions in the following order of priority, to the
extent of the balance of the remaining Total Amount Available:
first, concurrently, to each Class of Class A Certificates, the excess of
the Distributable Excess Spread for such Distribution Date over the amount
thereof distributed pursuant to (D) above on such Distribution Date in respect
of such Class, until its respective Certificate Principal Balance is reduced to
zero;
second, certain amounts in respect of indemnification that may be required
to be paid by the Trust Fund pursuant to the Pooling and Servicing Agreement;
third, if a successor Servicer has been appointed, to the successor
Servicer, the Certificate Insurer or the Trustee, as applicable, any
Transition Costs; and
fourth, to the Class X Certificates, for deposit into the Excess Reserve
Fund Account first to cover any Class A-2 Available Funds Cap Carryover Amount
(to the extent not covered by amounts already on deposit in the Excess Reserve
Fund Account and only to the extent of any remaining Group 2 Available Funds)
and then to cover any Required Reserve Amount, and then to be released to the
Class X Certificates, such amounts, if any, as described in the Pooling and
Servicing Agreement.
(F) To the Class R Certificates, the remaining amount.
On each Distribution Date, all amounts representing prepayment penalties
from the Mortgage Loans in each Loan Group received during the related
Prepayment Period will be distributed to the Class X Certificates.
Definitions
Many of the defined terms listed below may apply to both Loan Groups /
Class of Class A Certificates and are sometimes used in this prospectus
supplement to refer to a particular Loan Group / Class of Class A Certificates
by the adjectival use of the words "Group 1" and "Group 2".
The "Accrual Period" for the Class A-1 Certificates for a given
Distribution Date will be the calendar month preceding the month of such
Distribution Date based on a 360-day year consisting of twelve 30-day months.
The "Accrual Period" for the Class A-2 Certificates for a given
Distribution Date will be the actual number of days (based on a 360-day year)
included in the period commencing on the immediately preceding Distribution
Date and ending on the day immediately preceding the current Distribution Date;
provided, however, that the initial Accrual Period for the Class A-2
Certificates will be the actual number of days included in the period
commencing on the Closing Date and ending on December 26, 1999.
The "Certificate Principal Balance" of any Class of Class A Certificates
on any Distribution Date will be equal to the original Certificate Principal
Balance specified on the cover of this prospectus supplement reduced by all
amounts actually distributed in respect of principal of such Class on all prior
Distribution Dates.
The "Available Funds" for a Loan Group and Distribution Date will be equal
to the sum of:
o the aggregate amount of monthly payments on the related Mortgage
Loans due on the related Due Date and received by the Trustee
three business days prior to the related Distribution Date, after
deducting the Servicing Fee and any accrued and unpaid Servicing
Fee,
o certain unscheduled payments in respect of the Mortgage Loans,
including prepayments, insurance proceeds, net liquidation
proceeds and proceeds from repurchases of and substitutions for
the Mortgage Loans occurring during the related Prepayment
Period, excluding prepayment penalties and Arrearages, and
o payments from the Servicer in connection with Advances and
Prepayment Interest Shortfalls for the Distribution Date,
minus
o amounts reimbursable therefrom to the Servicer.
The "Prepayment Period" is the prior calendar month.
The "Total Amount Available" for any Distribution Date will equal the sum
of the Available Funds for both Loan Groups.
"Principal Distribution Amount" for a Class of Class A Certificates and
any Distribution Date shall equal the sum of:
o each scheduled payment of principal collected or advanced on the
related Mortgage Loans by the Servicer in respect of the related
Due Date,
o the principal portion of all partial and full principal
prepayments of related Mortgage Loans applied by the Servicer
during the related Prepayment Period,
o the principal portion of all related net liquidation proceeds and
insurance proceeds received during the related Prepayment Period
on the related Mortgage Loans,
o that portion of the Purchase Price, representing principal of any
repurchased Mortgage Loan in the related Loan Group, required to
be deposited to the Collection Account during the related
Prepayment Period,
o the principal portion of any related Substitution Adjustments
required to be deposited in the Collection Account during the
related Prepayment Period, and
o on the Distribution Date on which the Trust Fund is to be
terminated in accordance with the Pooling and Servicing
Agreement, that portion of the Termination Price, in respect of
principal for the related Loan Group.
With respect to any Distribution Date, the related Due Date is the date in
the month of such Distribution Date, if the Due Date is the first day of that
month, otherwise the related Due Date is the date in the prior calendar month.
The "Distributable Excess Spread" with respect to a Class of Class A
Certificates and any Distribution Date, is the amount, if any, required to be
distributed on such Distribution Date to satisfy the Overcollateralization
Target Amount for such Class on such Distribution Date.
The "Interest Distributable Amount" for any Distribution Date and a Class
of Class A Certificates, equals the sum of (i) the related Monthly Interest
Distributable Amount for such Class for such Distribution Date and (ii) the
related Unpaid Interest Shortfall Amount for such Class for such Distribution
Date. The Interest Distributable Amount for a Class of Class A Certificates
will be reduced on each Distribution Date by the amount of Relief Act
Shortfalls and Prepayment Interest Shortfalls occurring on the related Mortgage
Loans during the prior Prepayment Period not covered by Compensating Interest.
The "Monthly Interest Distributable Amount" for any Distribution Date and
a Class of Class A Certificates, equals the amount of interest accrued during
the related Accrual Period at the related Pass-Through Rate on the Certificate
Principal Balance of such Class immediately prior to such Distribution Date
(or, in the case of the first Distribution Date and the Class A-2 Certificates,
from the Closing Date).
The "Overcollateralization Target Amount" means with respect to each Class
of Class A Certificates, the amount specified in the Pooling and Servicing
Agreement which may vary over time.
A "Transition Cost" means any documented fees and expenses and allocated
costs reasonably incurred by a successor Servicer, the Certificate Insurer or
the Trustee in connection with a transfer of servicing from the Servicer to a
successor Servicer.
The "Unpaid Interest Shortfall Amount" means
(1) for each Class of Class A Certificates and the first Distribution
Date, zero, and
(2) with respect to each Class of Class A Certificates and any
Distribution Date after the first Distribution Date,
(a) the sum of (x) the Monthly Interest Distributable Amount for such
Class for the immediately preceding Distribution Date and (y) the
outstanding Unpaid Interest Shortfall Amount, if any, for such
Class for such preceding Distribution Date,
(b) minus the aggregate amount distributed on such Class in respect
of interest on such preceding Distribution Date, and
(3) plus interest on the amount calculated in clause (2), if any, to the
extent permitted by law, at the Pass-Through Rate for such Class for
the related Accrual Period.
Pass-Through Rates
The "Pass-Through Rate" on any Distribution Date on or prior to the
Optional Termination Date with respect to the Class A-1 Certificates will equal
7.47% per annum. With respect to any Distribution Date after the Optional
Termination Date, the Pass-Through Rate for the Class A-1 Certificates will
equal 7.97% per annum. Interest in respect of any Distribution Date will accrue
on the Class A-1 Certificates during the related Accrual Period on the basis of
a 360-day year consisting of twelve 30-day months.
The "Pass-Through Rate" on any Distribution Date with respect to the
Class A-2 Certificates will equal the lesser of (a) the Class A-2 Formula Rate
and (b) the Group 2 Available Funds Cap for such Distribution Date. With
respect to the Class A-2 Certificates, interest in respect of any Distribution
Date will accrue during the related Accrual Period on the basis of a 360-day
year and the actual number of days elapsed. The "Class A-2 Formula Rate" is the
sum of the interbank offered rate for one-month United States dollar deposits
in the London market (the "Certificate Index") as of the related LIBOR
Determination Date (as defined herein) plus a margin (the "Certificate
Margin"). The Certificate Index for the first Distribution Date is 5.58875%.
The Certificate Margin on each Distribution Date on or prior to the Optional
Termination Date will equal 0.45% and on each Distribution Date after the
Optional Termination Date, the Certificate Margin will equal 0.90%. The
Pass-Through Rate applicable to the first Distribution Date on the Class A-2
Certificate is 6.03875% per annum. The "Group 2 Available Funds Cap" for any
Distribution Date shall equal the difference between (A) the average of the
Loan Rates of the Group 2 Mortgage Loans as of the first day of the month
preceding the month of such Distribution Date (or, in the case of the first
Distribution Date, the Closing Date), weighted on the basis of the related
Principal Balances as of such date and (B) the sum of the Servicing Fee Rate
and the rates at which the Trustee Fee and the premium payable to the
Certificate Insurer with respect to the Class A-2 Certificates are calculated
and, beginning with the Distribution Date in December 2000, 0.50% (computed on
the basis of a 360-day year and the actual number of days elapsed during the
related Accrual Period).
The "Class A-2 Available Funds Cap Carryover Amount" is calculated on
any Distribution Date when the Pass-Through Rate for the Class A-2 Certificates
is based upon the Group 2 Available Funds Cap and equals the excess of
(1) the amount of interest the Class A-2 Certificates would have been
entitled to receive on such Distribution Date had their
Pass-Through Rate not been subject to the Group 2 Available Funds
Cap, up to the Maximum Cap, over
(2) the amount of interest the Class A-2 Certificates received on
such Distribution Date based on the Group 2 Available Funds Cap,
plus
(3) the unpaid portion of any such excess from prior Distribution
Dates (and interest accrued thereon at the then applicable
Pass-Through Rate on the Class A-2 Certificates, without giving
effect to the Group 2 Available Funds Cap up to the Maximum Cap).
Any Class A-2 Available Funds Cap Carryover Amount on the Class A-2
Certificates will be paid on future Distribution Dates from and to the extent
of funds available therefor in the Group 2 Excess Reserve Fund Account (as
described herein). The Policy does not cover the payment, nor do the ratings
assigned to the Class A-2 Certificates address the likelihood of the payment,
of any Class A-2 Available Funds Cap Carryover Amount.
The "Maximum Cap" for any Distribution Date is 13.00%.
Calculation of One-Month LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period following the initial Accrual Period (each
such date, a "LIBOR Determination Date"), the Trustee (except for the first
Accrual Period) will determine the Certificate Index for such Accrual Period
for the Class A-2 Certificates on the basis of the offered rates of the
Reference Banks for one-month United States dollar deposits, as such rates
appear on the Telerate Page 3750, as of 11:00 a.m. (London time) on such LIBOR
Determination Date. As used in this section, "LIBOR Business Day" means a day
on which banks are open for dealing in foreign currency and exchange in London
and New York City; "Telerate Page 3750" means the display page currently so
designated on the Dow Jones Telerate Service (or such other page as may replace
that page on that service for the purpose of displaying comparable rates or
prices); and "Reference Banks" means leading banks selected by the Depositor
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
whose quotations appear on the Telerate Page 3750 on the LIBOR Determination
Date in question, (iii) which have been designated as such by the Depositor and
(iv) not controlling, controlled by or under common control with, the
Depositor, the Servicer or any successor Servicer. On the Closing Date, the
Certificate Index for the initial Accrual Period will be determined on the
second LIBOR Business Day preceding the Closing Date.
On each LIBOR Determination Date, the Certificate Index for the
related Accrual Period for the Class A-2 Certificates will be established by
the Trustee as follows:
(a) If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, the Certificate Index for the related
Accrual Period will be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of 0.0625%).
(b) If on such LIBOR Determination Date fewer than two Reference Banks
provide such offered quotations, the Certificate Index for the related
Accrual Period will be the higher of (x) the Certificate Index as
determined on the previous LIBOR Determination Date and (y) the Reserve
Interest Rate. The "Reserve Interest Rate" will be the rate per annum that
the Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 0.0625%) of the
one-month United States dollar lending rates which New York City banks
selected by the Depositor are quoting on the relevant LIBOR Determination
Date to the principal London offices of leading banks in the London
interbank market or (ii) in the event that the Trustee can determine no
such arithmetic mean, (A) in the case of any LIBOR Determination Date
after the initial LIBOR Determination Date, the lowest one-month United
States dollar lending rate which New York City banks selected by the
Depositor are quoting on such LIBOR Determination Date to leading European
banks or (B) in the case of the initial LIBOR Determination Date,
5.58875%.
The establishment of the Certificate Index on each LIBOR Determination
Date by the Trustee and the Trustee's calculation of the rate of interest
applicable to the Class A-2 Certificates for the related Accrual Period will
(in the absence of manifest error) be final and binding.
Excess Reserve Fund Account
The Pooling and Servicing Agreement establishes for the Class A-2
Certificates an account (the "Excess Reserve Fund Account"), which is held in
trust, as part of the Trust Fund, by the Trustee on behalf of the Class A-2
Certificateholders. The Excess Reserve Fund Account will not be an asset of any
REMIC. Holders of the Class A-2 Certificates will be entitled to receive
payments from the Excess Reserve Fund Account to the extent of amounts on
deposit therein in an amount equal to any Class A-2 Available Funds Cap
Carryover Amount.
On the Closing Date, $1,000 will be deposited into the Excess Reserve
Fund Account. Thereafter, if the Group 2 Available Funds Cap does not exceed
the Pass-Through Rate by at least 0.25%, the amount to be held in the Excess
Reserve Fund on any Distribution Date thereafter will equal the greater of (i)
0.50% of the outstanding Certificate Principal Balance of the Class A-2
Certificates as of such Distribution Date and (ii) $5,000 and will be funded
from amounts otherwise to be paid to the Class X Certificates. Thereafter, if
the Group 2 Available Funds Cap for any Distribution Date exceeds the
Pass-Through Rate by 0.25% or more, the Required Reserve Amount for such
Distribution Date will be $5,000. Any distribution by the Trustee from amounts
in the Excess Reserve Fund Account shall be made on the applicable Distribution
Date. The amount required to be on deposit in the Excess Reserve Fund Account
at any time is referred to herein as the "Required Reserve Amount."
Amounts on deposit in the Excess Reserve Fund Account in excess of the
Required Reserve Amount will be released therefrom and distributed to the
holders of the Class X Certificates on any Distribution Date on which the Group
2 Available Funds Cap exceeds the Pass-Through Rate by 0.25% or more.
The Policy
The following information has been supplied by the Certificate Insurer
for inclusion in this prospectus supplement. Accordingly, none of the
Depositor, the Seller or the Servicer makes any representation as to the
accuracy and completeness of such information.
The Certificate Insurer, in consideration of the payment of a premium
and subject to the terms of the Policy, thereby unconditionally and irrevocably
guarantees to any Class A Certificateholder that an amount equal to each full
and complete Insured Payment will be received from the Certificate Insurer by
the Trustee or its successors, as Trustee for the Class A Certificateholders,
on behalf of the Class A Certificateholders, for distribution by the Trustee to
each Class A Certificateholder of that certificateholder's proportionate share
of the Insured Payment.
The Certificate Insurer's obligations under the Policy, with respect
to a particular Insured Payment, will be discharged to the extent funds equal
to the applicable Insured Payment are received by the Trustee, whether or not
those funds are properly applied by the Trustee. Insured Payments will be made
only at the time set forth in the Policy, and no accelerated Insured Payments
will be made regardless of any acceleration of the Class A Certificates, unless
the acceleration is at the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the trust, any REMIC or
the Trustee for withholding taxes, if any (including interest and penalties in
respect of any liability for withholding taxes). The Policy does not cover any
Prepayment Interest Shortfalls, Class A-2 Available Funds Cap Carryover Amounts
or Relief Act Interest Shortfalls.
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the business day following receipt on a business day by
the Certificate Insurer's fiscal agent of the following:
o a certified copy of the order requiring the return of a preference
payment;
o an opinion of counsel satisfactory to the Certificate Insurer that
the order is final and not subject to appeal;
o an assignment in a form that is reasonably required by the
Certificate Insurer, irrevocably assigning to the Certificate
Insurer all rights and claims of the Class A Certificateholder
relating to or arising under the Class A Certificates against the
debtor which made the preference payment or otherwise with
respect to the preference payment; and
o appropriate instruments to effect the appointment of the
Certificate Insurer as agent for the Class A Certificateholder in
any legal proceeding related to the preference payment, which
instruments are in a form satisfactory to the Certificate
Insurer;
provided that if these documents are received after 12:00 p.m., New York time,
on that business day, they will be deemed to be received on the following
business day. Payments by the Certificate Insurer will be disbursed to the
receiver or the trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Class A Certificateholder and not to
any Class A Certificateholder directly unless the Class A Certificateholder has
returned principal or interest paid on the Class A Certificates to the receiver
or trustee in bankruptcy, in which case that payment will be disbursed to the
Class A Certificateholder.
The Certificate Insurer will pay any other amount payable under the
Policy no later than 12:00 p.m., New York time, on the later of the
Distribution Date on which the related Deficiency Amount is due or the second
business day following receipt in New York, New York on a business day by State
Street Bank and Trust Company, N.A., as fiscal agent for the Certificate
Insurer or any successor fiscal agent appointed by the Certificate Insurer of a
notice from the Trustee specifying the Insured Payment which is due and owing
on the applicable Distribution Date, provided that if the notice is received
after 12:00 p.m., New York time, on that business day, it will be deemed to be
received on the following business day. If any notice received by the
Certificate Insurer's fiscal agent is not in proper form or is otherwise
insufficient for the purpose of making a claim under the Policy, it will be
deemed not to have been received by the Certificate Insurer's fiscal agent for
the purposes of this paragraph, and the Certificate Insurer or the fiscal
agent, as the case may be, will promptly so advise the Trustee and the Trustee
may submit an amended notice.
Insured Payments due under the Policy, unless otherwise stated
therein, will be disbursed by the Certificate Insurer's fiscal agent to the
Trustee, on behalf of the Class A Certificateholders, by wire transfer of
immediately available funds in the amount of the Insured Payment less, in
respect of Insured Payments related to Preference Amounts, any amount held by
the Trustee for the payment of the Insured Payment and legally available
therefor.
The fiscal agent is the agent of the Certificate Insurer only and the
fiscal agent will in no event be liable to the Class A Certificateholders for
any acts of the fiscal agent or any failure of the Certificate Insurer to
deposit or cause to be deposited sufficient funds to make payments due under
the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Deficiency Amount" means for any Distribution Date (a) the excess, if
any, of (i) the Interest Distributable Amount for the Class A Certificates (net
of any Relief Act Interest Shortfalls and any Prepayment Interest Shortfalls)
over (ii) funds on deposit in the Distribution Account available to be
distributed therefor on such Distribution Date and (b) the Guaranteed Principal
Amount.
"Final Distribution Date" means the Distribution Date in January 2031.
"Guaranteed Principal Amount" means (a) for any Distribution Date
(other than the Final Distribution Date) the amount, if any, by which the sum
of the Certificate Principal Balances of the Class A-1 and the Class A-2
Certificates exceeds the aggregate principal balance of the Mortgage Loans at
the end of the previous month (after giving effect to all distributions of
principal on the Class A Certificates on such Distribution Date) and (b) on the
Final Distribution Date (after giving effect to all other distributions of
principal on the Class A Certificates), an amount equal to the Certificate
Principal Balance of the Class A Certificates.
"Insured Payment" means (a) as of any Distribution Date, any
Deficiency Amount and (b) any Preference Amount.
"Preference Amount" means any amount previously distributed to a Class
A Certificateholder on the Class A Certificates that is recoverable and sought
to be recovered as a voidable preference by a trustee in bankruptcy pursuant to
the United States Bankruptcy Code (11 U.S.C.), as amended from time to time in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Pooling and
Servicing Agreement as of the date of execution of the Policy, without giving
effect to any subsequent amendment to or modification of the Pooling and
Servicing Agreement unless such amendment or modification has been approved in
writing by the Certificate Insurer.
The Policy is not cancelable for any reason. The premium on the Policy
is not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the Class A Certificates.
The Policy is being issued under and pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
Overcollateralization
Each Class of Class A Certificates is overcollateralized as of the
Closing Date (i.e. the aggregate principal balance of the Mortgage Loans in the
related Loan Group exceeds the Certificate Principal Balance of such Class). As
of the Cut-off Date, the Group 1 Loan Balance will exceed the Certificate
Principal Balance of the Class A-1 Certificates by approximately $7,015,028,
which represents 5.50% of the Group 1 Loan Balance as of that date. As of the
Cut-off Date, the Group 2 Loan Balance will exceed the Certificate Principal
Balance of the Class A-2 Certificates by approximately $4,783,449, which
represents 7.55% of the Group 2 Loan Balance as of that date. The
overcollateralization will be available to absorb losses on the Mortgage Loans
prior to any draw on the Policy. Excess interest collections on the Mortgage
Loans in a Loan Group will be applied to principal distributions on the Class A
Certificates related to such Loan Group in order to maintain the
Overcollateralization Target Amount.
The Pooling and Servicing Agreement provides that the
Overcollateralization Target Amount with respect to a Loan Group may increase
or decrease over time based upon the performance of the Mortgage Loans in such
Loan Group. Any such decrease may have the effect of reducing the amortization
of the Class A Certificates of the related Loan Group below what it otherwise
would have been.
Crosscollateralization
Certain Available Funds with respect to one Loan Group will be
available to make certain distributions with respect to the Class A
Certificates relating to the other Loan Group, as described above under
"--Priority of Distributions". Available Funds generated by Loan Group 1 are
not, however, available to pay any Class A-2 Available Funds Cap Carryover
Amount due to holders of the Class A-2 Certificates.
Reports to Certificateholders
On each Distribution Date, the Trustee will forward to each holder of
a Certificate, the Certificate Insurer and the Rating Agencies a statement
generally setting forth, among other things:
(i) the amount of the distributions, separately identified, with
respect to each Class of Certificates;
(ii) the amount of such distributions set forth in clause (i)
allocable to principal, separately identifying the aggregate amount
of any principal prepayments or other unscheduled recoveries of
principal included therein;
(iii) the amount of such distributions set forth in clause (i)
allocable to interest and the calculation thereof;
(iv) the amount of any Unpaid Interest Shortfall Amount with
respect to each Class of Certificates, separately identified;
(v) the Certificate Principal Balance of each Class of Class A
Certificates after giving effect to the distribution of principal on
such Distribution Date;
(vi) the Pool Balance at the end of the related Prepayment Period;
(vii) the amount of the Servicing Fee and any Special Servicing Fee
paid to or retained by the Servicer;
(viii) the amount of the Trustee Fee paid to the Trustee;
(ix) the amount, if any, of prepayment penalties paid with respect
to the Mortgage Loans;
(x) the amount of Advances for the related Prepayment Period;
(xi) the number and aggregate Principal Balance of Mortgage Loans
that were (A) Delinquent (exclusive of Mortgage Loans in foreclosure)
(1) 30 to 59 days, (2) 60 to 89 days and (3) 90 or more days, (B) in
foreclosure and Delinquent (1) 30 to 59 days, (2) 60 to 89 days and
(3) 90 or more days and (C) in bankruptcy as of the close of business
on the last day of the calendar month preceding such Distribution
Date;
(xii) with respect to any Mortgage Loan that became an REO Property
during the preceding calendar month, the loan number, the Principal
Balance of such Mortgage Loan as of the close of business on the last
day of the related Prepayment Period and the date of acquisition
thereof;
(xiii) the total number and principal balance of any REO Properties
as of the close of business on the last day of the prior calendar
month;
(xiv) the Pass-Through Rate for each Class of Certificates for such
Distribution Date; and
(xv) the amount on deposit on the Excess Reserve Fund Account on
such Distribution Date and the Available Funds Cap Carryover Amount
for the Class A-2 Certificates after giving effect to distributions
thereof on such Distribution Date.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their
tax returns. Such statements will not have been examined and reported upon by
an independent public accountant.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of the Class A Certificates will be sensitive to
defaults on the Mortgage Loans in the related Loan Group. If a purchaser of a
Class A Certificate calculates its anticipated yield based on an assumed rate
of default and amount of losses that is lower than the default rate and amount
of losses actually incurred, its actual yield to maturity will be lower than
that so calculated. In general, the earlier a loss occurs, the greater is the
effect on an investor's yield to maturity. There can be no assurance as to the
delinquency, foreclosure or loss experience with respect to the Mortgage Loans.
Because the Mortgage Loans were underwritten in accordance with standards less
stringent than those generally acceptable to FNMA and FHLMC with regard to a
borrower's credit standing and repayment ability, the risk of delinquencies
with respect to, and losses on, the Mortgage Loans will be greater than that of
mortgage loans underwritten in accordance with FNMA and FHLMC standards.
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the Class A Certificates will be related to the
rate and timing of payments of principal on the Mortgage Loans in the related
Loan Group. The rate of principal payments on the Mortgage Loans will in turn
be affected by the amortization schedules of the Mortgage Loans and by the rate
of principal prepayments (including for this purpose prepayments resulting from
refinancing, liquidations of the Mortgage Loans due to defaults, casualties or
condemnations and repurchases by the Seller). Because certain of the Mortgage
Loans contain prepayment penalties, the rate of principal payments may be less
than the rate of principal payments for mortgage loans which did not have
prepayment penalties. The Mortgage Loans are subject to the "due-on-sale"
provisions included therein. See "The Mortgage Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans in a
Loan Group (including any optional purchase) will result in distributions on
the related Class of Class A Certificates of principal amounts which would
otherwise be distributed over the remaining terms of the Mortgage Loans. Since
the rate of payment of principal on the Mortgage Loans will depend on future
events and a variety of other factors, no assurance can be given as to such
rate or the rate of principal prepayments. The extent to which the yield to
maturity of a Class of Class A Certificates may vary from the anticipated yield
will depend upon the degree to which such Class of Certificates is purchased at
a discount or premium, and the degree to which the timing of payments thereon
is sensitive to prepayments, liquidations and purchases of the Mortgage Loans
in the related Loan Group. Further, an investor should consider the risk that,
in the case of any Class A Certificate purchased at a discount, a slower than
anticipated rate of principal payments (including prepayments) on the Mortgage
Loans in the related Loan Group could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any Class
A Certificate purchased at a premium, a faster than anticipated rate of
principal payments on the Mortgage Loans in the related Loan Group could result
in an actual yield to such investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Loan Rates on the Mortgage
Loans, such Mortgage Loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the Loan Rates on such
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally
be expected to decrease. As is the case with the Group 1 Mortgage Loans and the
Sub-Group 2A Mortgage Loans, the Sub-Group 2B Mortgage Loans may be subject to
a greater rate of principal prepayments in a low interest rate environment. For
example, if prevailing interest rates were to fall, mortgagors with
adjustable-rate Mortgage Loans may be inclined to refinance their
adjustable-rate Mortgage Loans with a fixed-rate loan to "lock in" a lower
interest rate. The existence of the applicable Periodic Rate Cap and Maximum
Rate also may affect the likelihood of prepayments resulting from refinancings
of Sub-Group 2B Mortgage Loans. No assurances can be given as to the rate of
prepayments on the Mortgage Loans in stable or changing interest rate
environments. In addition, the delinquency and loss experience of the Sub-Group
2B Mortgage Loans may differ from that on the Group 1 Mortgage Loans and the
Sub-Group 2A Mortgage Loans because the amount of the monthly payments on the
Sub-Group 2B Mortgage Loans are subject to adjustment on each Adjustment Date.
In addition, a majority of the Sub-Group 2B Mortgage Loans will not have their
initial Adjustment Date for two to five years after the origination thereof.
The prepayment experience of the Delayed First Adjustment Mortgage Loans may
differ from that of the other Sub-Group 2B Mortgage Loans. The Delayed First
Adjustment Mortgage Loans may be subject to greater rates of prepayments as
they approach their initial Adjustment Dates even if market interest rates are
only slightly higher or lower than the Loan Rates on the Delayed First
Adjustment Mortgage Loans as borrowers seek to avoid changes in their monthly
payments.
Additional Information
The Depositor has filed certain yield tables and other computational
materials with respect to the Class A Certificates with the Commission in a
report on Form 8-K and may file certain additional yield tables and other
computational materials with respect to one or more Classes of Class A
Certificates with the Commission in a report on Form 8-K. Such tables and
materials were prepared by Greenwich Capital Markets, Inc. and First Union
Securities, Inc. (collectively, the "Underwriters") at the request of certain
prospective investors, based on assumptions provided by, and satisfying the
special requirements of, such prospective investors. Such tables and
assumptions may be based on assumptions that differ from the Structuring
Assumptions. Accordingly, such tables and other materials may not be relevant
to or appropriate for investors other than those specifically requesting them.
Weighted Average Lives
The timing of changes in the rate of principal prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal prepayments is consistent with such
investor's expectation. In general, the earlier a principal prepayment on the
Mortgage Loans occurs, the greater the effect of such principal prepayment on
an investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Class
A Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The projected weighted average life of each Class of Class A
Certificates is the average amount of time that will elapse from the Closing
Date, until each dollar of principal is scheduled to be repaid to the investors
in such Class of Class A Certificates. Because it is expected that there will
be prepayments and defaults on the Mortgage Loans, the actual weighted average
lives of the Class A Certificates are expected to vary substantially from the
weighted average remaining terms to stated maturity of the Mortgage Loans as
set forth herein under "The Mortgage Pool."
The "Assumed Final Maturity Date" for each Class of Class A
Certificates is as set forth herein under "Description of the
Certificates--General". The Assumed Final Maturity Date for each Class of Class
A Certificates is the Distribution Date in the thirteenth month following the
latest maturity date of any Mortgage Loan in a Loan Group. The weighted average
life of each Class of Class A Certificates is likely to be shorter than would
be the case if payments actually made on the Mortgage Loans conformed to the
foregoing assumptions, and the final Distribution Date with respect to the
Class A Certificates could occur significantly earlier than the related Assumed
Final Maturity Date because (i) prepayments are likely to occur, (ii) excess
cashflow, if any, may be applied as principal of the Class A Certificates as
described herein, and (iii) the Seller or the Certificate Insurer may cause a
termination of the Trust Fund as provided herein.
The model used in this prospectus supplement, the "Constant Prepayment
Rate" or "CPR" represents an assumed rate of prepayment each month expressed as
an annual rate relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. CPR does not purport to be
a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.
Each of the Prepayment Scenarios in the table below assumes the
respective percentages of CPR described thereunder.
The tables on pages S-84 through S-85 were prepared on the basis of
the assumptions in the following paragraph and the tables set forth below.
There are certain differences between the loan characteristics included in such
assumptions and the characteristics of the actual Mortgage Loans. Any such
discrepancy may have an effect upon the percentages of original Certificate
Principal Balances outstanding and weighted average lives of the Class A
Certificates set forth in those tables. In addition, since the actual Mortgage
Loans in the Trust Fund will have characteristics that differ from those
assumed in preparing the tables set forth below, the distributions of principal
of the Class A Certificates may be made earlier or later than indicated in the
tables.
The percentages and weighted average lives in the tables that follow
were determined assuming that (the "Structuring Assumptions"):
o the Mortgage Loans consist of two pools of mortgage loans with
the characteristics set forth in the
table below,
o the closing date for the Class A Certificates occurs on November
23, 1999 and the Class A Certificates were sold to investors on
such date,
o distributions on the Certificates are made on the 25th day of
each month regardless of the day on which the Distribution Date
actually occurs, commencing in December 1999, in accordance with
the allocation of Available Funds set forth above under
"Description of the Certificates--Allocation of Available Funds",
o the prepayment rates are the percentages of CPR set forth in the
"Prepayment Scenarios" table below,
o prepayments include thirty days' interest thereon,
o the Seller is not required to substitute or repurchase any or all
of the Mortgage Loans pursuant to the Pooling and Servicing
Agreement and no optional termination is exercised, except with
respect to the entries identified by the row heading "Weighted
Average Life (years) to Optional Termination" in the tables
below,
o the Overcollateralization Target Amounts are set initially as
specified in the Pooling and Servicing Agreement and thereafter
vary as described in the definition thereof,
o scheduled payments for all Mortgage Loans are received on the
first day of each month commencing in December 1999, the
principal portion of such payments is computed prior to giving
effect to prepayments received in such month and there are no
losses or delinquencies with respect to such Mortgage Loans,
o all Mortgage Loans prepay at the same rate and all such payments
are treated as prepayments in full of individual Mortgage Loans,
with no shortfalls in collection of interest,
o such prepayments are received on the last day of each month
commencing in the month prior to the Closing Date,
o the Certificate Index is at all times equal to 5.58875%,
o the Pass-Through Rates for the Class A Certificates are as set forth
herein,
o the Loan Rate for each Adjustable Rate Mortgage Loan is adjusted
on its next Adjustment Date (and on subsequent Adjustment Dates,
if necessary) to equal the sum of
o the assumed level of the Index and
o the respective Gross Margin (such sum being subject to the
applicable Periodic Rate Caps, Minimum Loan Rates and Maximum
Loan Rates), and
o with respect to the Adjustable Rate Mortgage Loans,
o Six Month LIBOR is equal to 6.03375%; and
o the One Year CMT Index is equal to 5.55000%.
Nothing contained in the foregoing assumptions should be construed as a
representation that the Mortgage Loans will not experience delinquencies or
losses.
Prepayment Scenarios
Loan Group Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
Group 1(1) 0.00% 10.00% 15.00% 20.00% 30.00% 35.00% 40.00%
Sub-Group 2A (1) 0.00% 12.50% 18.75% 25.00% 37.50% 43.75% 50.00%
Sub-Group 2B(1) 0.00% 15.00% 22.50% 30.00% 45.00% 52.50% 60.00%
- --------------
(1) percentage of CPR.
Assumed Mortgage Loan Characteristics
Loan Group 1
Original
Term to Remaining Term
Principal Maturity to Maturity
Collateral Description Balance ($) Loan Rate (%) (months) (months)
>
Fixed Rate: Other - 15 Yr $5,102,125.33 9.97632% 174 170
Fixed Rate: Other - 15 Yr $5,622,156.28 9.72885% 176 172
Fixed Rate: Other - 30 Yr $13,757,526.49 9.97049% 354 350
Fixed Rate: Other - 30 Yr $32,158,382.01 9.78397% 358 355
Fixed Rate: Balloon $111,779.99 11.50000% 180(1) 174
Fixed Rate: FHA/VA - 15 Yr $146,772.01 8.00000% 180 144
Fixed Rate: FHA/VA - 30 Yr $18,618,519.50 8.40077% 360 311
Fixed Rate: Other - 15 Yr $4,202,504.81 9.79903% 162 135
Fixed Rate: Other - 15 Yr $477,502.70 13.08601% 167 152
Fixed Rate: Other - 30 Yr $37,667,576.29 9.46858% 350 340
Fixed Rate: Other - 30 Yr $5,472,422.60 10.75108% 354 343
Fixed Rate: Balloon $3,722,943.74 9.38266% 184(2) 157
Fixed Rate: Balloon $493,815.93 11.16540% 180(1) 164
- --------------
(1) This loan has an original amortization term of 360 months. (2) This loan
has an original amortization term of 322 months.
Loan Group 2
Original
--------- Remaining Months
Term to Term to Maximum Minimum to Rate Initial Subsequent
Collateral Principal Loan Rate Maturity Maturity Gross Loan Loan Rate AdjustmentPeriodic Periodic
Description Balance ($) (%) (months) (months) Margin (%) Rate (%) (%) Date Cap (%) Cap (%)
Fixed Rate: Other -
15 Yr $267,638.06 10.60000% 180 177 N/A N/A N/A N/A N/A N/A
Fixed Rate: Other -
30 Yr $979,007.44 9.66334% 360 357 N/A N/A N/A N/A N/A N/A
Fixed Rate: Other -
30 Yr $2,791,651.27 8.96159% 360 357 N/A N/A N/A N/A N/A N/A
Fixed Rate: FHA/VA
- - 30 Yr $3,820,263.96 8.43048% 360 333 N/A N/A N/A N/A N/A N/A
Fixed Rate: Other -
15 Yr $71,508.29 11.99000% 180 157 N/A N/A N/A N/A N/A N/A
Fixed Rate: Other -
30 Yr $21,118,937.06 8.88223% 356 306 N/A N/A N/A N/A N/A N/A
Fixed Rate: Other -
30 Yr $1,434,321.14 10.69228% 338 327 N/A N/A N/A N/A N/A N/A
Fixed Rate: Balloon $762,350.93 8.36754% 276(1) 271 N/A N/A N/A N/A N/A N/A
One Year CMT $254,405.87 7.87500% 360 326 2.87000% 13.87000% 0.00000% 50 3.00000% 2.00000%
6 Mo LIBOR ARM $575,877.75 10.36998% 220(2) 192 6.28125% 14.80067% 8.80067% 1 1.00000% 1.00000%
6 Mo LIBOR ARM $365,011.05 11.62500% 360 338 6.37500% 14.62500% 8.62500% 2 1.00000% 1.00000%
2/28 6 Mo LIBOR ARM $1,175,124.78 11.52326% 360 348 7.81589% 18.12911% 11.52326% 12 2.74801% 1.37400%
2/28 6 Mo LIBOR ARM $1,411,963.85 9.79076% 360 346 6.16204% 15.41042% 9.05927% 11 3.00000% 1.22924%
3/27 6 Mo LIBOR ARM $298,106.55 10.85000% 360 344 8.85000% 17.35000% 10.85000% 20 3.00000% 1.50000%
3/27 6 Mo LIBOR ARM $1,147,975.23 9.42054% 360 350 6.44140% 15.76089% 9.42054% 26 3.00000% 1.22773%
5/25 6 Mo LIBOR ARM $286,499.57 8.80000% 360 353 5.20000% 15.30000% 8.80000% 53 3.00000% 1.50000%
5/25 6 Mo LIBOR ARM $336,517.87 8.40000% 360 345 6.50000% 14.90000% 8.40000% 45 3.00000% 1.50000%
One Year CMT $4,689,371.15 7.55700% 360 308 2.80172% 12.11283% 1.52351% 9 1.20349% 1.18563%
One Year CMT $377,526.91 9.79109% 360 316 6.17937% 16.01016% 8.26669% 14 2.74593% 1.36360%
6 Mo LIBOR ARM $2,856,465.34 11.32769% 320(2) 298 6.35741% 17.45457% 9.72584% 7 1.98040% 1.21956%
6 Mo LIBOR ARM $937,217.09 11.53157% 360 341 6.43430% 17.86903% 10.59315% 11 2.19792% 1.32687%
1/29 6 Mo LIBOR ARM $125,809.42 14.84699% 360 346 9.26294% 21.29441% 14.79441% 4 1.50000% 1.50000%
1/29 6 Mo LIBOR ARM $495,318.40 11.94652% 360 345 6.57586% 16.13557% 9.74386% 3 1.39172% 1.39172%
2/28 6 Mo LIBOR ARM $5,540,642.41 11.59887% 360 347 6.81004% 17.98895% 11.10044% 12 2.46042% 1.21746%
2/28 6 Mo LIBOR ARM $6,928,728.71 10.38617% 359 345 6.70201% 16.71589% 10.38212% 11 2.90255% 1.36224%
3/27 6 Mo LIBOR ARM $1,509,015.19 12.26395% 360 336 6.70352% 18.15463% 10.96062% 15 2.18247% 1.02672%
3/27 6 Mo LIBOR ARM $2,721,609.01 12.46992% 360 346 6.78018% 18.87889% 11.77295% 23 2.63954% 1.129800%
5/25 6 Mo LIBOR ARM $84,584.89 9.40000% 300 284 5.80000% 15.90000% 9.40000% 44 3.00000% 1.50000%
- --------------
(1) This loan has an original amortization term of 302 months. (2) This loan
has an original amortization term of 360 months.
Based on the foregoing assumptions, the following tables indicate the projected
weighted average lives of each Class of Class A Certificates, and set forth the
percentages of the Original Certificate Principal Balance of each such Class
that would be outstanding after each of the dates shown, at various Prepayment
Scenarios.
Percent of Original Certificate Principal Balance Outstanding*
Class A-1
Prepayment Scenario
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
Initial Percentage................ 100% 100% 100% 100% 100% 100% 100%
November, 2000.................... 99% 88% 83% 78% 67% 62% 57%
November, 2001.................... 97% 78% 69% 60% 45% 38% 31%
November, 2002.................... 96% 68% 57% 46% 29% 22% 16%
November, 2003.................... 94% 60% 47% 37% 21% 16% 12%
November, 2004.................... 93% 52% 39% 29% 15% 10% 7%
November, 2005.................... 91% 46% 32% 23% 10% 6% 4%
November, 2006.................... 89% 40% 27% 18% 7% 4% 2%
November, 2007.................... 86% 35% 22% 14% 5% 2% 1%
November, 2008.................... 84% 31% 18% 11% 3% 1% 0%
November, 2009.................... 81% 27% 15% 8% 2% 0% 0%
November, 2010.................... 78% 23% 12% 6% 1% 0% 0%
November, 2011.................... 75% 20% 10% 5% 0% 0% 0%
November, 2012.................... 72% 18% 8% 3% 0% 0% 0%
November, 2013.................... 66% 15% 7% 2% 0% 0% 0%
November, 2014.................... 63% 13% 5% 2% 0% 0% 0%
November, 2015.................... 60% 11% 4% 1% 0% 0% 0%
November, 2016.................... 57% 9% 3% 1% 0% 0% 0%
November, 2017.................... 54% 8% 2% 0% 0% 0% 0%
November, 2018.................... 50% 7% 2% 0% 0% 0% 0%
November, 2019.................... 47% 6% 1% 0% 0% 0% 0%
November, 2020.................... 43% 4% 1% 0% 0% 0% 0%
November, 2021.................... 39% 3% 0% 0% 0% 0% 0%
November, 2022.................... 34% 3% 0% 0% 0% 0% 0%
November, 2023.................... 29% 2% 0% 0% 0% 0% 0%
November, 2024.................... 23% 1% 0% 0% 0% 0% 0%
November, 2025.................... 17% 0% 0% 0% 0% 0% 0%
November, 2026.................... 12% 0% 0% 0% 0% 0% 0%
November, 2027.................... 6% 0% 0% 0% 0% 0% 0%
November, 2028.................... 1% 0% 0% 0% 0% 0% 0%
November, 2029.................... 0% 0% 0% 0% 0% 0% 0%
Weighted Average Life (years)
to maturity(1)................. 17.88 7.22 5.19 3.96 2.57 2.14 1.81
Weighted Average Life (years)
to Optional Termination(1)...... 17.79 6.73 4.75 3.59 2.31 1.91 1.62
- --------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined
by (i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such Class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reductions
in principal amount on such Class of Certificates.
Percent of Original Certificate Principal Balance Outstanding*
Class A-2
Prepayment Scenario
-----------------------------------------------------------------------------------------
Scenario I Scenario II Scenario Scenario IV Scenario V Scenario VI Scenario VII
Distribution Date III
- ----------------------------------- --------------------------------------------------------------------------- -------------
Initial Percentage................ 100% 100% 100% 100% 100% 100% 100%
November, 2000.................... 99% 84% 77% 70% 55% 47% 40%
November, 2001.................... 98% 71% 59% 48% 29% 21% 14%
November, 2002.................... 97% 59% 45% 32% 13% 7% 2%
November, 2003.................... 96% 50% 35% 25% 11% 7% 2%
November, 2004.................... 95% 42% 28% 18% 6% 3% 1%
November, 2005.................... 94% 36% 22% 13% 4% 1% 0%
November, 2006.................... 92% 30% 17% 9% 2% 0% 0%
November, 2007.................... 91% 26% 13% 7% 1% 0% 0%
November, 2008.................... 89% 22% 10% 5% 0% 0% 0%
November, 2009.................... 87% 18% 8% 3% 0% 0% 0%
November, 2010.................... 85% 16% 6% 2% 0% 0% 0%
November, 2011.................... 82% 13% 5% 1% 0% 0% 0%
November, 2012.................... 80% 11% 4% 1% 0% 0% 0%
November, 2013.................... 77% 9% 3% 0% 0% 0% 0%
November, 2014.................... 73% 8% 2% 0% 0% 0% 0%
November, 2015.................... 69% 6% 1% 0% 0% 0% 0%
November, 2016.................... 65% 5% 1% 0% 0% 0% 0%
November, 2017.................... 61% 4% 0% 0% 0% 0% 0%
November, 2018.................... 56% 3% 0% 0% 0% 0% 0%
November, 2019.................... 51% 2% 0% 0% 0% 0% 0%
November, 2020.................... 46% 2% 0% 0% 0% 0% 0%
November, 2021.................... 40% 1% 0% 0% 0% 0% 0%
November, 2022.................... 34% 0% 0% 0% 0% 0% 0%
November, 2023.................... 28% 0% 0% 0% 0% 0% 0%
November, 2024.................... 19% 0% 0% 0% 0% 0% 0%
November, 2025.................... 13% 0% 0% 0% 0% 0% 0%
November, 2026.................... 9% 0% 0% 0% 0% 0% 0%
November, 2027.................... 4% 0% 0% 0% 0% 0% 0%
November, 2028.................... 0% 0% 0% 0% 0% 0% 0%
November, 2029.................... 0% 0% 0% 0% 0% 0% 0%
Weighted Average Life (years)
to maturity(1)................. 18.85 5.71 3.88 2.84 1.71 1.36 1.07
Weighted Average Life (years)
to Optional Termination(1)...... 18.79 5.50 3.72 2.74 1.65 1.31 1.04
- --------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined
by (i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such Class of Certificates by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reductions
in principal amount on such Class of Certificates.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Class A
Certificates against the purchase price of the Mortgage Loans transferred to
the Trust Fund.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Pooling and Servicing Agreement provides that the Trust Fund,
exclusive of the assets held in the Excess Reserve Fund Account, will comprise
several Subsidiary REMICs and a Master REMIC organized in a tiered "real estate
mortgage investment conduit" ("REMIC") structure. Each Subsidiary REMIC will
issue uncertificated regular interests and those interests will be held
entirely by the REMIC immediately above it in the tiered structure. Each of the
Subsidiary REMICs and the Master REMIC will designate a single class of
interests as the residual interest in that REMIC. The Class R Certificates will
represent ownership of the residual interests in each of the REMICs. Elections
will be made to treat each Subsidiary REMIC and the Master REMIC as a REMIC for
federal income tax purposes.
Each Class of Class A Certificates and the Class X Certificates will
represent beneficial ownership of regular interests issued by the Master REMIC.
In addition, the Class A Certificates will represent a beneficial interest in
the right to receive payments from the Excess Reserve Fund Account.
Upon the issuance of the Class A Certificates, Brown & Wood llp ("Tax
Counsel"), will deliver its opinion concluding, assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, each
Subsidiary REMIC and the Master REMIC will qualify as a REMIC within the
meaning of Section 860D of the Internal Revenue Code of 1986, as amended (the
"Code"). In addition, Tax Counsel will deliver an opinion concluding that the
Excess Reserve Fund Account is an "outside reserve fund" that is beneficially
owned by the Certificateholders of the Class X Certificates. Moreover, Tax
Counsel will deliver an opinion concluding that the rights of the
Certificateholders of the Class A-2 Certificates to receive payments from the
Excess Reserve Fund Account represent, for federal income tax purposes,
contractual rights that are separate from their regular interests within the
meaning of Treasury regulations XX1.860G.2(i).
Taxation of Regular Interests
The following discussion assumes that the right of the Class A-2
Certificates to receive payments from the Excess Reserve Fund Account will be
treated as an interest rate cap agreement rather than as a partnership for
federal income tax purposes. Prospective investors in the Class A-2
Certificates should consult their tax advisors regarding their appropriate tax
treatment. A holder of a Class A Certificate will be treated for federal income
tax purposes as owning a regular interest in the Master REMIC. The Class A-2
Certificates will also represent beneficial ownership of an interest in a
limited recourse interest rate cap contract (the "Cap Contract"). A
Certificateholder of a Class A-2 Certificate must allocate its purchase price
for such Certificate between its two components - the REMIC regular interest
component and the Cap Contract component (the value of which should be
nominal). For information reporting purposes, the Trustee will assume that,
with respect to any Class A-2 Certificate, the Cap Contract component will have
only nominal value relative to the value of the regular interest component. The
IRS could, however, argue that the Cap Contract component has a greater than de
minimis value, and if that argument were to be sustained, the regular interest
component could be viewed as having been issued with original issue discount
("OID") (which could cause the total amount of discount to exceed a statutorily
defined de minimis amount). See "Certain Material Federal Income Tax
Considerations" in the Prospectus.
Upon the sale, exchange, or other disposition of a Class A
Certificate, the Certificateholder must allocate the amount realized between
the two components of the Class A-2 Certificate based on the relative fair
market values of those components at the time of sale. Assuming that a Class A
Certificate is held as a "capital asset" within the meaning of section 1221 of
the Code, with respect to the Class A-2 Certificate gain or loss on the
disposition of an interest in the Cap Contract component should be capital gain
or loss, and, gain or loss on the disposition of the regular interest component
should, subject to the limitation described below, be capital gain or loss.
Gain attributable to the Class A-1 Certificates and the regular interest
component of a Class A-1 or Class A-2 Certificate will be treated as ordinary
income, however, to the extent such gain does not exceed the excess, if any, of
(i) the amount that would have been includible in the Certificateholder's gross
income with respect to the regular interest component had income thereon
accrued at a rate equal to 110% of the applicable federal rate as defined in
section 1274(d) of the Code determined as of the date of purchase of such
Certificate over (ii) the amount actually included in such Certificateholder's
income.
Interest on a regular interest must be included in income by a
Certificateholder under the accrual method of accounting, regardless of the
Certificateholder's regular method of accounting. In addition, a Regular
interest could be considered to have been issued with OID. See "Certain
Material Federal Income Tax Considerations" in the Prospectus. The prepayment
assumption that will be used to in determining the accrual of any OID, market
discount, or bond premium, if any, will equal the rate described above under
"Yield, Prepayment and Maturity Considerations--Weighted Average Lives" for
Scenario IV No representation is made that the Mortgage Loans will prepay at
such a rate or at any other rate. OID must be included in income as it accrues
on a constant yield method, regardless of whether the Certificateholder
receives currently the cash attributable to such OID.
Status of the Class A Certificates
The Class A-1 Certificates and regular interest component of the Class
A-2 Certificates will be treated as assets described in Section 7701(a)(19)(C)
of the Code, and as "real estate assets" under Section 856(c)(5)(B) of the
Code, generally, in the same proportion that the assets of the Trust Fund,
exclusive of the Excess Reserve Fund Account, would be so treated. In addition,
to the extent a regular interest represents real estate assets under section
856(c)(5)(B) of the Code, the interest derived from that component would be
interest on obligations secured by interests in real property for purposes of
section 856(c)(3) of the Code. The Cap Contract component of Class A-2
Certificate will not, however, qualify as an asset described in Section
7701(a)(19)(C) of the Code or as a real estate asset under Section 856(c)(5)(B)
of the Code.
The Excess Reserve Fund Account
As indicated above, a portion of the purchase price paid by a
Certificateholder to acquire a Class A-2 Certificate will be attributable to
the Cap Contract component of such Certificate. The portion of the overall
purchase price attributable to the Cap Component must be amortized over the
life of any such Certificate, taking into account the declining balance of the
related regular interest component. Treasury regulations concerning notional
principal contracts provide alternative methods for amortizing the purchase
price of an interest rate cap contract. Under one method - the level yield
constant interest method - the price paid for an interest rate cap is amortized
over the life of the cap as though it were the principal amount of a loan
bearing interest at a reasonable rate. Certificateholders are urged to consult
their tax advisors concerning the methods that can be employed to amortize the
portion of the purchase price paid for the Cap Contract component of a Class
A-2 Certificate.
Any payments made to a Class A-2 Certificateholder from the Excess
Reserve Fund Account will be treated as periodic payments on an interest rate
cap contract. To the extent the sum of such periodic payments for any year
exceed that year's amortized cost of the Cap Contract component, such excess is
ordinary income. If for any year the amount of that year's amortized cost
exceeds the sum of the periodic payments, such excess is allowable as an
ordinary deduction.
Non-U.S. Persons
Interest paid to or accrued by a Certificateholder who is a non-U.S.
Person will be considered "portfolio interest", and will not be subject to U.S.
federal income tax and withholding tax, if the interest is not effectively
connected with the conduct of a trade or business within the United States by
the non-U.S. Person and the non-U.S. Person (i) is not actually or
constructively a "10 percent shareholder" of the Trust Fund or a "controlled
foreign corporation" with respect to which the Trust Fund is a "related person"
within the meaning of the Code and (ii) provides the Trust Fund or other person
who is otherwise required to withhold U.S. tax with respect to the Class A
Certificates with an appropriate statement (on Form W-8 or a similar form),
signed under penalties of perjury, certifying that the beneficial owner of the
Class A Certificate is a non-U.S. Person and providing the non-U.S. Person's
name and address. If a Class A Certificate is held through a securities
clearing organization or certain other financial institutions, the organization
or institution may provide the relevant signed statement to the withholding
agent; in that case, however, the signed statement must be accompanied by a
Form W-8 or substitute form provided by the non-U.S. Person that owns the
Certificate.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Class A Certificate by a non-U.S. Person will be
exempt from United States federal income and withholding tax, provided that (i)
such gain is not effectively connected with the conduct of a trade or business
in the United States by the non-U.S. Person and (ii) in the case of an
individual, the individual is not present in the United States for 183 days or
more in the taxable year.
For purposes of the foregoing discussion, the term "non-U.S. Person"
means any person other than (i) a citizen or resident of the United States;
(ii) a corporation (or entity treated as a corporation for tax purposes)
created or organized in the United States or under the laws of the United
States or of any state thereof, including, for this purpose, the District of
Columbia; (iii) a partnership (or entity treated as a partnership for tax
purposes) organized in the United States or under the laws of the United States
or of any state thereof, including, for this purpose, the District of Columbia
(unless provided otherwise by future Treasury regulations); (iv) an estate
whose income is includible in gross income for United States income tax
purposes regardless of its source; or (v) a trust, if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more U.S. Persons have authority to control all substantial
decisions of the trust. Notwithstanding the last clause of the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as U.S. Persons prior to such date,
may elect to continue to be U.S. Persons.
Prohibited Transactions Tax and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of a Mortgage Loan, the receipt of income from a source
other than a Mortgage Loan or certain other permitted investments, the receipt
of compensation for services, or gain from the disposition of an asset
purchased with the payments on the Mortgage Loans for temporary investment
pending distribution on the Certificates. It is not anticipated that the Trust
Fund will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of
its interests could result in the imposition of a tax on the trust fund equal
to 100% of the value of the contributed property (the "Contributions Tax"). The
Trust Fund will not accept contributions that would subject it to such tax.
In addition, a trust fund that elects to be treated as a REMIC may
also be subject to federal income tax at the highest corporate rate on "net
income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property other
than qualifying rents and other qualifying income for a real estate investment
trust. It is not anticipated that the Trust Fund will recognize net income from
foreclosure property subject to federal income tax.
Backup Withholding
Certain Certificate Owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Class A Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fail to provide the Trustee or their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
The Trustee will be required to report annually to the Internal
Revenue Service (the "IRS"), and to each Certificateholder of record, the
amount of interest paid (and OID accrued, if any) on the Class A Certificates
(and the amount of interest withheld for federal income taxes, if any) for each
calendar year, except as to exempt holders (generally, holders that are
corporations, certain tax-exempt organizations or nonresident aliens who
provide certification as to their status as nonresidents). As long as the only
holder of record of a Class of Class A Certificates is Cede & Co., as nominee
of DTC, the IRS and Certificate Owners of such Class will receive tax and other
information, including the amount of interest paid on such Certificates owned,
from Participants and Financial Intermediaries rather than from the Trustee.
(The Trustee, however, will respond to requests for necessary information to
enable Participants, Financial Intermediaries and certain other persons to
complete their reports.) Each non-exempt Certificate Owner will be required to
provide, under penalty of perjury, a certificate on IRS form W-9 containing his
or her name, address, correct federal taxpayer identification number and a
statement that he or she is not subject to backup withholding. Should a
nonexempt Certificate Owner fail to provide the required certification, the
Participants or Financial Intermediaries (or the Paying Agent) will be required
to withhold 31% of the interest (and principal) otherwise payable to the
holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Such amounts will be deemed distributed to the affected Certificate
Owner for all purposes of the related Certificates and the Pooling and
Servicing Agreement.
STATE TAXES
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Class A Certificates under the tax
laws of any state. Investors considering an investment in the Class A
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Class A Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA and/or a plan or other arrangement subject to the
excise tax provisions set forth under Section 4975 of the Code (each of the
foregoing, a "Plan") from engaging in certain transactions involving such Plan
and its assets unless a statutory, regulatory or administrative exemption
applies to the transaction. Section 4975 of the Code imposes certain excise
taxes on prohibited transactions involving plans described under that Section;
ERISA authorizes the imposition of civil penalties for prohibited transactions
involving plans not covered under Section 4975 of the Code. Any Plan fiduciary
which proposes to cause a Plan to acquire any of the Class A Certificates
should consult with its counsel with respect to the potential consequences
under ERISA and the Code of the Plan's acquisition and ownership of such
Certificates. See "ERISA Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and
certain church plans, are not subject to ERISA's requirements. Accordingly,
assets of such plans may be invested in the Class A Certificates without regard
to the ERISA considerations described herein and in the Prospectus, subject to
the provisions of other applicable federal and state law. Any such plan which
is qualified and exempt from taxation under Sections 401(a) and 501(a) of the
Code may nonetheless be subject to the prohibited transaction rules set forth
in Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment
prudence and diversification and the requirement that a Plan's investments be
made in accordance with the documents governing the Plan. A fiduciary which
decides to invest the assets of a Plan in the Class A Certificates should
consider, among other factors, the extreme sensitivity of the investments to
the rate of principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor (the "DOL") has granted to Greenwich
Capital Markets, Inc. an administrative exemption (Prohibited Transaction
Exemption 90-59; Exemption Application No. D-8374) (the "Exemption") from
certain of the prohibited transaction rules of ERISA and the related excise tax
provisions of Section 4975 of the Code with respect to the initial purchase,
the holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemption. The Exemption applies to
mortgage loans such as the Mortgage Loans in the Trust Fund.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable to
the Plan as they would be in an arm's length transaction with an unrelated
party;
(2) the rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by other
certificates of the trust fund;
(3) the certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic rating
categories from Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Rating Co. ("DCR") or Fitch IBCA, Inc.
("Fitch" and, together with S&P, Moody's and DCR, the "Exemption Rating
Agencies");
(4) the Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of all
payments made to and retained by the seller pursuant to the assignment of the
loans to the trust fund represents not more than the fair market value of such
loans; the sum of all payments made to and retained by the Servicer and any
other servicer represents not more than reasonable compensation for such
person's services under the agreement pursuant to which the loans are pooled
and reimbursement of such person's reasonable expenses in connection therewith;
and
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest generic rating categories by an Exemption
Rating Agency for at least one year prior to the Plan's acquisition of
certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust holding
receivables as to which the fiduciary (or its affiliate) is an obligor provided
that, among other requirements, (i) in the case of an acquisition in connection
with the initial issuance of certificates, at least fifty percent (50%) of each
class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is
an obligor with respect to five percent (5%) or less of the fair market value
of the obligations contained in the trust; (iii) a Plan's investment in
certificates of any class does not exceed twenty-five percent (25%) of all of
the certificates of that class outstanding at the time of the acquisition; and
(iv) immediately after the acquisition, no more than twenty-five percent (25%)
of the assets of any Plan with respect to which such person is a fiduciary are
invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemption does not
apply to Plans sponsored by the Underwriters, the Trustee, the Servicer, any
obligor with respect to Mortgage Loans included in the Trust Fund constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the Trust Fund, or any affiliate of such parties (the "Restricted
Group").
It is expected that the Exemption will apply to the acquisition and
holding by Plans of the Class A Certificates and that all conditions of the
Exemption other than those within the control of the investors will be met.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences
in their specific circumstances, prior to making an investment in the Class A
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Class A Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will not be "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 because each
of Loan Group 1 and Loan Group 2 has second lien mortgage loans and mortgage
loans that were originated by individuals and not by financial institutions or
mortgagees approved by the Secretary of Housing and Urban Development.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Class A Certificates
or to purchase Class A Certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the Class A Certificates
constitute legal investments for such investors. See "Legal Investment" in the
Prospectus.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1998 and December 31, 1997 and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1998
incorporated by reference in this prospectus supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, among the Depositor, Greenwich Capital Markets, Inc. (an affiliate
of the Depositor) and First Union Securities Inc., the Depositor has agreed to
sell to the Underwriters, and the Underwriters have agreed to purchase from the
Depositor, the Class A Certificates in the principal amounts set forth below
opposite their respective names
Underwriter Class A-1 Certificates Class A-2 Certificates
- ------------------------------------- ------------------------ --------------------------
Greenwich Capital Markets, Inc. $96,431,200 $46,864,000
First Union Securities, Inc. $24,107,800 $11,716,000
===================================== ======================== --------------------------
Total: $120,539,000 $58,580,000
Distribution of the Class A Certificates will be made by the
Underwriters from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The Underwriters may
effect such transactions by selling Class A Certificates to or through dealers
and such dealers may receive from the Underwriters, for which they act as
agent, compensation in the form of underwriting discounts, concessions or
commissions. The Underwriters and any dealers that participate with the
Underwriters in the distribution of such Class A Certificates may be deemed to
be underwriters, and any discounts, commissions or concessions received by
them, and any profits on resale of the Certificates purchased by them, may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended (the "Act").
The Depositor has been advised by the Underwriters that they intend to
make a market in the Class A Certificates but has no obligation to do so. There
can be no assurance that a secondary market for the Class A Certificates will
develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriters against, or
make contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Act.
LEGAL MATTERS
Certain federal income tax consequences with respect to the
Certificates will be passed upon for the Trust Fund by Brown & Wood LLP, New
York, New York. Brown & Wood LLP, New York, New York, will act as counsel for
the Depositor and the Underwriters. Thacher Proffitt & Wood will act as counsel
for the Seller.
RATINGS
It is a condition to the issuance of the Class A Certificates that the
Class A Certificates be rated "AAA" by Standard & Poor's Rating Services, a
division of The McGraw-Hill Companies, Inc. ("S&P") and by Duff & Phelps Credit
Rating Co. ("DCR") and "Aaa" by Moody's Investors Service, Inc. ("Moody's" and,
together with S&P and DCR, the "Rating Agencies").
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Class A Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans, the payment of
any Class A-2 Available Funds Cap Carryover Amount or the possibility that a
holder of a Class A Certificate might realize a lower than anticipated yield.
The ratings assigned to the Class A Certificates will depend primarily
upon the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
ratings initially assigned to the Class A Certificates may result in a
reduction of one or more of the ratings assigned to the Class A Certificates.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Class A Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Class A Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Class A
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Class A Certificates by the Rating Agencies
are subsequently lowered for any reason, no person or entity is obligated to
provide any additional support or credit enhancement with respect to such Class
A Certificates.
INDEX OF DEFINED TERMS
Accrual Period......................................................S-71
Act.................................................................S-91
Adjustment Date.....................................................S-38
Advance.............................................................S-61
Arrearage.....................................................S-16, S-23
Assignment Program..................................................S-52
Assumed Final Distribution Date.....................................S-65
Assumed Final Maturity Date.........................................S-80
Available Funds.....................................................S-72
Balloon Loan........................................................S-24
Balloon Payment...............................................S-24, S-31
Bankruptcy Code.....................................................S-23
Bankruptcy Plan Mortgage Loan.......................................S-23
Beneficial Owner....................................................S-66
Book-Entry Certificates.............................................S-66
Cap Contract........................................................S-86
Cedelbank...........................................................S-67
Cedelbank Participants..............................................S-67
Certificate Index...................................................S-73
Certificate Insurer.................................................S-65
Certificate Margin..................................................S-73
Certificate Owners..................................................S-66
Certificate Principal Balance.......................................S-71
Certificateholder...................................................S-66
Certificates........................................................S-65
Class A Certificates................................................S-65
Class A-2 Available Funds Cap Carryover Amount......................S-74
Class A-2 Formula Rate..............................................S-73
Code................................................................S-86
Collection Account..................................................S-60
Commission..........................................................S-54
Compensating Interest...............................................S-63
Constant Prepayment Rate............................................S-80
Contributions Tax...................................................S-88
Cooperative.........................................................S-68
CPR.................................................................S-80
Cut-off Date........................................................S-21
Cut-off Date Principal Balance......................................S-21
DCR......................................................S-8, S-90, S-92
Defective Mortgage Loans............................................S-60
Deferred............................................................S-39
Deficiency Amount...................................................S-76
Definitions.........................................................S-71
Definitive Certificate..............................................S-66
Delayed First Adjustment Mortgage Loan..............................S-38
Delinquent..........................................................S-23
Determination Date..................................................S-63
Distributable Excess Spread.........................................S-72
Distribution Account................................................S-60
Distribution Date...................................................S-66
DOL.................................................................S-89
DTC.................................................................S-97
Due Date............................................................S-24
EFSG................................................................S-54
Eligible Account....................................................S-60
Eligible Substitute Mortgage Loan...................................S-59
ERISA...............................................................S-89
Euroclear...........................................................S-68
Euroclear Operator..................................................S-68
Euroclear Participants..............................................S-68
European Depositaries...............................................S-66
Excess Reserve Fund Account.........................................S-75
Exemption...........................................................S-89
Exemption Rating Agencies...........................................S-90
FHA.................................................................S-52
FHA Mortgage Loans..................................................S-52
Final Distribution Date.............................................S-76
Financial Intermediary..............................................S-66
Fitch.........................................................S-56, S-90
Forbearance Plan Mortgage Loan......................................S-22
Full Documentation..................................................S-55
Global Securities...................................................S-97
Gross Margin........................................................S-38
Group 1 Loan Balance................................................S-22
Group 1 Mortgage Loans..............................................S-22
Group 2 Available Funds Cap.........................................S-73
Group 2 Loan Balance................................................S-22
Group 2 Mortgage Loans..............................................S-22
Guaranteed Principal Amount.........................................S-77
HUD.................................................................S-52
IML.................................................................S-67
Index...............................................................S-38
Initial Periodic Rate Cap...........................................S-38
Insured Payment.....................................................S-77
Interest Distributable Amount.......................................S-72
IRS.................................................................S-88
LIBOR Business Day..................................................S-74
LIBOR Determination Date............................................S-74
Litton..............................................................S-56
Loan Group..........................................................S-22
Loan Group 1........................................................S-22
Loan Group 2........................................................S-22
Loan Rate...........................................................S-24
Loan-to-Value Ratio.................................................S-23
Maximum Cap.........................................................S-74
Maximum Loan Rate...................................................S-38
MGIC................................................................S-54
Minimum Loan Rate...................................................S-38
Modified Scheduled Payments.........................................S-22
Monthly Interest Distributable Amount...............................S-73
Moody's..................................................S-8, S-90, S-92
Mortgage............................................................S-24
Mortgage Loan Purchase Agreement....................................S-21
Mortgage Loan Schedule..............................................S-58
Mortgage Loans......................................................S-21
Mortgage Pool.......................................................S-21
mortgage related securities....................................S-9, S-91
Mortgaged Property..................................................S-24
National Housing Act................................................S-52
Negative Amortization Mortgage Loan.................................S-39
Net income from foreclosure property................................S-88
no-bid..............................................................S-54
Non-U.S. Person.....................................................S-88
OID.................................................................S-86
One Year CMT........................................................S-51
Optional Termination Date...........................................S-64
outside reserve fund................................................S-86
Overcollateralization Target Amount.................................S-73
Owner-Financed Mortgage Loan........................................S-24
Pass-Through Rate...................................................S-73
Payment Cap.........................................................S-39
Performing Mortgage Loan............................................S-22
Periodic Rate Cap...................................................S-38
Plan................................................................S-89
Policy..............................................................S-65
Pool Balance........................................................S-21
Pooling and Servicing Agreement.....................................S-58
Preference Amount...................................................S-77
Prepayment Interest Shortfall.......................................S-63
Prepayment Period...................................................S-72
Principal Balance...................................................S-21
Principal Distribution Amount.......................................S-72
Prohibited Transactions Tax.........................................S-88
Purchase Price......................................................S-59
Rating Agencies.....................................................S-92
Record Date.........................................................S-66
Reference Banks.....................................................S-74
regular interests....................................................S-8
Regular Scheduled Payments..........................................S-22
Related Documents...................................................S-58
Relevant Depositary.................................................S-66
Relief Act..........................................................S-61
REMIC...............................................................S-86
REMICs...............................................................S-8
REO Property........................................................S-64
Re-Performance Test.................................................S-23
Re-Performing Mortgage Loan.........................................S-23
Required Reserve Amount.............................................S-75
Reserve Interest Rate...............................................S-74
Residual Certificates...............................................S-65
residual interests...................................................S-8
Restricted Group....................................................S-90
Rules...............................................................S-66
S&P......................................................S-8, S-90, S-92
Servicer............................................................S-56
Servicing Advance...................................................S-61
Servicing Fee.......................................................S-62
Servicing Fee Rate..................................................S-62
Six Month LIBOR.....................................................S-51
Special Servicing Fee...............................................S-63
Structuring Assumptions.............................................S-81
Sub-Group 2A........................................................S-22
Sub-Group 2A Loan Balance...........................................S-22
Sub-Group 2A Mortgage Loans.........................................S-22
Sub-Group 2B........................................................S-22
Sub-group 2B Loan Balance...........................................S-22
Sub-Group 2B Mortgage Loans.........................................S-22
Sub-Performing Mortgage Loan........................................S-22
Substitution Adjustment.............................................S-59
Systems.............................................................S-69
Tax Counsel.........................................................S-86
Telerate Page 3750..................................................S-74
Termination Price...................................................S-64
Terms and Conditions................................................S-68
Total Amount Available..............................................S-72
Transition Cost.....................................................S-73
Trust Fund..........................................................S-21
Trustee Fee.........................................................S-62
Trustee Fee Rate....................................................S-62
U.S. Person........................................................S-100
Underwriters........................................................S-80
United States Housing Act...........................................S-52
Unpaid Interest Shortfall Amount....................................S-73
VA S-52
VA Mortgage Loans...................................................S-52
Year 2000 problems..................................................S-69
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Class A Certificates will
be offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of The Depository Trust Company ("DTC"), Cedelbank or
Euroclear. The Global Securities will be tradable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedelbank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedelbank
and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedelbank and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedelbank
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no `lock-up' or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
Trading between Cedelbank and/or Euroclear Participants. Secondary
market trading between Cedelbank Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC seller and Cedelbank or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a Cedelbank Participant or a Euroclear Participant, the
purchaser will send instructions to Cedelbank or Euroclear through a Cedelbank
Participant or Euroclear Participant at least one business day prior to
settlement. Cedelbank or Euroclear will instruct the respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Depositary of the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be system and by the clearing system, in
accordance with its usual procedures, to the Cedelbank Participant's or
Euroclear Participant's account. The securities credit will appear the next day
(European time) and the cash debt will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Cedelbank or
Euroclear cash debt will be valued instead as of the actual settlement date.
Cedelbank Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of
credit to them, Cedelbank Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedelbank Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although this result
will depend on each Cedelbank Participant's or Euroclear Participant's
particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global
Securities to the respective European Depositary for the benefit of Cedelbank
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two
DTC Participants.
Trading between Cedelbank or Euroclear Seller and DTC Purchaser. Due
to time zone differences in their favor, Cedelbank Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedelbank or Euroclear through a Cedelbank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedelbank or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedelbank Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Cedelbank Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Cedelbank Participant or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Cedelbank
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedelbank Participants
or Euroclear Participants should note that these trades would automatically
fail on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedelbank or
Euroclear accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedelbank or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedelbank
Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedelbank or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on
Income Effectively Connected with the Conduct of a Trade or Business in the
United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Certificate Owners residing in
a country that has a tax treaty with the United States can obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides only
for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the Certificate
Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a
corporation or partnership for United States federal income tax purposes
organized in or under the laws of the United States or any state thereof or the
District of Columbia or (iii) an estate the income of which is includible in
gross income for United States tax purposes, regardless of its source, or (iv)
a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have authority to control all substantial decisions of the trust. This
summary does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the Global Securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
$179,119,000
(Approximate)
Financial Asset Securities Corp.
Depositor
Credit-Based Asset Servicing and
Securitization LLC
Seller
Litton Loan Servicing LP
Servicer
C-BASS Mortgage Loan Asset-Backed Certificates, Series 1999-CB5
PROSPECTUS SUPPLEMENT
Greenwich Capital Markets, Inc. First Union Securities, Inc. You
should rely only on the information contained or incorporated by reference in
this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the C-BASS Mortgage Loan Asset-Backed
Certificates, Series 1999-CB5 in any state where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of the C-BASS Mortgage Loan Asset-Backed Certificates,
Series 1999-CB5 and with respect to their unsold allotments or subscriptions.
In addition, all dealers selling the C-BASS Mortgage Loan Asset-Backed
Certificates, Series 1999-CB5 will be required to deliver a prospectus
supplement and prospectus for ninety days following the date of this prospectus
supplement.
November 22, 1999
PROSPECTUS
ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
THE SECURITIES
Financial Asset Securities Corp., as depositor, will sell the securities,
which may be in the form of asset backed certificates or asset backed notes.
Each issue of securities will have its own series designation and will
evidence either:
o the ownership of certain trust assets or
o debt obligations secured by certain trust assets.
Each series of securities will consist of one or more classes. Each
class of securities will represent the entitlement to a specified portion of
future interest payments and a specified portion of future principal payments
on the assets in the related trust. In each case, the specified portion may
equal from 100% to 0%. A series may include one or more classes of securities
that are senior in right of payment to one or more other classes. One or more
classes of securities may be entitled to receive distributions of principal,
interest or both prior to one or more other classes or before or after certain
specified events have occurred. The related prospectus supplement will specify
each of these features.
THE TRUST AND ITS ASSETS
As specified in the related prospectus supplement, the assets of a trust will
include primarily the following:
o closed-end and/or revolving home equity loans secured by senior or
junior liens on one- to four-family residential properties;
o home improvement installment sales contracts and installment loan
agreements that are either unsecured or secured generally by junior
liens on one- to four-family residential properties or by purchase
money security interests in the related home improvements; and/or
o private asset backed securities.
Each trust may be subject to early termination in certain circumstances.
MARKET FOR THE SECURITIES
No market will exist for the securities of any series before they are issued.
In addition, even after the securities of a series have been issued and sold,
there can be no assurance that a resale market will develop.
OFFERS OF THE SECURITIES
Offers of the securities may be made through one or more different methods,
including through underwriters. All certificates will be distributed by, or
sold through underwriters managed by, Greenwich Capital Markets, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
September 15, 1999
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS AND EACH
ACCOMPANYING PROSPECTUS SUPPLEMENT.............................................3
RISK FACTORS...................................................................4
THE TRUST FUND................................................................10
USE OF PROCEEDS...............................................................15
THE DEPOSITOR.................................................................15
LOAN PROGRAM..................................................................16
DESCRIPTION OF THE SECURITIES.................................................18
CREDIT ENHANCEMENT............................................................27
YIELD AND PREPAYMENT CONSIDERATIONS...........................................32
THE AGREEMENTS................................................................35
CERTAIN LEGAL ASPECTS OF THE LOANS............................................47
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS............................58
STATE TAX CONSIDERATIONS......................................................79
ERISA CONSIDERATIONS..........................................................80
LEGAL INVESTMENT..............................................................83
METHOD OF DISTRIBUTION........................................................84
LEGAL MATTERS.................................................................85
FINANCIAL INFORMATION.........................................................85
AVAILABLE INFORMATION.........................................................86
RATING........................................................................86
INDEX OF DEFINED TERMS........................................................88
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of which
may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series,
which describes the specific terms of the securities of that series.
If the prospectus supplement contains information about a particular
series that differs from the information contained in this
prospectus, you should rely on the information in the prospectus
supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide
you with information that is different from that contained in this prospectus
and the accompanying prospectus supplement. The information in this prospectus
is accurate only as of the date of this prospectus.
Beginning with the section titled "The Trust Fund", certain capitalized terms
are used in this prospectus to assist you in understanding the terms of the
securities. The capitalized terms used in this prospectus are defined on the
pages indicated under the caption "Index of Defined Terms" beginning on page
117 in this prospectus.
- ---------------------
If you require additional information, the mailing address of our principal
executive offices is Financial Asset Securities Corp., 600 Steamboat Road,
Greenwich, Connecticut 06830 and the telephone number is (203) 625-2756. For
other means of acquiring additional information about us or a series of
securities, see "The Trust Fund -- Incorporation of Certain Information by
Reference" beginning on page 20 of this prospectus.
---------------------
RISK FACTORS
You should carefully consider the following information, since it
identifies certain significant sources of risk associated with an investment
in these securities.
Limited Liquidity........................ No market will exist for the
securities of any series before
they are issued. In addition, there
can be no assurance that a resale
market will develop following the
issuance and sale of any series of
the securities. Even if a resale
market does develop, it might not
provide investors with liquidity of
investment or continue for the life
of the securities.
Limited Assets........................... Unless the applicable prospectus
supplement provides otherwise, the
securities of each series will be
payable solely from the assets of
the related trust, including any
applicable credit enhancement, and
will not have any claims against
the assets of any other trust.
Moreover, at the times specified in
the related prospectus supplement,
certain assets of the trust and/or
the related security account may be
released to the depositor, master
servicer, any servicer, credit
enhancement provider or other
person, if:
o all payments then due on the
related securities have been
made;
o adequate provision for future
payments on certain classes of
the securities has been made;
and
o any other payments specified
in the related prospectus
supplement have been made.
Once released, such assets will no
longer be available to make
payments to securityholders.
There will be no recourse against
the depositor or the master
servicer if any required
distribution on the securities is
not made. The securities will not
represent an interest in the
depositor, the master servicer, any
servicer or any of their respective
affiliates, nor will the securities
represent an obligation of any of
them. The only obligations of the
depositor with respect to the
related trust or the securities
would arise from the
representations and warranties that
the depositor may make concerning
the related assets. The depositor
does not have significant assets
and is unlikely to have significant
assets in the future. If the
depositor should be required to
repurchase a loan from a trust
because of the breach of a
representation or warranty, the
depositor's sole source of funds
for the repurchase would be:
o funds obtained from enforcing
any similar obligation of the
seller or originator of the
loan, or
o funds from a reserve account
or similar credit enhancement
established to pay for loan
repurchases.
In addition, the master servicer
may be obligated to make certain
advances if loans are delinquent,
but only to the extent it deems the
advances to be recoverable from
amounts it expects to receive on
those loans.
Credit Enhancement....................... Credit enhancement is intended to
reduce the effect of delinquent
payments or loan losses on those
classes of securities that have the
benefit of the credit enhancement.
Nevertheless, the amount of any
credit enhancement is subject to
the limits described in the related
prospectus supplement. Moreover,
the amount of credit enhancement
may decline or be depleted under
certain circumstances before the
securities are paid in full. As a
result, securityholders may suffer
losses. In addition, credit
enhancement may not cover all
potential sources of risk of loss,
such as fraud or negligence by a
loan originator or other parties.
Prepayment and Yield
Considerations...... The timing of
principal payments on the
securities of a series will be
affected by a number of factors,
including the following:
o the extent of prepayments on
the underlying loans in the
trust or, if the trust is
comprised of underlying
securities, on the loans
backing the underlying
securities;
o how payments of principal are
allocated among the classes of
securities of that series as
specified in the related
prospectus supplement;
o if any party has an option to
terminate the related trust
early, the effect of the
exercise of the option;
o the rate and timing of
defaults and losses on the
assets in the related trust;
and
o repurchases of assets in the
related trust as a result of
material breaches of
representations and warranties
made by the depositor or
master servicer.
The rate of prepayment of the loans
included in or underlying the
assets in each trust may affect the
yield to maturity of the
securities.
Interest payable on the securities
on any given distribution date will
include all interest accrued during
the related interest accrual
period. The interest accrual period
for the securities of each series
will be specified in the applicable
prospectus supplement. If the
interest accrual period ends two or
more days before the related
distribution date, your effective
yield will be less than it would be
if the interest accrual period
ended the day before the
distribution date. As a result,
your effective yield at par would
be less than the indicated coupon
rate.
Balloon Payments......................... Certain of the underlying loans may
not be fully amortizing and may
require a substantial principal
payment (I.E., a "balloon" payment)
at their stated maturity. Loans of
this type involve a greater degree
of risk than fully amortizing loans
since the related borrower must
generally be able to refinance the
loan or sell the related property
prior to the loan's maturity date.
The borrower's ability to do so
will depend on such factors as the
level of available mortgage rates
at the time of sale or refinancing,
the relative strength of the local
housing market, the borrower's
equity in the property, the
borrower's general financial
condition and tax laws.
Nature of Mortgages...................... The following factors, among
others, could adversely affect
property values in such a way that
the outstanding balance of the
related loans, together with any
senior financing on the same
properties, would equal or exceed
those values:
o an overall decline in the
residential real estate
markets where the properties
are located,
o failure of borrowers to
maintain their properties
adequately, and
o natural disasters that are not
necessarily covered by hazard
insurance, such as earthquakes
and floods.
If a home equity loan is in a
junior lien position, a decline in
property values could extinguish
the value of the junior
mortgageholder in the property
before having any effect on the
interest of the senior
mortgageholder. If property values
decline, actual rates of
delinquencies, foreclosures and
losses on the underlying loans
could be higher than those
currently experienced by the
mortgage lending industry in
general.
Even if you assume that the
properties provide adequate
security for the loans, substantial
delays could occur before defaulted
loans are liquidated and the
proceeds forwarded to investors.
Property foreclosure actions are
regulated by state statutes and
rules and are subject to many of
the delays and expenses that
characterize other types of
lawsuits if defenses or
counterclaims are made. As a
result, foreclosure actions can
sometimes take several years to
complete. Moreover, some states
prohibit a mortgage lender from
obtaining a judgment against the
borrower for amounts not covered by
property proceeds if the property
is sold outside of a judicial
proceeding. As a result, if a
borrower defaults, these
restrictions may impede the
servicer's ability to dispose of
the borrower's property and obtain
sufficient proceeds to repay the
loan in full. In addition, the
servicer is entitled to deduct from
liquidation proceeds all the
expenses it reasonably incurs in
trying to recover on the defaulted
loan, including payment to the
holders of any senior mortgages,
legal fees and costs, real estate
taxes, and property preservation
and maintenance expenses.
In general, the expenses of
liquidating defaulted loans do not
vary directly with the unpaid
amount. So, assuming that a
servicer would take the same steps
to recover a defaulted loan with a
small unpaid balance as it would a
loan with a large unpaid balance,
the net amount realized after
paying liquidation expenses would
be a smaller percentage of the
balance of the small loan than of
the large loan. Since the mortgages
or deeds of trust securing home
equity loans typically will be in a
junior lien position, the proceeds
from any liquidation will be
applied first to the claims of the
related senior mortgageholders,
including foreclosure costs. In
addition, a junior mortgage lender
may only foreclose subject to any
related senior mortgage. As a
result, the junior mortgage lender
generally must either pay the
related senior mortgage lender in
full at or before the foreclosure
sale or agree to make the regular
payments on the senior mortgage.
Since the trust will not have any
source of funds to satisfy any
senior mortgages or to continue
making payments on them, the
trust's ability as a practical
matter to foreclose on any junior
mortgage will be quite limited.
State laws generally regulate
interest rates and other loan
charges, require certain
disclosures, and often require
licensing of loan originators and
servicers. In addition, most states
have other laws and public policies
for the protection of consumers
that prohibit unfair and deceptive
practices in the origination,
servicing and collection of loans.
Depending on the provisions of the
particular law or policy and the
specific facts and circumstances
involved, violations may limit the
ability of the servicer to collect
interest or principal on the loans.
Also, the borrower may be entitled
to a refund of amounts previously
paid and the servicer may be
subject to damage claims and
administrative sanctions.
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 that secure the loans.
Failure to comply with these laws
and regulations can result in fines
and penalties that could be
assessed against the trust as owner
of the related property.
In some states, a lien on the
property due to contamination has
priority over the lien of an
existing mortgage. Further, a
mortgage lender may be held liable
as an "owner" or "operator" for
costs associated with the release
of petroleum from an underground
storage tank under certain
circumstances. If the trust is
considered the owner or operator of
a property, it will suffer losses
as a result of any liability
imposed for environmental hazards
on the property.
Certain Other Legal Considerations
Regarding the Loans...................... The loans may also be subject to
federal laws relating to the
origination and underwriting. These
laws
o require certain disclosures to
the borrowers regarding the
terms of the loans;
o prohibit discrimination on the
basis of age, race, color,
sex, religion, marital status,
national origin, receipt of
public assistance or the
exercise of any right under
the consumer credit protection
act, in the extension of
credit;
o regulate the use and reporting
of information related to the
borrower's credit experience;
and
o require additional application
disclosures, limit changes
that may be made to the loan
documents without the
borrower's consent and
restrict a lender's ability to
declare a default or to
suspend or reduce a borrower's
credit limit to certain
enumerated events.
Certain loans are also subject to
federal laws which impose
additional disclosure requirements
on creditors with respect to
non-purchase money mortgage loans
with high interest rates or high
up-front fees and charges. These
laws can impose specific statutory
liabilities upon creditors that
fail to comply and may affect the
enforceability of the related
loans. In addition, any assignee of
the creditor (including the trust)
would generally be subject to all
claims and defenses that the
borrower could assert against the
creditor, including the right to
rescind the loan.
Certain loans relating to home
improvement contracts are subject
to federal laws that protect the
borrower from defective or
incomplete work by a contractor.
These laws permit the borrower to
withhold payment if the work does
not meet the quality and durability
standards agreed to between the
borrower and the contractor. These
laws have the effect of subjecting
any assignee of the creditor
(including the trust) to all claims
and defenses which the borrower in
a sale transaction could assert
against the seller of defective
goods.
If certain provisions of these
federal laws are violated, the
master servicer may be unable to
collect all or part of the
principal or interest on the loans.
The trust also could be subject to
damages and administrative
enforcement.
Ratings of the Securities................ Any class of securities is issued
under this prospectus and the
accompanying prospectus supplement
will be rated in one of the four
highest rating categories of a
nationally recognized rating
agency. A rating is based on the
adequacy of the value of the trust
assets and any credit enhancement
for that class and reflects the
rating agency's assessment of how
likely it is that holders of the
class of securities will receive
the payments to which they are
entitled. A rating does not
constitute an assessment of how
likely it is that principal
prepayments on the underlying loans
will be made, the degree to which
the rate of prepayments might
differ from that originally
anticipated or the likelihood of
early, optional termination of the
securities. You must not view a
rating as a recommendation to
purchase, hold or sell securities
because it does not address the
market price or suitability of the
securities for any particular
investor.
There is no assurance that any
rating will remain in effect for
any given period of time or that
the rating agency will not lower or
withdraw it entirely in the future.
The rating agency could lower or
withdraw its rating due to:
o any decrease in the adequacy
of the value of the trust
assets or any related credit
enhancement;
o an adverse change in the
financial or other condition
of a credit enhancement
provider; or
o a change in the rating of the
credit enhancement provider's
long-term debt.
Book-Entry Registration.................. LIMIT ON LIQUIDITY OF SECURITIES.
Securities issued in book-entry
form may have only limited
liquidity in the resale market,
since investors may be unwilling to
purchase securities for which they
cannot obtain physical instruments.
LIMIT ON ABILITY TO TRANSFER OR
PLEDGE. Transactions in book-entry
securities can be effected only
through The Depository Trust
Company ("DTC"), its participating
organizations, its indirect
participants and certain banks. As
a result, your ability to transfer
or pledge securities issued in
book-entry form may be limited.
DELAYS IN DISTRIBUTIONS. You may
experience some delay in the
receipt of distributions on
book-entry securities since the
distributions will be forwarded by
the trustee to DTC for DTC to
credit the accounts of its
participants. In turn, these
participants will thereafter credit
the distributions to your account
either directly or indirectly
through indirect participants.
Pre-Funding Accounts..................... The related prospectus supplement
may provide that the depositor
deposit a specified amount in a
pre-funding account on the date the
securities are issued. In this
case, the deposited funds may only
be used to acquire the additional
assets for the trust during a set
period after the initial issuance
of the securities. Any amounts
remaining in the account at the end
of the period will be distributed
as a prepayment of principal to the
holders of the related securities.
Lower Credit Quality Trust Fund Assets... Certain of the trust assets may
have been made to lower credit
quality borrowers who fall into one
of two categories:
o customers with moderate
income, limited assets and
other income characteristics
that cause difficulty in
borrowing from banks and other
traditional lenders; and
o customers with a history of
irregular employment, previous
bankruptcy filings,
repossession of property,
charged-off loans or
garnishment of wages.
The average interest rate charged
on loans made to these types of
borrowers is generally higher than
that charged by lenders that
typically impose more stringent
credit requirements. There is a
greater likelihood of late payments
on loans made to these types of
borrowers than on loans to
borrowers with a higher credit
quality. Payments from borrowers
with a lower credit quality are
more likely to be sensitive to
changes in the economic climate in
the areas in which they reside.
Delinquent Trust Fund Assets............. No more than 20% (by principal
balance) of the trust assets for
any particular series of securities
will be contractually delinquent as
of the related cut-off date.
Other Considerations..................... There is no assurance that the
value of the trust assets for any
series of securities at any time
will equal or exceed the principal
amount of the outstanding
securities of the series. If trust
assets have to be sold because of
an event of default or otherwise,
providers of services to the trust
(including the trustee, the master
servicer and the credit enhancer,
if any) generally will be entitled
to receive the proceeds of the sale
to the extent of their unpaid fees
and other amounts due them before
any proceeds are paid to investors.
As a result, the proceeds of such a
sale may be insufficient to pay the
full amount of interest and
principal of the related
securities.
THE TRUST FUND
The Certificates of each Series will represent interests in the
assets of the related Trust Fund, and the Notes of each Series will be secured
by the pledge of the assets of the related Trust Fund. The Trust Fund for each
Series will be held by the Trustee for the benefit of the related
Securityholders. Each Trust Fund will consist of certain assets (the "TRUST
FUND ASSETS") consisting of a pool (each, a "POOL") comprised of Loans or
Private Asset Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Trust Fund
Assets and certain other accounts, obligations or agreements, in each case as
specified in the related Prospectus Supplement.(1) The Pool will be created on
the first day of the month of the issuance of the related Series of Securities
or such other date specified in the Prospectus Supplement (the "CUT-OFF
DATE"). The Securities will be entitled to payment from the assets of the
related Trust Fund or Funds or other assets pledged for the benefit of the
Securityholders as specified in the related Prospectus Supplement and will not
be entitled to payments in respect of the assets of any other trust fund
established by the Depositor.
The Trust Fund Assets will be acquired by the Depositor, either
directly or through affiliates, from originators or sellers which may be
affiliates of the Depositor (the "SELLERS"), and conveyed by the Depositor to
the related Trust Fund. Loans acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Loan Program--Underwriting Standards" or as otherwise described in a related
Prospectus Supplement. See "Loan Program--Underwriting Standards".
The Depositor will cause the Trust Fund Assets to be assigned to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Master Servicer named in
the related Prospectus Supplement will service the Trust Fund Assets, either
directly or through other servicing institutions ("SUB-SERVICERS"), pursuant
to a Pooling and Servicing Agreement among the Depositor, the Master Servicer
and the Trustee with respect to a Series of Certificates, or a servicing
agreement (each, a "SERVICING AGREEMENT") between the Trustee and the Servicer
with respect to a Series of Notes, and will receive a fee for such services.
See "Loan Program" and "The Pooling and Servicing Agreement". With respect to
Loans serviced by the Master Servicer through a Sub-Servicer, the Master
Servicer will remain liable for its servicing obligations under the related
Agreement as if the Master Servicer alone were servicing such Loans.
As used herein, "AGREEMENT" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as
the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the
laws of the state specified in the related Prospectus Supplement pursuant to a
trust agreement (each, a "TRUST AGREEMENT") between the Depositor and the
trustee of such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or
liabilities. No Trust Fund is expected to engage in any activities other than
acquiring, managing and holding of the related Trust Fund Assets and other
assets contemplated herein and in the related Prospectus Supplement and the
proceeds thereof, issuing Securities and making payments and distributions
thereon and certain related activities. No Trust Fund is expected to have any
source of capital other than its assets and any related credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Depositor with respect to a Series of Securities will
be to obtain certain representations and warranties from the Sellers and to
assign to the Trustee for such Series of Securities the Depositor's rights
with respect to such representations and warranties. See "The
Agreements--Assignment of Trust Fund Assets". The obligations of the Master
Servicer with respect to the Loans will consist principally of its contractual
servicing obligations under the related Agreement (including its obligation to
enforce the obligations of the Sub-Servicers or Sellers, or both, as more
fully described herein under "Loan Program--Representations by Sellers;
Repurchases or Substitutions" and "The Agreements--Assignment of the Trust
Fund Assets" and "--Sub-Servicing of Loans") and its obligation, if any, to
make certain cash advances in the event of delinquencies in payments on or
with respect to the Loans in the amounts described herein under "Description
of the Securities--Advances". The obligations of the Master Servicer to make
advances may be subject to limitations, to the extent provided herein and in
the related Prospectus Supplement.
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(1) Whenever the terms "POOL", "CERTIFICATES" and "NOTES" are used in
this Prospectus, such terms will be deemed to apply, unless the
context indicates otherwise, to one specific Pool and the
Certificates representing certain undivided interests in, or Asset
Backed Notes secured by the assets of, a single trust fund (the
"TRUST FUND") consisting primarily of the Loans in such Pool.
Similarly, the term "Pass-Through Rate" will refer to the
Pass-Through Rate borne by the Certificates or Notes of one specific
Series and the term "Trust Fund" will refer to one specific Trust
Fund.
As specified in the related Prospectus Supplement, the Trust fund
Assets for a Series of Securities may consist of (i) closed-end and/or
revolving home equity loans (the "HOME EQUITY LOANS") secured by senior or
junior liens on one- to four-family residential properties, (ii) have
improvement installment sales contracts and installment loan agreements (the
"HOME IMPROVEMENT CONTRACTS") that are either unsecured or secured primarily
by junior liens on one- to four-family residential properties, or by purchase
money security interests in the home improvements financed thereby (the "HOME
IMPROVEMENTS") and/or (iii) Private Asset Backed Securities (as defined
herein).
The following is a brief description of the assets expected to be
included in the Trust Funds. If specific information respecting the Trust Fund
Assets is not known at the time the related Series of Securities initially is
offered, more general information of the nature described below will be
provided in the related Prospectus Supplement, and specific information will
be set forth in a report on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of such
Securities (the "DETAILED DESCRIPTION"). A copy of the Agreement with respect
to each Series of Securities will be attached to the Form 8-K and will be
available for inspection at the corporate trust office of the Trustee
specified in the related Prospectus Supplement. A schedule of the Trust Fund
Assets relating to such Series will be attached to the Agreement delivered to
the Trustee upon delivery of the Securities.
THE LOANS
GENERAL. The real property which secures repayment of the Loans is
referred to as "PROPERTIES". Unless otherwise specified in the related
Prospectus Supplement, the Loans will be secured by mortgages or deeds of
trust or other similar security instruments creating a lien on a Property,
which may be subordinated to one or more senior liens on the related
Properties, each as described in the related Prospectus Supplement. As more
fully described in the related Prospectus Supplement, the Loans may be
"conventional" loans or loans that are insured or guaranteed by a governmental
agency such as the FHA or VA. The proceeds of the Closed-End Loans may have
been applied to the purchase of the related Property.
The Properties relating to Loans will consist primarily of detached
or semi-detached one- to four-family dwelling units, townhouses, rowhouses,
individual condominium units, individual units in planned unit developments,
and certain other dwelling units ("SINGLE FAMILY PROPERTIES") or Small
Mixed-Used Properties (as defined herein) which consist of structures of not
more than three stories which include one- to four-family residential dwelling
units and space used for retail, professional or other commercial uses. Such
Properties may include vacation and second homes, investment properties and
leasehold interests. The Properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory of
the United States.
The payment terms of the Loans to be included in a Trust Fund will be
described in the related Prospectus Supplement and may include any of the
following features (or combination thereof) or other features, all as
described above or in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index (which will be
specified in the related Prospectus Supplement), a rate that is
fixed for a period of time or under certain circumstances and is
followed by an adjustable rate, a rate that otherwise varies
from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an adjustable rate
may be subject to periodic limitations, maximum rates, minimum
rates or a combination of such limitations. Accrued interest may
be deferred and added to the principal of a loan for such
periods and under such circumstances as may be specified in the
related Prospectus Supplement. Loans may provide for the payment
of interest at a rate lower than the specified interest rate
borne by such Mortgage (the "LOAN RATE") for a period of time or
for the life of the Loan, and the amount of any difference may
be contributed from funds supplied by the Seller of the Property
or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the loan over its term, may be calculated on the
basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate
that is different from the interest rate on the Loan or may not
be amortized during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be
due on maturity ("balloon payment"). Principal may include
interest that has been deferred and added to the principal
balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for
the life of the loan, may increase over a specified period of
time or may change from period to period. Loans may include
limits on periodic increases or decreases in the amount of
monthly payments and may include maximum or minimum amounts of
monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the loan or may decline over
time, and may be prohibited for the life of the loan or for
certain periods ("lockout periods"). Certain loans may permit
prepayments after expiration of the applicable lockout period
and may require the payment of a prepayment fee in connection
with any such subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment
occurs during specified time periods. The loans may include "due
on sale" clauses which permit the mortgagee to demand payment of
the entire loan in connection with the sale or certain transfers
of the related Property. Other loans may be assumable by persons
meeting the then applicable underwriting standards of the
Seller.
As more fully described in the related Prospectus Supplement,
interest on each Revolving Credit Line Loan, excluding introduction rates
offered from time to time during promotional periods, is computed and payable
monthly on the average daily outstanding principal balance of such Loan.
Principal amounts on a Revolving Credit Line Loan may be drawn down (up to a
maximum amount as set forth in the related Prospectus Supplement) or repaid
under each Revolving Credit Line Loan from time to time, but may be subject to
a minimum periodic payment. Except to the extent provided in the related
Prospectus Supplement, the Trust Fund will not include any amounts borrowed
under a Revolving Credit Line Loan after the Cut-off Date. The full amount of
a Closed-End Loan is advanced at the inception of the loan and generally is
repayable in equal (or substantially equal) installments of an amount to fully
amortize such loan at its stated maturity. Except to the extent provided in
the related Prospectus Supplement, the original terms to stated maturity of
Closed-End Loan will not exceed 360 months. Under certain circumstances, under
either a Revolving Credit Line Loan or a Closed-End Loan, a borrower may
choose an interest only payment option and is obligated to pay only the amount
of interest which accrues on the loan during the billing cycle. An interest
only payment option may be available for a specified period before the
borrower must begin paying at least the minimum monthly payment of a specified
percentage of the average outstanding balance of the loan.
The aggregate principal balance of Loans secured by Properties that
are owner-occupied will be disclosed in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the sole
basis for a representation that a given percentage of the Loans is secured by
Single Family Property that is owner-occupied will be either (i) the making of
a representation by the borrower at origination of the Loan either that the
underlying Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Property as a
primary residence or (ii) a finding that the address of the underlying
Property is the borrower's mailing address.
The Loans may include fixed-rate, closed-end mortgage loans having
terms to maturity of up to 30 years and secured by first-lien mortgages
originated on Properties containing one to four residential units and no more
than three income producing non-residential units ("SMALL MIXED-USE
PROPERTIES"). At least 50% of the units contained in a Small Mixed-Use
Property will consist of residential units. Income from such non-residential
units will not exceed 40% of the adjusted gross income of the related
borrower. The maximum Loan-to-Value Ratio on Small Mixed-Use Properties will
not exceed 65%. Small Mixed-Use Properties may be owner occupied or investor
properties and the loan purpose may be a refinancing or a purchase.
HOME IMPROVEMENT CONTRACTS. The Trust Fund Assets for a Series may
consist, in whole or part, of Home Improvement Contracts originated by a home
improvement contractor, a thrift or a commercial mortgage banker in the
ordinary course of business. As specified in the related Prospectus
Supplement, the Home Improvement Contracts will either be unsecured or secured
by the Mortgages primarily on Single Family Properties which are generally
subordinate to other mortgages on the same Property, or secured by purchase
money security interest in the Home Improvements financed thereby. Except as
otherwise specified in the related Prospectus Supplement, the Home Improvement
Contracts will be fully amortizing and may have fixed interest rates or
adjustable interest rates and may provide for other payment characteristics as
described below and in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement,
the Home Improvements securing the Home Improvement Contracts will include,
but are not limited to, replacement windows, house siding, new roofs, swimming
pools, satellite dishes, kitchen and bathroom remodeling goods and solar
heating panels.
The initial Loan-to-Value Ratio of a Home Improvement Contract is
computed in the manner described in the related Prospectus Supplement.
ADDITIONAL INFORMATION. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent
then specifically known to the Depositor, with respect to the Loans contained
in the related Pool, including (i) the aggregate outstanding principal balance
and the average outstanding principal balance of the Loans as of the
applicable Cut-off Date, (ii) the type of property securing the Loan (E.G.,
one- to four-family houses, individual units in condominium apartment
buildings, vacation and second homes or other real property), (iii) the
original terms to maturity of the Loans, (iv) the largest principal balance
and the smallest principal balance of any of the Loans, (v) the earliest
origination date and latest maturity date of any of the Loans, (vi) the
Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as applicable, of the
Loans, (vii) the Loan Rates or annual percentage rates ("APR") or range of
Loan Rates or APR's borne by the Loans, and (viii) the geographical location
of the Loans on a state-by-state basis. If specific information respecting the
Loans is not known to the Depositor at the time the related Securities are
initially offered, more general information of the nature described above will
be provided in the related Prospectus Supplement, and specific information
will be set forth in the Detailed Description.
Except as otherwise specified in the related Prospectus Supplement,
the "COMBINED LOAN-TO-VALUE RATIO" of a Loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal
balance of the Loan (or, in the case of a Revolving Credit Line Loan, the
maximum amount thereof available) and (b) the outstanding principal balance at
the date of origination of the Loan of any senior mortgage loan(s) or, in the
case of any open-ended senior mortgage loan, the maximum available line of
credit with respect to such mortgage loan, regardless of any lesser amount
actually outstanding at the date of origination of the Loan, to (ii) the
Collateral Value of the related Property. Except as otherwise specified in the
related Prospectus Supplement, the "COLLATERAL VALUE" of the Property, other
than with respect to certain Loans the proceeds of which were used to
refinance an existing mortgage loan (each, a "REFINANCE LOAN"), is the lesser
of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such Loan and (b) the sales price for such
Property. In the case of Refinance Loans, the "Collateral Value" of the
related Property is the appraised value thereof determined in an appraisal
obtained at the time of refinancing.
PRIVATE ASSET BACKED SECURITIES
GENERAL. Private Asset Backed Securities may consist of (a)
pass-through certificates or participation certificates evidencing an
undivided interest in a pool of home equity or home improvement loans, or (b)
collateralized mortgage obligations secured by home equity or home improvement
loans. Private Asset Backed Securities may include stripped asset backed
securities representing an undivided interest in all or a part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions) or in some specified
portion of the principal and interest distributions (but not all of such
distributions) on certain home equity or home improvement loans. Private Asset
Backed Securities will have been issued pursuant to a pooling and servicing
agreement, an indenture or similar agreement (a "PABS AGREEMENT"). The
seller/servicer of the underlying Loans will have entered into the PABS
Agreement with the trustee under such PABS Agreement (the "PABS TRUSTEE"). The
PABS Trustee or its agent, or a custodian, will possess the loans underlying
such Private Asset Backed Security. Loans underlying a Private Asset Backed
Security will be serviced by a servicer (the "PABS SERVICER") directly or by
one or more subservicers who may be subject to the supervision of the PABS
Servicer. Except as otherwise specified in the related Prospectus Supplement,
the PABS Servicer will be a FNMA or FHLMC approved servicer and, if FHA Loans
underlie the Private Asset Backed Securities, approved by HUD as an FHA
mortgagee.
The issuer of the Private Asset Backed Securities (the "PABS ISSUER")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for
the purpose of, among other things, establishing trusts and acquiring and
selling housing loans to such trusts and selling beneficial interests in such
trusts. The PABS Issuer shall not be an affiliate of the Depositor. The
obligations of the PABS Issuer will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to
the related trust. Except as otherwise specified in the related Prospectus
Supplement, the PABS Issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Asset Backed Securities
issued under the PABS Agreement. Additionally, although the loans underlying
the Private Asset Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Asset Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Asset Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Asset Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Asset Backed
Securities by the PABS Trustee or the PABS Servicer. The PABS Issuer or the
PABS Servicer may have the right to repurchase assets underlying the Private
Asset Backed Securities after a certain date or under other circumstances as
specified in the related Prospectus Supplement.
UNDERLYING LOANS. The home equity or home improvement loans
underlying the Private Asset Backed Securities may consist of fixed rate,
level payment, fully amortizing loans or graduated payment loans, buydown
loans, adjustable rate loans, or loans having balloon or other special payment
features. Such loans may be secured by single family property, multifamily
property, manufactured homes or by an assignment of the proprietary lease or
occupancy agreement relating to a specific dwelling within a cooperative and
the related shares issued by such cooperative. Except as otherwise specified
in the related Prospectus Supplement, the underlying loans will have the
following characterizations: (i) no loan will have had a Loan-to-Value Ratio
at origination in excess of 95%, (ii) each single family loan secured by a
mortgaged property that had a Loan-to-Value ratio in excess of 80% at
origination will be covered by a primary mortgage insurance policy, (iii) each
loan will have had an original term to stated maturity of not less than 5
years and not more than 40 years, (iv) no loan that was more than 89 days
delinquent as to the payment of principal or interest will have been eligible
for inclusion in the assets under the related PABS Agreement, (v) each loan
(other than a cooperative loan) will be required to be covered by a standard
hazard insurance policy (which may be a blanket policy), and (vi) each loan
(other than a cooperative loan or a contract secured by a manufactured home)
will be covered by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE ASSET BACKED SECURITIES. Credit
support in the form of reserve funds, subordination of other private
certificates issued under the PABS Agreement, letters of credit, surety bonds,
insurance policies or other types of credit support may be provided with
respect to the loans underlying the Private Asset Backed Securities
themselves.
RATING OF PRIVATE ASSET BACKED SECURITIES. The PABS upon their
issuance will have been assigned a rating in one of the four highest rating
categories by at least one nationally recognized statistical rating agency.
ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Asset Backed Securities will specify (i)
the aggregate approximate principal amount and type of the Private Asset
Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the loans which comprise the underlying assets for the
Private Asset Backed Securities including (A) the payment features of such
loans, (B) the approximate aggregate principal balance, if known, of
underlying loans insured or guaranteed by a governmental entity, (C) the
servicing fee or range of servicing fees with respect to the loans, and (D)
the minimum and maximum stated maturities of the underlying loans at
origination, (iii) the maximum original term-to-stated maturity of the Private
Asset Backed Securities, (iv) the weighted average term-to-stated maturity of
the Private Asset Backed Securities, (v) the pass-through or certificate rate
of the Private Asset Backed Securities, (vi) the weighted average pass-through
or certificate rate of the Private Asset Backed Securities, (vii) the PABS
Issuer, the PABS Servicer (if other than the PABS Issuer) and the PABS Trustee
for such Private Asset Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, surety
bonds, letters of credit or guaranties relating to the loans underlying the
Private Asset Backed Securities or to such Private Asset Backed Securities
themselves, (ix) the term on which the underlying loans for such Private Asset
Backed Securities may, or are required to, be purchased prior to their stated
maturity or the stated maturity of the Private Asset Backed Securities, (x)
the terms on which loans may be substituted for those originally underlying
the Private Asset Backed Securities and (xi) to the extent provided in a
periodic report to the Trustee in its capacity as holder of the PABS, certain
information regarding the status of the credit support, if any, relating to
the PABS.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by Financial Asset Securities Corp. ("FASCO") with
respect to a Trust Fund pursuant to Section 13(a), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, prior to the termination of the
offering of Certificates evidencing interests therein. Upon request by any
person to whom this Prospectus is delivered in connection with the offering of
one or more classes of Certificates, FASCO will provide or cause to be
provided without charge a copy of any such documents and/or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to such classes of Certificates, other than the exhibits to
such documents (unless such exhibits are specifically incorporated by
reference in such documents). Requests to FASCO should be directed in writing
to: Paul D. Stevelman, Financial Asset Securities Corp., 600 Steamboat Road,
Greenwich, Connecticut 06830, telephone number (203) 625-2700. FASCO has
determined that its financial statements are not material to the offering of
any Certificates.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and
Exchange (the "SEC") at 450 Fifth Street, N.W., Washington, D.C. 20549.
Investors may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website
at http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each Trust Fund, that file
electronically with the SEC.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will
be applied by the Depositor to the purchase of Trust Fund Assets or will be
used by the Depositor for general corporate purposes. The Depositor expects to
sell Securities in Series from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the
volume of Trust Fund Assets acquired by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
THE DEPOSITOR
Financial Asset Securities Corp., the Depositor, is a Delaware
corporation organized on August 2, 1995 for the limited purpose of acquiring,
owning and transferring Trust Fund Assets and selling interests therein or
bonds secured thereby. It is an indirect limited purpose finance subsidiary of
National Westminster Bank Plc and an affiliate of Greenwich Capital Markets,
Inc., a registered securities broker-dealer. The Depositor maintains its
principal office at 600 Steamboat Road, Greenwich, Connecticut 06830. Its
telephone number is (203) 625-2700.
Neither the Depositor nor any of the Depositor's affiliates will
insure or guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly
or through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards".
UNDERWRITING STANDARDS
Each Seller will represent and warrant that all Loans originated
and/or sold by it to the Depositor or one of its affiliates will have been
underwritten in accordance with standards consistent with those utilized by
mortgage lenders generally during the period of origination for similar types
of loans. As to any Loan insured by the FHA or partially guaranteed by the VA,
the Seller will represent that it has complied with underwriting policies of
the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value
and adequacy of the Property as collateral. In general, a prospective borrower
applying for a Loan is required to fill out a detailed application designed to
provide to the underwriting officer pertinent credit information, including
the principal balance and payment history with respect to any senior mortgage,
if any, which, unless otherwise specified in the related Prospectus
Supplement, the borrower's income will be verified by the Seller. As part of
the description of the borrower's financial condition, the borrower generally
is required to provide a current list of assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In most cases, an
employment verification is obtained from an independent source (typically the
borrower's employer) which verification reports the length of employment with
that organization, the current salary, and whether it is expected that the
borrower will continue such employment in the future. If a prospective
borrower is self-employed, the borrower may be required to submit copies of
signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has
demand or savings accounts.
In determining the adequacy of the property to be used as collateral,
an appraisal will generally be made of each property considered for financing.
The appraiser is generally required to inspect the property, issue a report on
its condition and, if applicable, verify that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the
cost of replacing the home. The value of the property being financed, as
indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other
expenses related to the property (such as property taxes and hazard insurance)
and (ii) to meet monthly housing expenses and other financial obligations and
monthly living expenses. The underwriting standards applied by Sellers,
particularly with respect to the level of loan documentation and the
mortgagor's income and credit history, may be varied in appropriate cases
where factors such as low Combined Loan-to-Value Ratios or other favorable
credit exist.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing loans
of the type contained in the related Pool in accordance with accepted
practices and prudent guidelines, and must maintain satisfactory facilities to
originate and service those loans. Unless otherwise specified in the related
Prospectus Supplement, each Seller will be a seller/servicer approved by
either FNMA or FHLMC.
REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each Seller will have made representations and warranties in respect
of the Loans sold by such Seller and evidenced by all, or a part, of a Series
of Securities. Except as otherwise specified in the related Prospectus
Supplement, such representations and warranties include, among other things:
(i) that title insurance (or in the case of Properties located in areas where
such policies are generally not available, an attorney's certificate of title)
and any required hazard insurance policy (or certificate of title as
applicable) remained in effect on the date of purchase of the Loan from the
Seller by or on behalf of the Depositor; (ii) that the Seller had good title
to each such Loan and such Loan was subject to no offsets, defenses,
counterclaims or rights of rescission except to the extent that any buydown
agreement described herein may forgive certain indebtedness of a borrower;
(iii) that each Loan constituted a valid lien on the Property (subject only to
permissible liens disclosed, if applicable, title insurance exceptions, if
applicable, and certain other exceptions described in the Agreement) and that
the Property was free from damage and was in acceptable condition; (iv) that
there were no delinquent tax or assessment liens against the Property; (v)
that no required payment on a Loan was more than thirty days' delinquent; and
(vi) that each Loan was made in compliance with, and is enforceable under, all
applicable local, state and federal laws and regulations in all material
respects.
If so specified in the related Prospectus Supplement, the
representations and warranties of a Seller in respect of a Loan will be made
not as of the Cut-off Date but as of the date on which such Seller sold the
Loan to the Depositor or one of its affiliates. Under such circumstances, a
substantial period of time may have elapsed between such date and the date of
initial issuance of the Series of Securities evidencing an interest in such
Loan. Since the representations and warranties of a Seller do not address
events that may occur following the sale of a Loan by such Seller, its
repurchase obligation described below will not arise if the relevant event
that would otherwise have given rise to such an obligation with respect to a
Loan occurs after the date of sale of such Loan by such Seller to the
Depositor or its affiliates. However, the Depositor will not include any Loan
in the Trust Fund for any Series of Securities if anything has come to the
Depositor's attention that would cause it to believe that the representationes
and warranties of a Seller will not be accurate and complete in all material
respects in respect of such Loan as of the date of initial issuance of the
related Series of Securities. If the Master Servicer is also a Seller of Loans
with respect to a particular Series, such representations will be in addition
to the representations and warranties made by the Master Servicer in its
capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the
Seller, will promptly notify the relevant Seller of any breach of any
representation or warranty made by it in respect of a Loan which materially
and adversely affects the interests of the Securityholders in such Loan.
Unless otherwise specified in the related Prospectus Supplement, if such
Seller cannot cure such breach within 90 days following notice from the Master
Servicer or the Trustee, as the case may be, then such Seller will be
obligated either (i) to repurchase such Loan from the Trust Fund at a price
(the "PURCHASE PRICE") equal to 100% of the unpaid principal balance thereof
as of the date of the repurchase plus accrued interest thereon to the first
day of the month following the month of repurchase at the Loan Rate (less any
Advances or amount payable as related servicing compensation if the Seller is
the Master Servicer) or (ii) to substitute for such Loan a replacement loan
that satisfies certain requirements set forth in the Agreement. If a REMIC
election is to be made with respect to a Trust Fund, unless otherwise
specified in the related Prospectus Supplement, the Master Servicer or a
holder of the related residual certificate generally will be obligated to pay
any prohibited transaction tax which may arise in connection with any such
repurchase or substitution and the Trustee must have received a satisfactory
opinion of counsel that such repurchase or substitution will not cause the
Trust Fund to lose its status as a REMIC or otherwise subject the Trust Fund
to a prohibited transaction tax. The Master Servicer may be entitled to
reimbursement for any such payment from the assets of the related Trust Fund
or from any holder of the related residual certificate. See "Description of
the Securities--General". Except in those cases in which the Master Servicer
is the Seller, the Master Servicer will be required under the applicable
Agreement to enforce this obligation for the benefit of the Trustee and the
holders of the Securities, following the practices it would employ in its good
faith business judgment were it the owner of such Loan. This repurchase or
substitution obligation will constitute the sole remedy available to holders
of Securities or the Trustee for a breach of representation by a Seller.
Neither the Depositor nor the Master Servicer (unless the Master
Servicer is the Seller) will be obligated to purchase or substitute a Loan if
a Seller defaults on its obligation to do so, and no assurance can be given
that Sellers will carry out their respective repurchase or substitution
obligations with respect to Loans. However, to the extent that a breach of a
representation and warranty of a Seller may also constitute a breach of a
representation made by the Master Servicer, the Master Servicer may have a
repurchase or substitution obligation as described below under "The
Agreements--Assignment of Trust Fund Assets".
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to a pooling and
servicing agreement (a "POOLING AND SERVICING AGREEMENT") or a Trust Agreement
among the Depositor, the Servicer, if the Series relates to Loans, and the
Trustee. A form of Pooling and Servicing Agreement and Trust Agreement has
been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. Each Series of Notes will be issued pursuant to an
indenture (the "INDENTURE") between the related Trust Fund and the entity
named in the related Prospectus Supplement as trustee (the "TRUSTEE") with
respect to such Series. A form of Indenture has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. A Series may
consist of both Notes and Certificates. Each Agreement, dated as of the
related Cut-off Date, will be among the Depositor, the Master Servicer and the
Trustee for the benefit of the holders of the Securities of such Series. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain provisions which may appear in each
Agreement. The Prospectus Supplement for a Series of Securities will describe
any provision of the Agreement relating to such Series that mainly differs
from the description thereof contained in this Prospectus. The summaries do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Agreement for each
Series of Securities and the applicable Prospectus Supplement. The Depositor
will provide a copy of the Agreement (without exhibits) relating to any Series
without charge upon written request of a holder of record of a Security of
such Series addressed to Financial Asset Securities Corp., 600 Steamboat Road,
Greenwich, Connecticut 06830, Attention: Asset Backed Finance Group.
GENERAL
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be entitled
to payments in respect of the assets included in any other Trust Fund
established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Notes of each Series will be issued in book-entry
or fully registered form, in the authorized denominations specified in the
related Prospectus Supplement, will be secured by the pledge of the assets of
the related Trust Fund and will not be entitled to payments in respect of the
assets included in any other Trust Fund established by the Depositor. The
Securities will not represent obligations of the Depositor or any affiliate of
the Depositor. Certain of the Loans may be guaranteed or insured as set forth
in the related Prospectus Supplement. Each Trust Fund will consist of, to the
extent provided in the Agreement, (i) the Trust Fund Assets, as from time to
time are subject to the related Agreement (exclusive of any amounts specified
in the related Prospectus Supplement ("RETAINED INTEREST")), including all
payments of interest and principal received with respect to the Loans after
the Cut-off Date (to the extent not applied in computing the Cut-off Date
Principal Balance); (ii) such assets as from time to time are required to be
deposited in the related Security Account, as described below under "The
Agreements--Payments on Loans; Deposits to Security Account"; (iii) property
which secured a Loan and which is acquired on behalf of the Securityholders by
foreclosure or deed in lieu of foreclosure and (iv) any insurance policies or
other forms of credit enhancement required to be maintained pursuant to the
related Agreement. If so specified in the related Prospectus Supplement, a
Trust Fund may also include one or more of the following: reinvestment income
on payments received on the Trust Fund Assets, a Reserve Account, a mortgage
pool insurance policy, a Special Hazard Insurance Policy, a Bankruptcy Bond,
one or more letters of credit, a surety bond, guaranties or similar
instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right to payment
to one or more other classes of Securities of such Series. One or more classes
of Securities of a Series may be entitled to receive distributions of
principal, interest or any combination thereof. Distributions on one or more
classes of a Series of Securities may be made prior to one or more other
classes, after the occurrence of specified events, in accordance with a
schedule or formula, on the basis of collections from designated portions of
the Trust Fund Assets in the related Trust Fund or on a different basis, in
each case as specified in the related Prospectus Supplement. The timing and
amounts of such distributions may vary among classes or over time as specified
in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the Trustee
on each Distribution Date (I.E., monthly or at such other intervals and on the
dates as are specified in the Prospectus Supplement) in proportion to the
percentages specified in the related Prospectus Supplement. Distributions will
be made to the persons in whose names the Securities are registered at the
close of business on the dates specified in the related Prospectus Supplement
(each, a "RECORD DATE"). Distributions will be made in the manner specified in
the Prospectus Supplement to the persons entitled thereto at the address
appearing in the register maintained for holders of Securities (the "SECURITY
REGISTER"); provided, however, that the final distribution in retirement of
the Securities will be made only upon presentation and surrender of the
Securities at the office or agency of the Trustee or other person specified in
the notice to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee benefit
plan or other retirement arrangement (including individual retirement accounts
and annuities, Keogh plans and collective investment funds in which such
plans, accounts or arrangements are invested) subject to provisions of ERISA
or the Code may result in prohibited transactions within the meaning of ERISA
and the Code. See "ERISA Considerations". Unless otherwise specified in the
related Prospectus Supplement, the transfer of Securities of such a class will
not be registered unless the transferee (i) represents that it is not, and is
not purchasing on behalf of, any such plan, account or arrangement or (ii)
provides an opinion of counsel satisfactory to the Trustee and the Depositor
that the purchase of Securities of such a class by or on behalf of such plan,
account or arrangement is permissible under applicable law and will not
subject the Trustee, the Master Servicer or the Depositor to any obligation or
liability in addition to those undertaken in the Agreements.
As to each Series, an election may be made to treat the related Trust
Fund or designated portions thereof as a "real estate mortgage investment
conduit" or "REMIC" as defined in the Code. The related Prospectus Supplement
will specify whether a REMIC election is to be made. Alternatively, the
Agreement for a Series may provide that a REMIC election may be made at the
discretion of the Depositor or the Master Servicer and may only be made if
certain conditions are satisfied. As to any such Series, the terms and
provisions applicable to the making of a REMIC election, as well as any
material federal income tax consequences to Securityholders not otherwise
described herein, will be set forth in the related Prospectus Supplement. If
such an election is made with respect to a Series, one of the classes will be
designated as evidencing the sole class of "residual interests" in the related
REMIC, as defined in the Code. All other classes of Securities in such a
Series will constitute "regular interests" in the related REMIC, as defined in
the Code. As to each Series with respect to which a REMIC election is to be
made, the Master Servicer or a holder of the related residual certificate will
be obligated to take all actions required in order to comply with applicable
laws and regulations and will be obligated to pay any prohibited transaction
taxes. The Master Servicer, to the extent set forth in the related Prospectus
Supplement, will be entitled to reimbursement for any such payment from the
assets of the Trust Fund or from any holder of the related residual
certificate.
DISTRIBUTIONS ON SECURITIES
GENERAL. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type of
credit support, if any, that is used with respect to such Series. See "Credit
Enhancement" herein. Set forth below are descriptions of various methods that
may be used to determine the amount of distributions on the Securities of a
particular Series. The Prospectus Supplement for each Series of Securities
will describe the method to be used in determining the amount of distributions
on the Securities of such Series.
Distributions allocable to principal and interest on the Securities
will be made by the Trustee out of, and only to the extent of, funds in the
related Security Account, including any funds transferred from any Reserve
Account (a "RESERVE ACCOUNT"). As between Securities of different classes and
as between distributions of principal (and, if applicable, between
distributions of Principal Prepayments, as defined below, and scheduled
payments of principal) and interest, distributions made on any Distribution
Date will be applied as specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the distributions to
any class of Securities will be made pro rata to all Securityholders of that
class.
AVAILABLE FUNDS. All distributions on the Securities of each Series
on each Distribution Date will be made from the Available Funds described
below, in accordance with the terms described in the related Prospectus
Supplement and specified in the Agreement. Unless otherwise provided in the
related Prospectus Supplement, "AVAILABLE FUNDS" for each Distribution Date
will equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including Principal Prepayments, if any,
and prepayment penalties, if so provided in the related
Prospectus Supplement) and interest on the Loans in the related
Trust Fund (including Liquidation Proceeds and Insurance
Proceeds and amounts drawn under letters of credit or other
credit enhancement instruments as permitted thereunder and as
specified in the related Agreement) received by the Master
Servicer after the Cut-off Date and on or prior to the day of
the month of the related Distribution Date specified in the
related Prospectus Supplement (the "DETERMINATION DATE") except
(a) all payments which were due on or before the
Cut-off Date;
(b) all Liquidation Proceeds and all Insurance
Proceeds, all Principal Prepayments and all other proceeds of
any Loan purchased by the Depositor, Master Servicer, any
Sub-Servicer or any Seller pursuant to the Agreement that were
received after the prepayment period specified in the related
Prospectus Supplement and all related payments of interest
representing interest for any period after the interest accrual
period;
(c) all scheduled payments of principal and interest
due on a date or dates subsequent to the Due Period relating to
such Distribution Date;
(d) amounts received on particular Loans as late
payments of principal or interest or other amounts required to
be paid by borrowers, but only to the extent of any unreimbursed
advance in respect thereof made by the Master Servicer
(including the related Sub-Servicers, Support Servicers or the
Trustee);
(e) amounts representing reimbursement, to the extent
permitted by the Agreement and as described under "Advances"
below, for advances made by the Master Servicer, Sub-Servicers
(as defined below), Support Servicers or the Trustee that were
deposited into the Security Account, and amounts representing
reimbursement for certain other losses and expenses incurred by
the Master Servicer or the Depositor and described below;
(f) that portion of each collection of interest on a
particular Loan in such Trust Fund which represents servicing
compensation payable to the Master Servicer or Retained Interest
which is to be retained from such collection or is permitted to
be retained from related Insurance Proceeds, Liquidation
Proceeds or proceeds of Loans purchased pursuant to the
Agreement;
(ii) the amount of any advance made by the Master Servicer, Sub
Servicer, Support Servicer or Trustee as described under
"--Advances" below and deposited by it in the Security Account;
(iii) if applicable, amounts withdrawn from a Reserve Account;
(iv) if applicable, amounts provided under a letter of credit,
insurance policy, surety bond or other third-party guaranties;
and
(v) if applicable, the amount of prepayment interest shortfall.
DISTRIBUTIONS OF INTEREST. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Security
Principal Balance (or, in the case of Securities (i) entitled only to
distributions allocable to interest, the aggregate notional principal balance
or (ii) which, under certain circumstances, allow for the accrual of interest
otherwise scheduled for payment to remain unpaid until the occurrence of
certain events specified in the related Prospectus Supplement) of each class
of Securities entitled to interest from the date, at the Pass-Through Rate
(which may be a fixed rate or rate adjustable as specified in such Prospectus
Supplement) and for the periods specified in such Prospectus Supplement. To
the extent funds are available therefor, interest accrued during each such
specified period on each class of Securities entitled to interest (other than
a class of Securities that provides for interest that accrues, but is not
currently payable, referred to hereafter as "ACCRUAL SECURITIES") will be
distributable on the Distribution Dates specified in the related Prospectus
Supplement until the aggregate Security Principal Balance of the Securities of
such class has been distributed in full or, in the case of Securities entitled
only to distributions allocable to interest, until the aggregate notional
principal balance of such Securities is reduced to zero or for the period of
time designated in the related Prospectus Supplement. The original Security
Principal Balance of each Security will equal the aggregate distributions
allocable to principal to which such Security is entitled. Unless otherwise
specified in the related Prospectus Supplement, distributions allocable to
interest on each Security that is not entitled to distributions allocable to
principal will be calculated based on the notional principal balance of such
Security. The notional principal balance of a Security will not evidence an
interest in or entitlement to distributions allocable to principal but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two
or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at par)
to Securityholders will be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid
on a given Distribution Date will be added to the aggregate Security Principal
Balance of such class of Securities on that Distribution Date. Distributions
of interest on any class of Accrual Securities will commence only after the
occurrence of the events specified in the related Prospectus Supplement. Prior
to such time, the beneficial ownership interest of such class of Accrual
Securities in the Trust Fund, as reflected in the aggregate Security Principal
Balance of such class of Accrual Securities, will increase on each
Distribution Date by the amount of interest that accrued on such class of
Accrual Securities during the preceding interest accrual period but that was
not required to be distributed to such class on such Distribution Date. Any
such class of Accrual Securities will thereafter accrue interest on its
outstanding Security Principal Balance as so adjusted.
DISTRIBUTIONS OF PRINCIPAL. The related Prospectus Supplement will
specify the method by which the amount of principal to be distributed on the
Securities on each Distribution Date will be calculated and the manner in
which such amount will be allocated among the classes of Securities entitled
to distributions of principal. The aggregate Security Principal Balance of any
class of Securities entitled to distributions of principal generally will be
the aggregate original Security Principal Balance of such class of Securities
specified in such Prospectus Supplement, reduced by all distributions reported
to the holders of such Securities as allocable to principal and, (i) in the
case of Accrual Securities, increased by all interest accrued but not then
distributable on such Accrual Securities and (ii) in the case of adjustable
rate Securities, subject to the effect of negative amortization, if
applicable.
If so provided in the related Prospectus Supplement, one or more
classes of Securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("PRINCIPAL PREPAYMENTS") in the percentages and under the circumstances or
for the periods specified in such Prospectus Supplement. Any such allocation
of Principal Prepayments to such class or classes of Securityholders will have
the effect of accelerating the amortization of such Securities while
increasing the interests evidenced by other Securities in the Trust Fund.
Increasing the interests of the other Securities relative to that of certain
Securities allocated by the principal prepayments is intended to preserve the
availability of the subordination provided by such other Securities. See
"Credit Enhancement--Subordination".
UNSCHEDULED DISTRIBUTIONS. The Securities will be subject to receipt
of distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such
unscheduled distributions on the day and in the amount specified in the
related Prospectus Supplement if, due to substantial payments of principal
(including Principal Prepayments) on the Trust Fund Assets, the Trustee or the
Master Servicer determines that the funds available or anticipated to be
available from the Security Account and, if applicable, any Reserve Account,
may be insufficient to make required distributions on the Securities on such
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the amount of any such unscheduled distribution that is allocable
to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Securities on the next
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified
in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Securities would have been made on the next Distribution Date, and with
respect to Securities of the same class, unscheduled distributions of
principal will be made on the same basis as such distributions would have been
made on the next Distribution Date on a pro rata basis. Notice of any
unscheduled distribution will be given by the Trustee prior to the date of
such distribution.
ADVANCES
To the extent provided in the related Prospectus Supplement, the
Master Servicer will be required to advance on or before each Distribution
Date (from its own funds, funds advanced by Sub-Servicers or Support Servicers
or funds held in the Security Account for future distributions to the holders
of such Securities), an amount equal to the aggregate of payments of interest
and/or principal that were delinquent on the related Determination Date and
were not advanced by any Sub-Servicer, subject to the Master Servicer's
determination that such advances will be recoverable out of late payments by
borrowers, Liquidation Proceeds, Insurance Proceeds or otherwise. In addition,
to the extent provided in the related Prospectus Supplement, a cash account
may be established to provide for Advances to be made in the event of certain
Trust Fund Assets payment defaults or collection shortfalls.
In making Advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If Advances are
made by the Master Servicer from cash being held for future distribution to
Securityholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Security
Account on such Distribution Date would be less than the amount required to be
available for distributions to Securityholders on such date. Any Master
Servicer funds advanced will be reimbursable to the Master Servicer out of
recoveries on the specific Loans with respect to which such Advances were made
(E.G., late payments made by the related borrower, any related Insurance
Proceeds, Liquidation Proceeds or proceeds of any Loan purchased by a
Sub-Servicer or a Seller under the circumstances described hereinabove).
Advances by the Master Servicer (and any advances by a Sub-Servicer or a
Support Servicer) also will be reimbursable to the Master Servicer (or
Sub-Servicer or a Support Servicer) from cash otherwise distributable to
Securityholders (including the holders of Senior Securities) to the extent
that the Master Servicer determines that any such Advances previously made are
not ultimately recoverable as described above. To the extent provided in the
related Prospectus Supplement, the Master Servicer also will be obligated to
make Advances, to the extent recoverable out of Insurance Proceeds,
Liquidation Proceeds or otherwise, in respect of certain taxes and insurance
premiums not paid by borrowers on a timely basis. Funds so advanced are
reimbursable to the Master Servicer to the extent permitted by the Agreement.
The obligations of the Master Servicer to make advances may be supported by a
cash advance reserve fund, a surety bond or other arrangement, in each case as
described in such Prospectus Supplement.
The Master Servicer or Sub-Servicer may enter into an agreement (a
"SUPPORT AGREEMENT") with a support servicer (each, a "SUPPORT SERVICER")
pursuant to which the Support Servicer agrees to provide funds on behalf of
the Master Servicer or Sub-Servicer in connection with the obligation of the
Master Servicer or Sub-Servicer, as the case may be, to make Advances. The
Support Agreement will be delivered to the Trustee and the Trustee will be
authorized to accept a substitute Support Agreement in exchange for an
original Support Agreement, provided that such substitution of the Support
Agreement will not adversely affect the rating or ratings then in effect on
the Securities.
Unless otherwise specified in the related Prospectus Supplement, in
the event the Master Servicer, a Sub-Servicer or a Support Servicer fails to
make a required Advance, the Trustee will be obligated to make such Advance in
its capacity as successor servicer. If the Trustee makes such an Advance, it
will be entitled to be reimbursed for such Advance to the same extent and
degree as the Master Servicer, a Sub-Servicer or a Support Servicer is
entitled to be reimbursed for Advances. See "Description of the
Securities--Distributions on Securities" herein.
COMPENSATING INTEREST
If so specified in the related Prospectus Supplement, the Master
Servicer will be required to remit to the Trustee, with respect to each Loan
in the related Trust Fund as to which a principal prepayment in full or a
principal payment which is in excess of the scheduled monthly payment and is
not intended to cure a delinquency was received during any Due Period, an
amount, from and to the extent of amounts otherwise payable to the Master
Servicer as servicing compensation, equal to the excess, if any, of (a) 30
days' interest on the principal balance of the related Loan at the Loan Rate
net of the per annum rate at which the Master Servicer's servicing fee
accrues, over (b) the amount of interest actually received on such Loan during
such Due Period, net of the Master Servicer's servicing fee.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution
Date, the Master Servicer or the Trustee will furnish to each Securityholder
of record of the related Series a statement setting forth, to the extent
applicable to such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and any applicable prepayment penalties included
therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on such Distribution Date, and (b)
withdrawn from the Reserve Fund, if any, that is included in the
amounts distributed to the Senior Securityholders;
(v) the outstanding principal balance or notional principal
balance of such class after giving effect to the distribution of
principal on such Distribution Date;
(vi) the percentage of principal payments on the Loans
(excluding prepayments), if any, which such class will be
entitled to receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if
any, which such class will be entitled to receive on the
following Distribution Date;
(viii) the related amount of the servicing compensation retained
or withdrawn from the Security Account by the Master Servicer,
and the amount of additional servicing compensation received by
the Master Servicer attributable to penalties, fees, excess
Liquidation Proceeds and other similar charges and items;
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 31 to 60
days, (2) 61 to 90 days and (3) 91 or more days and (B) in
foreclosure and delinquent (1) 31 to 60 days, (2) 61 to 90 days
and (3) 91 or more days, as of the close of business on the last
day of the calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure;
(xi) if a class is entitled only to a specified portion of
payments of interest on the Loans in the related Pool, the
Pass-Through Rate, if adjusted from the date of the last
statement, of the Loans expected to be applicable to the next
distribution to such class;
(xii) if applicable, the amount remaining in any Reserve Account
at the close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the
immediately preceding Distribution Date;and
(xiv) any amounts remaining under letters of credit, pool
policies or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Securityholders for any Series of Securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record
during a portion of such calendar year, for the applicable portion of such
year and (b) such other customary information as may be deemed necessary or
desirable for Securityholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "BOOK-ENTRY SECURITIES"). Persons acquiring beneficial
ownership interests in the Securities ("SECURITY OWNERS") will hold their
Securities through the Depository Trust Company ("DTC") in the United States,
or Cedel Bank ("CEDEL") or the Euroclear System ("Euroclear") (in Europe) if
they are participants ("PARTICIPANTs") of such systems, or indirectly through
organizations which are Participants in such systems. The Book-Entry
Securities will be issued in one or more certificates which equal the
aggregate principal balance of the Securities and will initially be registered
in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear will hold
omnibus positions on behalf of their Participants through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank,
N.A. will act as depositary for CEDEL and The Chase Manhattan Bank will act as
depositary for Euroclear (in such capacities, individually the "RELEVANT
DEPOSITARY" and collectively the "EUROPEAN DEPOSITARIES"). Except as described
below, no Security Owner will be entitled to receive a physical certificate
representing such Security (a "DEFINITIVE SECURITY"). Unless and until
Definitive Securities are issued, it is anticipated that the only
"Securityholders" of the Securities will be Cede & Co. ("CEDE"), as nominee of
DTC. Security Owners are only permitted to exercise their rights indirectly
through Participants and DTC.
The Security Owner's ownership of a Book-Entry Security will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains
the Security Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the records
of DTC, if the Security Owner's Financial Intermediary is not a Participant
and on the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants.
While the Securities are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "RULES"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Securities and
is required to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and indirect participants with whom
Security Owners have accounts with respect to Securities are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Security Owners. Accordingly,
although Security Owners will not possess certificates, the Rules provide a
mechanism by which Security Owners will receive distributions and will be able
to transfer their interest.
Security Owners will not receive or be entitled to receive
certificates representing their respective interests in the Securities, except
under the limited circumstances described below. Unless and until Definitive
Securities are issued, Security Owners who are not Participants may transfer
ownership of Securities only through Participants and indirect participants by
instructing such Participants and indirect participants to transfer
Securities, by book-entry transfer, through DTC for the account of the
purchasers of such Securities, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Securities will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Security Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in
such securities settled during such processing will be reported to the
relevant Euroclear or CEDEL Participants on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant (as defined herein) or Euroclear Participant (as defined herein)
to a DTC Participant will be received with value on the DTC settlement date
but will be available in the relevant CEDEL or Euroclear cash account only as
of the business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC
rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
PARTICIPANTS") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for its participants
("EUROCLEAR PARTICIPANTS") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan, under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "COOPERATIVE"). All operations
are conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which
is a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are
governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "TERMS AND CONDITIONS"). The Terms and Conditions
govern transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants, and has no record of or relationship
with persons holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect
to Securities held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Certain
Material Federal Income Tax Considerations--Tax Treatment of Foreign
Investors" and "--Tax Consequences to Holders of the Notes--BACKUP
WITHHOLDIng" herein. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Securities to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Securities,
may be limited due to the lack of physical certificates for such Book-Entry
Securities. In addition, issuance of the Book-Entry Securities in book-entry
form may reduce the liquidity of such Securities in the secondary market since
certain potential investors may be unwilling to purchase Securities for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Securities under the applicable Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts
the Book-Entry Securities are credited, to the extent that such actions are
taken on behalf of Financial Intermediaries whose holdings include such
Book-Entry Securities. CEDEL or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a Securityholder under the
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability
of the Relevant Depositary to effect such actions on its behalf through DTC.
DTC may take actions, at the direction of the related Participants, with
respect to some Securities which conflict with actions taken with respect to
other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
None of the Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating, to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more
classes of a Series of Securities or with respect to the Trust Fund Assets in
the related Trust Fund. Credit enhancement may be in the form of a limited
financial guaranty policy issued by an entity named in the related Prospectus
Supplement, the subordination of one or more classes of the Securities of such
Series, the establishment of one or more Reserve Accounts, the use of a
cross-support feature, use of a mortgage pool insurance policy, FHA Insurance,
VA Guarantee, bankruptcy bond, special hazard insurance policy, surety bond,
letter of credit, guaranteed investment contract or another method of credit
enhancement described in the related Prospectus Supplement, or any combination
of the foregoing. Unless otherwise specified in the related Prospectus
Supplement, credit enhancement will not provide protection against all risks
of loss and will not guarantee repayment of the entire principal balance of
the Securities and interest thereon. If losses occur which exceed the amount
covered be credit enhancement or which are not covered by the credit
enhancement, Securityholders will bear their allocable share of deficiencies.
SUBORDINATION
Protection afforded to holders of one or more classes of Securities
of a Series by means of the subordination feature may be accomplished by the
preferential right of holders of one or more other classes of such Series (the
"SENIOR SECURITIES") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise
would have been payable to holders of Subordinated Securities under the
circumstances and to the extent specified in the related Prospectus
Supplement. Protection may also be afforded to the holders of Senior
Securities of a Series by: (i) reducing the ownership interest of the related
Subordinated Securities; (ii) a combination of the immediately preceding
sentence and clause (i) above; or (iii) as otherwise described in the related
Prospectus Supplement. Delays in receipt of scheduled payments on the Loans
and losses on defaulted Loans may be borne first by the various classes of
Subordinated Securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the
limitations specified in such related Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Loans over the lives of
the Securities or at any time, the aggregate losses in respect of defaulted
Loans which must be borne by the Subordinated Securities by virtue of
subordination and the amount of the distributions otherwise distributable to
the Subordinated Securityholders that will be distributable to Senior
Securityholders on any Distribution Date may be limited as specified in the
related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Loans or aggregate losses in respect of such Loans
were to exceed an amount specified in the related Prospectus Supplement,
holders of Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee or distributed to holders of Senior Securities. Such deposits may be
made on each Distribution Date, for specified periods or until the balance in
the Reserve Account has reached a specified amount and, following payments
from the Reserve Account to holders of Senior Securities or otherwise,
thereafter to the extent necessary to restore the balance in the Reserve
Account to required levels, in each case as specified in the related
Prospectus Supplement. Amounts on deposit in the Reserve Account may be
released to the holders of certain classes of Securities at the times and
under the circumstances specified in such Prospectus Supplement.
Various classes of Senior Securities and Subordinated Securities may
themselves be subordinate in their right to receive certain distributions to
other classes of Senior and Subordinated Securities, respectively, through a
cross support mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus
Supplement. As between classes of Subordinated Securities, payments to holders
of Senior Securities on account of delinquencies or losses and payments to any
Reserve Account will be allocated as specified in the related Prospectus
Supplement.
SPECIAL HAZARD INSURANCE POLICIES
A separate special hazard insurance policy (each, a "SPECIAL HAZARD
INSURANCE POLICY") may be obtained for the Pool and issued by the insurer (the
"SPECIAL HAZARD INSURER") named in the related Prospectus Supplement. Each
Special Hazard Insurance Policy will, subject to limitations described below,
protect holders of the related Securities from (i) loss by reason of damage to
Properties caused by certain hazards (including earthquakes and, to a limited
extent, tidal waves and related water damage or as otherwise specified in the
related Prospectus Supplement) not insured against under the standard form of
hazard insurance policy for the respective states in which the Properties are
located or under a flood insurance policy if the Property is located in a
federally designated flood area, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "The Agreements--Hazard Insurance". Each Special Hazard Insurance Policy
will not cover losses occasioned by fraud or conversion by the Trustee or
Master Servicer, war, insurrection, civil war, certain governmental action,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear or chemical reactions, flood (if the Property is
located in a federally designated flood area), nuclear or chemical
contamination and certain other risks. The amount of coverage under any
Special Hazard Insurance Policy will be specified in the related Prospectus
Supplement. Each Special Hazard Insurance Policy will provide that no claim
may be paid unless hazard and, if applicable, flood insurance on the Property
securing the Loan have been kept in force and other protection and
preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified
in the related Prospectus Supplement, each Special Hazard Insurance Policy
will provide that where there has been damage to Property securing a
foreclosed Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the borrower or the Master Servicer,
the Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the Property to the
Special Hazard Insurer, the unpaid principal balance of such Loan at the time
of acquisition of such Property by foreclosure or deed in lieu of foreclosure,
plus accrued interest to the date of claim settlement and certain expenses
incurred by the Master Servicer with respect to such Property. If the unpaid
principal balance of a Loan plus accrued interest and certain expenses is paid
by the Special Hazard Insurer, the amount of further coverage under the
related Special Hazard Insurance Policy will be reduced by such amount less
any net proceeds from the sale of the Property. Any amount paid as the cost of
repair of the Property will further reduce coverage by such amount.
The Master Servicer may deposit cash, an irrevocable letter of credit
or any other instrument acceptable to each Rating Agency rating the Securities
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Special Hazard Insurance Policy. The
amount of any Special Hazard Insurance Policy or of the deposit to the special
trust account relating to such Securities in lieu thereof may be reduced so
long as any such reduction will not result in a downgrading of the rating of
such Securities by any such Rating Agency.
BANKRUPTCY BONDS
A bankruptcy bond ("BANKRUPTCY BOND") for proceedings under the
federal Bankruptcy Code may be issued by an insurer named in such Prospectus
Supplement. Each Bankruptcy Bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal and
interest on a Loan or a reduction by such court of the principal amount of a
Loan and will cover certain unpaid interest on the amount of such a principal
reduction from the date of the filing of a bankruptcy petition. The required
amount of coverage under each Bankruptcy Bond will be set forth in the related
Prospectus Supplement. The Master Servicer may deposit cash, an irrevocable
letter of credit or any other instrument acceptable to each Rating Agency
rating the Securities of the related Series in a special trust account to
provide protection in lieu of or in addition to that provided by a Bankruptcy
Bond. Coverage under a Bankruptcy Bond may be cancelled or reduced by the
Master Servicer if such cancellation or reduction would not adversely affect
the then current rating or ratings of the related Securities. See "Certain
Legal Aspects of the Loans--Anti-Deficiency Legislation and Other Limitations
on Lenders".
RESERVE ACCOUNTS
Credit support with respect to a Series of Securities may be provided
by the establishment and maintenance with the Trustee for such Series of
Securities, in trust, of one or more Reserve Accounts for such Series. The
related Prospectus Supplement will specify whether or not any such Reserve
Accounts will be included in the Trust Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit
therein of cash, United States Treasury securities, instruments evidencing
ownership of principal or interest payments thereon, letters of credit, demand
notes, certificates of deposit or a combination thereof in the aggregate
amount specified in the related Prospectus Supplement, (ii) by the deposit
therein from time to time of certain amounts, as specified in the related
Prospectus Supplement to which the Subordinate Securityholders, if any, would
otherwise be entitled or (iii) in such other manner as may be specified in the
related Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
Permitted Investments which may include obligations of the United States and
certain agencies thereof, certificates of deposit, certain commercial paper,
time deposits and bankers acceptances sold by eligible commercial banks and
certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the
Trustee, such letter of credit will be irrevocable. Any instrument deposited
therein will name the Trustee, in its capacity as trustee for the holders of
the Securities, as beneficiary and will be issued by an entity acceptable to
each Rating Agency that rates the Securities. Additional information with
respect to such instruments deposited in the Reserve Accounts will be set
forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited
will be available for withdrawal from the Reserve Account for distribution to
the holders of Securities for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
POOL INSURANCE POLICIES
A separate pool insurance policy ("POOL INSURANCE POLICY") may be
obtained for the Pool and issued by the insurer (the "POOL INSURER") named in
the related Prospectus Supplement. Each Pool Insurance Policy will, subject to
the limitations described below, cover loss by reason of default in payment on
Loans in the Pool in an amount equal to a percentage specified in such
Prospectus Supplement of the aggregate principal balance of such Loans on the
Cut-off Date which are not covered as to their entire outstanding principal
balances by Primary Mortgage Insurance Policies. As more fully described
below, the Master Servicer will present claims thereunder to the Pool Insurer
on behalf of itself, the Trustee and the holders of the Securities. The Pool
Insurance Policies, however, are not blanket policies against loss, since
claims thereunder may only be made respecting particular defaulted Loans and
only upon satisfaction of certain conditions precedent described below. Unless
otherwise specified in the related Prospectus Supplement, the Pool Insurance
Policies will not cover losses due to a failure to pay or denial of a claim
under a Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for the
defaulted Loan and a claim thereunder has been submitted and settled; (ii)
hazard insurance on the related Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Property, it has been
restored to its physical condition (reasonable wear and tear excepted) at the
time of issuance of the policy; and (iv) the insured has acquired good and
merchantable title to the Property free and clear of liens except certain
permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted Loan at a price equal to the principal balance thereof plus accrued
and unpaid interest at the Loan Rate to the date of purchase and certain
expenses incurred by the Master Servicer on behalf of the Trustee and
Securityholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted Loan plus accrued and unpaid interest at the Loan
Rate to the date of payment of the claim and the aforementioned expenses
exceeds the proceeds received from an approved sale of the Property, in either
case net of certain amounts paid or assumed to have been paid under the
related Primary Mortgage Insurance Policy. If any Property securing a
defaulted Loan is damaged and proceeds, if any, from the related hazard
insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged Property to a condition sufficient to
permit recovery under the Pool Insurance Policy, the Master Servicer will not
be required to expend its own funds to restore the damaged Property unless it
determines that (i) such restoration will increase the proceeds to
securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) such expenses will be recoverable by it
through proceeds of the sale of the Property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will not insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Loan, including misrepresentation by the borrower, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Property in accordance with plans and specifications. A failure of
coverage attributable to one of the foregoing events might result in a breach
of the related Seller's representations described above, and, in such events
might give rise to an obligation on the part of such Seller to purchase the
defaulted Loan if the breach cannot be cured by such Seller. No Pool Insurance
Policy will cover (and many Primary Mortgage Insurance Policies do not cover)
a claim in respect of a defaulted Loan occurring when the servicer of such
Loan, at the time of default or thereafter, was not approved by the applicable
insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of
claims paid less the aggregate of the net amounts realized by the Pool Insurer
upon disposition of all foreclosed properties. The amount of claims paid may
include certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Loans to the date of payment of the claim. Accordingly,
if aggregate net claims paid under any Pool Insurance Policy reach the
original policy limit, coverage under that Pool Insurance Policy will be
exhausted and any further losses will be borne by the Securityholders.
FHA INSURANCE; VA GUARANTEES
Loans designated in the related Prospectus Supplement as insured by
the FHA will be insured by the FHA as authorized under the United States
Housing Act of 1934, as amended. In addition to the Title I Program of the FHA
(see "Certain Legal Aspects of the Loans -- The Title I Program" herein),
certain Loans will be insured under various FHA programs which generally limit
the principal amount and interest rates of the mortgage loans insured.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD") or
by the Master Servicer or any Sub-Servicer and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged premises to the
United States of America or upon assignment of the defaulted Loan to the
United States of America. With respect to a defaulted FHA-insured Loan, the
Master Servicer or any Sub-Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Master Servicer
or any Sub-Servicer or HUD, that default was caused by circumstances beyond
the mortgagor's control, the Master Servicer or any Sub-Servicer is expected
to make an effort to avoid foreclosure by entering, if feasible, into one of a
number of available forms of forbearance plans with the mortgagor. Such plans
may involve the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made upon or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up
to or, other than Loans originated under the Title I Program of the FHA,
beyond the maturity date. In addition, when a default caused by such
circumstances is accompanied by certain other criteria, HUD may provide relief
by making payments to the Master Servicer or any Sub-Servicer in partial or
full satisfaction of amounts due under the Loan (which payments are to be
repaid by the mortgagor to HUD) or by accepting assignment of the loan from
the Master Servicer or any Sub-Servicer. With certain exceptions, at least
three full monthly installments must be due and unpaid under the Loan, and HUD
must have rejected any request for relief from the mortgagor before the Master
Servicer or any Sub-Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such
debenture issued in satisfaction of such Loan upon default for an amount equal
to the principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount
of insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master
Servicer or Sub-Servicer for certain costs and expenses and to deduct certain
amounts received or retained by the Master Servicer or Sub-Servicer after
default. When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance to HUD, the Master Servicer or
Sub-Servicer is compensated for no more than two-thirds of its foreclosure
costs, and is compensated for interest accrued and unpaid prior to such date
but in general only to the extent it was allowed pursuant to a forbearance
plan approved by HUD. When entitlement to insurance benefits results from
assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the borrower's first uncorrected failure to
perform any obligation to make any payment due under the mortgage and, upon
assignment, from the date of assignment to the date of payment of the claim,
in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed
by the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA GUARANTY POLICY"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan guarantee
by the VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no
mortgage loan limits, requires no down payment from the purchaser and permits
the guarantee of mortgage loans of up to 30 years' duration. However, no Loan
guaranteed by the VA will have an original principal amount greater than five
times the partial VA guarantee for such Loan.
The maximum guarantee that may be issued by the VA under a VA
guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 1803(a),
as amended. As of November 1, 1998, the maximum guarantee that may be issued
by the VA under a VA guaranteed mortgage loan of more than $144,000 is the
lesser of 25% of the original principal amount of the mortgage loan and
$50,750. The liability on the guarantee is reduced or increased pro rata with
any reduction or increase in the amount of indebtedness, but in no event will
the amount payable on the guarantee exceed the amount of the original
guarantee. The VA may, at its option and without regard to the guarantee, make
full payment to a mortgage holder of unsatisfied indebtedness on a mortgage
upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Master Servicer
or Sub-Servicer is, absent exceptional circumstances, authorized to announce
its intention to foreclose only when the default has continued for three
months. Generally, a claim for the guarantee is submitted after liquidation of
the Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Loan originally guaranteed applied to indebtedness outstanding as
of the applicable date of computation specified in the VA regulations.
Payments under the guarantee will be equal to the unpaid principal amount of
the Loan, interest accrued on the unpaid balance of the Loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Property. The amount payable under the guarantee may in no
event exceed the amount of the original guarantee.
CROSS-SUPPORT
The beneficial ownership of separate groups of assets included in a
Trust Fund may be evidenced by separate classes of the related Series of
Securities. In such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect to Securities
evidencing a beneficial ownership interest in, or secured by, other asset
groups within the same Trust Fund. The related Prospectus Supplement for a
Series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
The coverage provided by one or more forms of credit support may
apply concurrently to two or more related Trust Funds. If applicable, the
related Prospectus Supplement will identify the Trust Funds to which such
credit support relates and the manner of determining the amount of the
coverage provided thereby and of the application of such coverage to the
identified Trust Funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A Trust Fund may also include insurance, guaranties, surety bonds,
letters of credit or similar arrangements for the purpose of (i) maintaining
timely payments or providing additional protection against losses on the
assets included in such Trust Fund, (ii) paying administrative expenses or
(iii) establishing a minimum reinvestment rate on the payments made in respect
of such assets or principal payment rate on such assets. Such arrangements may
include agreements under which Securityholders are entitled to receive amounts
deposited in various accounts held by the Trustee upon the terms specified in
such Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities
will be affected primarily by the amount and timing of principal payments
received on or in respect of the Trust Fund Assets included in the related
Trust Fund. With respect to a Trust Fund which includes Private Asset Backed
Securities, the possible effects of the amount and timing of principal
payments received with respect to the underlying mortgage loans will be
described in the related Prospectus Supplement. The original terms to maturity
of the Loans in a given Pool will vary depending upon the type of Loans
included therein. Each Prospectus Supplement will contain information with
respect to the type and maturities of the Loans in the related Pool. Unless
otherwise specified in the related Prospectus Supplement, Loans may be prepaid
without penalty in full or in part at any time. The prepayment experience on
the Loans in a Pool will affect the life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant
volume only during the past few years and the Depositor is not aware of any
publicly available studies or statistics on the rate of prepayment of such
loans. Generally, home equity loans and home improvement contracts are not
viewed by borrowers as permanent financing. Accordingly, the Loans may
experience a higher rate of prepayment than traditional first mortgage loans.
On the other hand, because home equity loans such as the Revolving Credit Line
Loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments lower than, or similar to,
those of traditional fully-amortizing first mortgages. The prepayment
experience of the related Trust Fund may be affected by a wide variety of
factors, including general economic conditions, prevailing interest rate
levels, the availability of alternative financing and homeowner mobility and
the frequency and amount of any future draws on any Revolving Credit Line
Loans. Other factors that might be expected to affect the prepayment rate of a
pool of home equity mortgage loans or home improvement contracts include the
amounts of, and interest rates on, the underlying senior mortgage loans, and
the use of first mortgage loans as long-term financing for home purchase and
subordinate mortgage loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, the Loans may experience a
higher rate of prepayment than traditional fixed-rate mortgage loans. In
addition, any future limitations on the right of borrowers to deduct interest
payments on home equity loans for federal income tax purposes may further
increase the rate of prepayments of the Loans. The enforcement of a
"due-on-sale" provision (as described below) will have the same effect as a
prepayment of the related Loan. See "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses" herein. The yield to an investor who purchases
Securities in the secondary market at a price other than par will vary from
the anticipated yield if the rate of prepayment on the Loans is actually
different than the rate anticipated by such investor at the time such
Securities were purchased.
Collections on Revolving Credit Line Loans may vary because, among
other things, borrowers may (i) make payments during any month as low as the
minimum monthly payment for such month or, during the interest-only period for
certain Revolving Credit Line Loans and, in more limited circumstances,
Closed-End Loans, with respect to which an interest-only payment option has
been selected, the interest and the fees and charges for such month or (ii)
make payments as high as the entire outstanding principal balance plus accrued
interest and the fees and charges thereon. It is possible that borrowers may
fail to make the required periodic payments. In addition, collections on the
Loans may vary due to seasonal purchasing and the payment habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, the
Loans will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the loan upon sale or certain transfers by the
borrower. Loans insured by the FHA, and Single Family Loans partially
guaranteed by the VA, are assumable with the consent of the FHA and the VA,
respectively. Thus, the rate of prepayments on such Loans may be lower than
that of conventional Loans bearing comparable interest rates. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer generally
will enforce any due-on-sale or due-on-encumbrance clause, to the extent it
has knowledge of the conveyance or further encumbrance or the proposed
conveyance or proposed further encumbrance of the Property and reasonably
believes that it is entitled to do so under applicable law; provided, however,
that the Master Servicer will not take any enforcement action that would
impair or threaten to impair any recovery under any related insurance policy.
See "The Agreements--Collection Procedures" and "Certain Legal Aspects of the
Loans" for a description of certain provisions of each Agreement and certain
legal developments that may affect the prepayment experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans
has fluctuated significantly in recent years. If prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans may be
subject to higher prepayment rates than if prevailing interest rates remain at
or above such Loan Rates. Conversely, if prevailing interest rates rise
appreciably above the Loan Rates borne by the Loans, such Loans may experience
a lower prepayment rate than if prevailing rates remain at or below such Loan
Rates. However, there can be no assurance that such will be the case.
When a full prepayment is made on a Loan, the borrower is charged
interest on the principal amount of the Loan so prepaid only for the number of
days in the month actually elapsed up to the date of the prepayment, rather
than for a full month. Unless the Master Servicer remits amounts otherwise
payable to it as servicing compensation, see "Description of the
Securities--Compensating Interest", the effect of prepayments in full will be
to reduce the amount of interest passed through in the following month to
holders of Securities because interest on the principal amount of any Loan so
prepaid will be paid only to the date of prepayment. Partial prepayments in a
given month may be applied to the outstanding principal balances of the Loans
so prepaid on the first day of the month of receipt or the month following
receipt. In the latter case, partial prepayments will not reduce the amount of
interest passed through in such month. Unless otherwise specified in the
related Prospectus Supplement, neither full nor partial prepayments will be
passed through until the month following receipt.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a
default by a borrower, these restrictions among other things, may impede the
ability of the Master Servicer to foreclose on or sell the Property or to
obtain liquidation proceeds sufficient to repay all amounts due on the related
Loan. In addition, the Master Servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on defaulted Loans and not yet repaid, including payments to
senior lienholders, legal fees and costs of legal action, real estate taxes
and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the remaining principal balance of the
small mortgage loan than would be the case with the other defaulted mortgage
loan having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most have other laws, public
policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and practices which may apply to the
origination, servicing and collection of the Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Master Servicer to damages
and administrative sanctions.
If the rate at which interest is passed through to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis, disproportionate
principal prepayments among Loans with different Loan Rates will affect the
yield on such Securities. In most cases, the effective yield to
Securityholders will be lower than the yield otherwise produced by the
applicable Pass-Through Rate and purchase price, because while interest will
accrue on each Loan from the first day of the month (unless otherwise
specified in the related Prospectus Supplement), the distribution of such
interest will not be made earlier than the month following the month of
accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust
Fund thereby effecting earlier retirement of the related Series of Securities.
See "The Agreements--Termination; Optional Termination".
Factors other than those identified herein and in the related
Prospectus Supplement could significantly affect principal prepayments at any
time and over the lives of the Securities. The relative contribution of the
various factors affecting prepayment may also vary from time to time. There
can be no assurance as to the rate of payment of principal of the Trust Fund
Assets at any time or over the lives of the Securities.
The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements. Except as otherwise specified, the Agreement
described herein contemplates a Trust Fund comprised of Loans. The provisions
of an Agreement with respect to a Trust Fund which consists of or includes
Private Asset Backed Securities may contain provisions similar to those
described herein but will be more fully described in the related Prospectus
Supplement.
ASSIGNMENT OF THE TRUST FUND ASSETS
ASSIGNMENT OF THE LOANS. At the time of issuance of the Securities of
a Series, the Depositor will cause the Loans comprising the related Trust Fund
to be assigned to the Trustee, together with all principal and interest
received by or on behalf of the Depositor on or with respect to such Loans
after the Cut-off Date, other than principal and interest due on or before the
Cut-off Date and other than any Retained Interest specified in the related
Prospectus Supplement. The Trustee will, concurrently with such assignment,
deliver the Securities to the Depositor in exchange for the Loans. Each Loan
will be identified in a schedule appearing as an exhibit to the related
Agreement. Such schedule will include information as to the outstanding
principal balance of each Loan after application of payments due on or before
the Cut-off Date, as well as information regarding the Loan Rate or APR, the
current scheduled monthly payment of principal and interest, the maturity of
the Loan, the Combined Loan-to-Value Ratios at origination and certain other
information.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies of
documents and instruments related to each Home Improvement Contract and, other
than in the case of unsecured Home Improvement Contracts, the security
interest in the Property securing such Home Improvement Contract. In order to
give notice of the right, title and interest of Securityholders to the Home
Improvement Contracts, the Depositor will cause a UCC-1 financing statement to
be executed by the Depositor or the Seller identifying the Trustee as the
secured party and identifying all Home Improvement Contracts as collateral.
Unless otherwise specified in the related Prospectus Supplement, the Home
Improvement Contracts will not be stamped or otherwise marked to reflect their
assignment to the Trustee. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Home Improvement Contracts without notice of such assignment, the interest of
Securityholders in the Home Improvement Contracts could be defeated. See
"Certain Legal Aspects of the Loans--The Home Improvement Contracts" herein.
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Home Equity Loan, among other
things, (i) the mortgage note or contract endorsed without recourse in blank
or to the order of the Trustee, (ii) the mortgage, deed of trust or similar
instrument (a "MORTGAGE") with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office, in which case
the Depositor will deliver or cause to be delivered a copy of such Mortgage
together with a certificate that the original of such Mortgage was delivered
to such recording office), (iii) an assignment of the Mortgage to the Trustee,
which assignment will be in recordable form in the case of a Mortgage
assignment, and (iv) such other security documents, including those relating
to any senior interests in the Property, as may be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will promptly cause the assignments of the related
Loans to be recorded in the appropriate public office for real property
records, except in states in which, in the opinion of counsel acceptable to
the Trustee, such recording is not required to protect the Trustee's interest
in such Loans against the claim of any subsequent transferee or any successor
to or creditor of the Depositor or the originator of such Loans.
The Trustee (or the custodian hereinafter referred to) will review
such Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the Securityholders. Unless otherwise specified in
the related Prospectus Supplement, if any such document is found to be missing
or defective in any material respect, the Trustee (or such custodian) will
notify the Master Servicer and the Depositor, and the Master Servicer will
notify the related Seller. If the Seller cannot cure the omission or defect
within a specified number of days after receipt of such notice (or such other
period as may be specified in the related Prospectus Supplement), the Seller
will be obligated either (i) to purchase the related Loan from the Trust at
the Purchase Price or (ii) to remove such Loan from the Trust Fund and
substitute in its place one or more other Loans. There can be no assurance
that a Seller will fulfill this purchase or substitution obligation. Although
the Master Servicer may be obligated to enforce such obligation to the extent
described above under "Loan Program--Representations by Sellers; Repurchases",
neither the Master Servicer nor the Depositor will be obligated to purchase or
replace such Loan if the Seller defaults on its obligation, unless such breach
also constitutes a breach of the representations or warranties of the Master
Servicer or the Depositor, as the case may be. Unless otherwise specified in
the related Prospectus Supplement, this purchase obligation constitutes the
sole remedy available to the Securityholders or the Trustee for omission of,
or a material defect in, a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation of
the Master Servicer which materially and adversely affects the interests of
the Securityholders in a Loan, the Master Servicer will be obligated either to
cure the breach in all material respects or to purchase or replace the Loan at
the Purchase Price. Unless otherwise specified in the related Prospectus
Supplement, this obligation to cure, purchase or substitute constitutes the
sole remedy available to the Securityholders or the Trustee for such a breach
of representation by the Master Servicer.
ASSIGNMENT OF PRIVATE ASSET BACKED SECURITIES. The Depositor will
cause Private Asset Backed Securities to be registered in the name of the
Trustee. The Trustee (or the custodian) will have possession of any
certificated Private Asset Backed Securities. Unless otherwise specified in
the related Prospectus Supplement, the Trustee will not be in possession of or
be assignee of record of any underlying assets for a Private Asset Backed
Security. See "The Trust Fund--Private Asset Backed Securities" herein. Each
Private Asset Backed Security will be identified in a schedule appearing as an
exhibit to the related Agreement which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, annual
pass-through rate or interest rate and maturity date and certain other
pertinent information for each Private Asset Backed Security conveyed to the
Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust
Fund for which a REMIC election is to be made, no purchase or substitution of
a Loan will be made if such purchase or substitution would result in a
prohibited transaction tax under the Code.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing
Agreement (as defined below under "--Sub-Servicing of Loans") will establish
and maintain an account (the "SUB-SERVICING ACCOUNt") which meets the
following requirements and is otherwise acceptable to the Master Servicer. A
Sub-Servicing Account must be established with a Federal Home Loan Bank or
with a depository institution (including the Sub-Servicer itself) whose
accounts are insured by either the Bank Insurance Fund (the "BIF") of the FDIC
or the Savings Association Insurance Fund (as successor to the Federal Savings
and Loan Insurance Corporation ("SAIF")) of the Federal Deposit Insurance
Corporation (the "FDIC"). If a Sub-Servicing Account is maintained at an
institution that is a Federal Home Loan Bank or an FDIC-insured institution
and, in either case, the amount on deposit in the Sub-Servicing Account
exceeds the FDIC insurance coverage amount, then such excess amount must be
remitted to the Master Servicer within one business day of receipt. In
addition, the Sub-Servicer must maintain a separate account for escrow and
impound funds relating to the Loans. Each Sub-Servicer is required to deposit
into its Sub-Servicing Account on a daily basis all amounts described below
under "--Sub-Servicing of Loans" that are received by it in respect of the
Loans, less its servicing or other compensation. On or before the date
specified in the Sub-Servicing Agreement, the Sub-Servicer will remit or cause
to be remitted to the Master Servicer or the Trustee all funds held in the
Sub-Servicing Account with respect to Loans that are required to be so
remitted. The Sub-Servicer may also be required to advance on the scheduled
date of remittance an amount corresponding to any monthly installment of
interest and/or principal, less its servicing or other compensation, on any
Loan for which payment was not received from the mortgagor. Unless otherwise
specified in the related Prospectus Supplement, any such obligation of the
Sub-Servicer to advance will continue up to and including the first of the
month following the date on which the related Property is sold at a
foreclosure sale or is acquired on behalf of the Securityholders by deed in
lieu of foreclosure, or until the related Loan is liquidated.
The Master Servicer will establish and maintain or cause to be
established and maintained with respect to the related Trust Fund a separate
account or accounts for the collection of payments on the related Trust Fund
Assets in the Trust Fund (the "SECURITY ACCOUNT") must be either (i)
maintained with a depository institution the debt obligations of which (or in
the case of a depository institution that is the principal subsidiary of a
holding company, the obligations of which) are rated in one of the two highest
rating categories by the Rating Agency or Rating Agencies that rated one or
more classes of the related Series of Securities, (ii) an account or accounts
the deposits in which are fully insured by either the BIF or SAIF, (iii) an
account or accounts the deposits in which are insured by the BIF or SAIF (to
the limits established by the FDIC), and the uninsured deposits in which are
otherwise secured such that, as evidenced by an opinion of counsel, the
Securityholders have a claim with respect to the funds in the Security Account
or a perfected first priority security interest against any collateral
securing such funds that is superior to the claims of any other depositors or
general creditors of the depository institution with which the Security
Account is maintained, or (iv) an account or accounts otherwise acceptable to
each Rating Agency. The collateral eligible to secure amounts in the Security
Account is limited to United States government securities and other
high-quality investments ("PERMITTED INVESTMENTS"). A Security Account may be
maintained as an interest bearing account or the funds held therein may be
invested pending each succeeding Distribution Date in Permitted Investments.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or its designee will be entitled to receive any such interest or
other income earned on funds in the Security Account as additional
compensation and will be obligated to deposit in the Security Account the
amount of any loss immediately as realized. The Security Account may be
maintained with the Master Servicer or with a depository institution that is
an affiliate of the Master Servicer, provided it meets the standards set forth
above.
The Master Servicer will deposit or cause to be deposited in the
Security Account for each Trust Fund on a daily basis, to the extent
applicable and provided in the Agreement, the following payments and
collections received or advances made by or on behalf of it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and any applicable prepayment penalties, on the
Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property
taxes, insurance premiums and similar items ("INSURED EXPENSES")
incurred, and unreimbursed advances made, by the related
Sub-Servicer, if any) of the hazard insurance policies and any
Primary Mortgage Insurance Policies, to the extent such proceeds
are not applied to the restoration of the property or released
to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, "INSURANCE PROCEEDS") and
all other cash amounts (net of unreimbursed expenses incurred in
connection with liquidation or foreclosure ("LIQUIDATION
EXPENSES") and unreimbursed advances made, by the related
Sub-Servicer, if any) received and retained in connection with
the liquidation of defaulted Loans, by foreclosure or otherwise
("LIQUIDATION PROCEEDS"), together with any net proceeds
received on a monthly basis with respect to any properties
acquired on behalf of the Securityholders by foreclosure or deed
in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any
Sub-Servicer or any Seller as described under "Loan
Program--Representations by Sellers; Repurchases or
Substitutions" herein or "--Assignment of Trust Fund Assets"
above and all proceeds of any Loan repurchased as described
under "--Termination; Optional Termination" below;
(v) all payments required to be deposited in the Security
Account with respect to any deductible clause in any blanket
insurance policy described under "--Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer
in connection with losses realized on investments for the
benefit of the Master Servicer of funds held in the Security
Account; and
(vii) all other amounts required to be deposited in the Security
Account pursuant to the Agreement.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master
Servicer will establish and maintain a pre-funding account (a "PRE-FUNDING
ACCOUNT"), in the name of the related Trustee on behalf of the related
Securityholders, into which the Depositor will deposit the pre-funded amount
(the "PRE-FUNDED AMOUNT") on the related Closing Date. The Pre-Funded Amount
will not exceed 25% of the initial aggregate principal amount of the
Certificates and Notes of the related Series. The Pre-Funded Amount will be
used by the related Trustee to purchase Subsequent Loans from the Depositor
from time to time during the Funding Period. The Funding Period, if any, for a
Trust Fund will begin on the related Closing Date and will end on the date
specified in the related Prospectus Supplement, which in no event will be
later than the date that is three months after the Closing Date. Any amounts
remaining in the Pre-Funding Account at the end of the Funding Period will be
distributed to the related Securityholders in the manner and priority
specified in the related Prospectus Supplement, as a prepayment of principal
of the related Securities.
SUB-SERVICING OF LOANS
Each Seller of a Loan or any other servicing entity may act as the
Sub-Servicer for such Loan pursuant to an agreement (each, a "SUB-SERVICING
AGREEMENT"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely
between the Master Servicer and the Sub-Servicer, the Agreement pursuant to
which a Series of Securities is issued will provide that, if for any reason
the Master Servicer for such Series of Securities is no longer the Master
Servicer of the related Loans, the Trustee or any successor Master Servicer
must recognize the Sub-Servicer's rights and obligations under such
Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers, but such Sub-Servicer will
remain obligated under the related Sub-Servicing Agreement. Each Sub-Servicer
will be required to perform the customary functions of a servicer of mortgage
loans. Such functions generally include collecting payments from mortgagors or
obligors and remitting such collections to the Master Servicer; maintaining
hazard insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder, subject in certain
cases to the right of the Master Servicer to approve in advance any such
settlement; maintaining escrow or impoundment accounts of mortgagors or
obligors for payment of taxes, insurance and other items required to be paid
by the mortgagor or obligor pursuant to the related Loan; processing
assumptions or substitutions, although, the Master Servicer is generally
required to exercise due-on-sale clauses to the extent such exercise is
permitted by law and would not adversely affect insurance coverage; attempting
to cure delinquencies; supervising foreclosures; inspecting and managing
Properties under certain circumstances; maintaining accounting records
relating to the Loans; and, to the extent specified in the related Prospectus
Supplement, maintaining additional insurance policies or credit support
instruments and filing and settling claims thereunder. A Sub-Servicer will
also be obligated to make advances in respect of delinquent installments of
interest and/or principal on Loans, as described more fully above under
"--Payments on Loans; Deposits to Security Account", and in respect of certain
taxes and insurance premiums not paid on a timely basis by mortgagors or
obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on
the related Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and
retain, as part of its servicing compensation, any prepayment or late charges
provided in the Mortgage Note or related instruments. Each Sub-Servicer will
be reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under the
Agreement. The Master Servicer may purchase the servicing of Loans if the
Sub-Servicer elects to release the servicing of such Loans to the Master
Servicer. See "--Servicing and Other Compensation and Payment of Expenses".
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer will be required to maintain a fidelity bond and
an errors and omissions policy with respect to its officers, employees and
other persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Loan pursuant to
the terms of the Sub-Servicing Agreement for the entire term of such Loan,
unless the Sub-Servicing Agreement is earlier terminated by the Master
Servicer or unless servicing is released to the Master Servicer. The Master
Servicer may terminate a Sub-Servicing Agreement without cause, upon written
notice to the Sub-Servicer in the manner specified in such Sub-Servicing
Agreement.
The Master Servicer may agree with a Sub-Servicer to amend a
Sub-Servicing Agreement or, upon termination of the Sub-Servicing Agreement,
the Master Servicer may act as servicer of the related Loans or enter into new
Sub-Servicing Agreements with other Sub-Servicers. If the Master Servicer acts
as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be a
Seller or meet the standards for becoming a Seller or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Depositor. The Master Servicer will make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an assumption
will occur. In the event of such an assumption, the Master Servicer may in the
exercise of its business judgment release the terminated Sub-Servicer from
liability in respect of such representations and warranties. Any amendments to
a Sub-Servicing Agreement or new Sub-Servicing Agreements may contain
provisions different from those which are in effect in the original
Sub-Servicing Agreement. However, each Agreement will provide that any such
amendment or new agreement may not be inconsistent with or violate such
Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers,
will make reasonable efforts to collect all payments called for under the
Loans and will, consistent with each Agreement and any Pool Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and
Bankruptcy Bond or alternative arrangements, follow such collection procedures
as are customary with respect to loans that are comparable to the Loans.
Consistent with the above, the Master Servicer may, in its discretion, (i)
waive any assumption fee, late payment or other charge in connection with a
Loan and (ii) to the extent not inconsistent with the coverage of such Loan by
a Pool Insurance Policy, Primary Mortgage Insurance Policy, FHA Insurance, VA
Guaranty or Bankruptcy Bond or alternative arrangements, if applicable,
arrange with a borrower a schedule for the liquidation of delinquencies
running for no more than 125 days after the applicable due date for each
payment. Both the Sub-Servicer and the Master Servicer may be obligated to
make Advances during any period of such an arrangement.
Except as otherwise specified in the related Prospectus Supplement,
in any case in which property securing a Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Master Servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause
to be exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law. If these conditions are not met or if the
Master Servicer reasonably believes it is unable under applicable law to
enforce such due-on-sale clause, or the Master Servicer will enter into or
cause to be entered into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable for repayment of the Loan and, to the extent
permitted by applicable law, the mortgagor remains liable thereon. Any fee
collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer
as additional servicing compensation. See "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses". In connection with any such assumption, the terms
of the related Loan may not be changed.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement,
the Master Servicer will require the mortgagor or obligor on each Loan to
maintain a hazard insurance policy providing for no less than the coverage of
the standard form of fire insurance policy with extended coverage customary
for the type of Property in the state in which such Property is located. All
amounts collected by the Master Servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the Property or released
to the mortgagor or obligor in accordance with the Master Servicer's normal
servicing procedures) will be deposited in the related Security Account. In
the event that the Master Servicer maintains a blanket policy insuring against
hazard losses on all the Loans comprising part of a Trust Fund, it will
conclusively be deemed to have satisfied its obligation relating to the
maintenance of hazard insurance. Such blanket policy may contain a deductible
clause, in which case the Master Servicer will be required to deposit from its
own funds into the related Security Account the amounts which would have been
deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a Loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the Loans may have been
underwritten by different insurers under different state laws in accordance
with different applicable forms and therefore may not contain identical terms
and conditions, the basic terms thereof are dictated by respective state laws,
and most such policies typically do not cover any physical damage resulting
from the following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mud flows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list
is merely indicative of certain kinds of uninsured risks and is not intended
to be all inclusive. If the Property securing a Loan is located in a federally
designated special flood area at the time of origination, the Master Servicer
will require the mortgagor or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of the full replacement value of the
insured property in order to recover the full amount of any partial loss. If
the insured's coverage falls below this specified percentage, then the
insurer's liability in the event of partial loss will not exceed the larger of
(i) the actual cash value (generally defined as replacement cost at the time
and place of loss, less physical depreciation) of the improvements damaged or
destroyed or (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements. Since the amount of hazard insurance the Master Servicer may
cause to be maintained on the improvements securing the Loans declines as the
principal balances owing thereon decrease, and since improved real estate
generally has appreciated in value over time in the past, the effect of this
requirement in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property. If specified in
the related Prospectus Supplement, a special hazard insurance policy will be
obtained to insure against certain of the uninsured risks described above. See
"Credit Enhancement--Special Hazard Insurance Policies".
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the Master Servicer is not required to expend its own funds
to restore the damaged Property unless it determines (i) that such restoration
will increase the proceeds to Securityholders on liquidation of the Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is
not available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer will
be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the
defaulted Loan are less than the principal balance of such Loan plus interest
accrued thereon that is payable to Securityholders, the Trust Fund will
realize a loss in the amount of such difference plus the aggregate of expenses
incurred by the Master Servicer in connection with such proceedings and which
are reimbursable under the Agreement. In the unlikely event that any such
proceedings result in a total recovery which is, after reimbursement to the
Master Servicer of its expenses, in excess of the principal balance of such
Loan plus interest accrued thereon that is payable to Securityholders, the
Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect to
such Loan and, unless otherwise specified in the related Prospectus
Supplement, amounts representing the balance of such excess, exclusive of any
amount required by law to be forwarded to the related borrower, as additional
servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if
the Master Servicer or its designee recovers Insurance Proceeds which, when
added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of
such Loan plus interest accrued thereon that is payable to Securityholders,
the Master Servicer will be entitled to withdraw or retain from the Security
Account amounts representing its normal servicing compensation with respect to
such Loan. In the event that the Master Servicer has expended its own funds to
restore the damaged Property and such funds have not been reimbursed under the
related hazard insurance policy, it will be entitled to withdraw from the
Security Account out of related Liquidation Proceeds or Insurance Proceeds in
an amount equal to such expenses incurred by it, in which event the Trust Fund
may realize a loss up to the amount so charged. Since Insurance Proceeds
cannot exceed deficiency claims and certain expenses incurred by the Master
Servicer, no such payment or recovery will result in a recovery to the Trust
Fund which exceeds the principal balance of the defaulted Loan together with
accrued interest thereon. See "Credit Enhancement".
REALIZATION UPON DEFAULTED LOANS
PRIMARY MORTGAGE INSURANCE POLICIES. The Master Servicer will
maintain or cause each Sub-Servicer to maintain, as the case may be, in full
force and effect, to the extent specified in the related Prospectus
Supplement, a Primary Mortgage Insurance Policy with regard to each Loan for
which such coverage is required. The Master Servicer will not cancel or refuse
to renew any such Primary Mortgage Insurance Policy in effect at the time of
the initial issuance of a Series of Securities that is required to be kept in
force under the applicable Agreement unless the replacement Primary Mortgage
Insurance Policy for such cancelled or nonrenewed policy is maintained with an
insurer whose claims-paying ability is sufficient to maintain the current
rating of the classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Loan will consist of the insured percentage of the unpaid principal
amount of the covered Loan and accrued and unpaid interest thereon and
reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Property, (ii)
hazard insurance proceeds in excess of the amount required to restore the
Property and which have not been applied to the payment of the Loan, (iii)
amounts expended but not approved by the issuer of the related Primary
Mortgage Insurance Policy (the "PRIMARY INSURER"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses
sustained by reason of defaults in payments by borrowers. Primary Mortgage
Insurance Policies will not insure against, and exclude from coverage, a loss
sustained by reason of a default arising from or involving certain matters,
including (i) fraud or negligence in origination or servicing of the Loans,
including misrepresentation by the originator, borrower or other persons
involved in the origination of the Loans; (ii) failure to construct the
Property subject to the Loan in accordance with specified plans; (iii)
physical damage to the Property; and (iv) the related Master Servicer or
Sub-servicer not being approved as a servicer by the Primary Insurer.
RECOVERIES UNDER A PRIMARY MORTGAGE INSURANCE POLICY. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Loan, the insured will be required to (i) advance
or discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes,
(2) all expenses required to maintain the related Property in at least as good
a condition as existed at the effective date of such Primary Mortgage
Insurance Policy, ordinary wear and tear excepted, (3) Property sales
expenses, (4) any outstanding liens (as defined in such Primary Mortgage
Insurance Policy) on the Property and (5) foreclosure costs, including court
costs and reasonable attorneys' fees; (ii) in the event of any physical loss
or damage to the Property, to have the Property restored and repaired to at
least as good a condition as existed at the effective date of such Primary
Mortgage Insurance Policy, ordinary wear and tear excepted; and (iii) tender
to the Primary Insurer good and merchantable title to and possession of the
Property.
In those cases in which a Loan is serviced by a Sub-Servicer, the
Sub-Servicer, on behalf of itself, the Trustee and Securityholders, will
present claims to the Primary Insurer, and all collection thereunder will be
deposited in the Sub-Servicing Account. In all other cases, the Master
Servicer, on behalf of itself, the Trustee and the Securityholders, will
present claims to the insurer under each Primary Mortgage Insurance Policy,
and will take such reasonable steps as are necessary to receive payment or to
permit recovery thereunder with respect to defaulted Loans. As set forth
above, all collections by or on behalf of the Master Servicer under any
Primary Mortgage Insurance Policy and, when the Property has not been
restored, the hazard insurance policy, are to be deposited in the Security
Account, subject to withdrawal as heretofore described.
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property to a condition sufficient to permit recovery under the
related Primary Mortgage Insurance Policy, if any, the Master Servicer is not
required to expend its own funds to restore the damaged Property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) that such expenses will be recoverable by
it from related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Loan is not covered by a Primary Mortgage
Insurance Policy, the Master Servicer will be obligated to follow or cause to
be followed such normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted Loan. If the proceeds of any
liquidation of the Property securing the defaulted Loan are less than the
principal balance of such Loan plus interest accrued thereon that is payable
to Securityholders, the Trust Fund will realize a loss in the amount of such
difference plus the aggregate of expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the
Agreement. In the unlikely event that any such proceedings result in a total
recovery which is, after reimbursement to the Master Servicer of its expenses,
in excess of the principal balance of such Loan plus interest accrued thereon
that is payable to Securityholders, the Master Servicer will be entitled to
withdraw or retain from the Security Account amounts representing its normal
servicing compensation with respect to such Loan and, except as otherwise
specified in the Prospectus Supplement, amounts representing the balance of
such excess, exclusive of any amount required by law to be forwarded to the
related borrower, as additional servicing compensation.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's primary servicing compensation with respect to a Series of
Securities will come from the monthly payment to it, out of each interest
payment on a Loan, of an amount equal to the percentage per annum specified in
the related Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of
the outstanding principal balance of each Loan, such amounts will decrease as
the Loans amortize. In addition to primary compensation, the Master Servicer
or the Sub-Servicers may be entitled to retain all assumption fees and late
payment charges, to the extent collected from borrowers, and, if so provided
in the related Prospectus Supplement, any prepayment penalties and any
interest or other income which may be earned on funds held in the Security
Account or any Sub-Servicing Account. Unless otherwise specified in the
related Prospectus Supplement, any Sub-Servicer will receive a portion of the
Master Servicer's primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Master
Servicer will, unless otherwise specified in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing of the Loans, including, without limitation,
payment of any premium for any insurance policy, guaranty, surety or other
form of credit enhancement as specified in the related Prospectus Supplement,
payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Securityholders, and payment of any other expenses described in the
related Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in
each year, a firm of independent public accountants will furnish a statement
to the Trustee to the effect that, on the basis of the examination by such
firm conducted substantially in compliance with the Uniform Single Audit
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC, the servicing by or on behalf of the Master Servicer of mortgage loans
or private asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Audit Program
for Mortgage Bankers, it is required to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of Loans or
Private Asset Backed Securities by Sub-Servicers, upon comparable statements
for examinations conducted substantially in compliance with the Uniform Single
Audit Program for Mortgage Bankers or the Audit Program for Mortgages serviced
for FHLMC (rendered within one year of such statement) of firms of independent
public accountants with respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at
the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign
from its obligations and duties under the Agreement except upon a
determination that its duties thereunder are no longer permissible under
applicable law. The Master Servicer may, however, be removed from its
obligations and duties as set forth in the Agreement. No such resignation will
become effective until the Trustee or a successor servicer has assumed the
Master Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Depositor nor any director, officer, employee, or agent of the Master
Servicer or the Depositor will be under any liability to the related Trust
Fund or Securityholders for any action taken or for refraining from the taking
of any action in good faith pursuant to the Agreement, or for errors in
judgment; provided, however, that neither the Master Servicer, the Depositor
nor any such person will be protected against any liability which would
otherwise be imposed by reason of wilful misfeasance or gross negligence in
the performance of duties thereunder or by reasons of reckless disregard of
obligations and duties thereunder. To the extent provided in the related
Agreement, the Master Servicer, the Depositor and any director, officer,
employee or agent of the Master Servicer or the Depositor may be entitled to
indemnification by the related Trust Fund and may be held harmless against any
loss, liability or expense incurred in connection with any legal action
relating to the Agreement or the Securities, other than any loss, liability or
expense related to any specific Loan or Loans (except any such loss, liability
or expense otherwise reimbursable pursuant to the Agreement) and any loss,
liability or expense incurred by reason of willful misfeasance or gross
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, each Agreement
will provide that neither the Master Servicer nor the Depositor will be under
any obligation to appear in, prosecute or defend any legal action which is not
incidental to its respective responsibilities under the Agreement and which in
its opinion may involve it in any expense or liability. The Master Servicer or
the Depositor may, however, in its discretion undertake any such action which
it may deem necessary or desirable with respect to the Agreement and the
rights and duties of the parties thereto and the interests of the
Securityholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund and the Master Servicer or the Depositor, as the
case may be, will be entitled to be reimbursed therefor out of funds otherwise
distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement,
any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; SERVICING AGREEMENT. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer to
distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
business days after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Securities of such class
evidencing not less than 25% of the aggregate Percentage Interests evidenced
by such class; (ii) any failure by the Master Servicer to make an Advance as
required under the Agreement, unless cured as specified therein; (iii) any
failure by the Master Servicer duly to observe or perform in any material
respect any of its other covenants or agreements in the Agreement which
continues unremedied for thirty days after the giving of written notice of
such failure to the Master Servicer by the Trustee or the Depositor, or to the
Master Servicer, the Depositor and the Trustee by the holders of Securities of
any class evidencing not less than 25% of the aggregate Percentage Interests
constituting such class; and (iv) certain events of insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceeding and
certain actions by or on behalf of the Master Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund in the event that payments in respect thereto are insufficient to
make payments required in the Agreement. The assets of the Trust Fund will be
sold only under the circumstances and in the manner specified in the related
Prospectus Supplement.
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Securities of any class evidencing not less than 51% of the aggregate
Percentage Interests constituting such class and under such other
circumstances as may be specified in such Agreement, the Trustee shall,
terminate all of its rights and obligations of the Master Servicer under the
Agreement relating to such Trust Fund and in and to the Trust Fund Assets,
whereupon the Trustee will succeed to all of the responsibilities, duties and
liabilities of the Master Servicer under the Agreement, including, if
specified in the related Prospectus Supplement, the obligation to make
advances, and will be entitled to similar compensation arrangements. In the
event that the Trustee is unwilling or unable so to act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a mortgage
loan servicing institution with a net worth of a least $10,000,000 to act as
successor to the Master Servicer under the Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee and
any such successor may agree upon the servicing compensation to be paid, which
in no event may be greater than the compensation payable to the Master
Servicer under the Agreement.
No Securityholder, solely by virtue of such holder's status as a
Securityholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
INDENTURE. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for five (5) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of thirty (30) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund
in the Indenture or in any certificate or other writing delivered pursuant
thereto or in connection therewith with respect to or affecting such Series
having been incorrect in a material respect as of the time made, and such
breach is not cured within thirty (30) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iv) certain events of bankruptcy, insolvency, receivership or liquidation of
the Depositor or the Trust Fund; or (v) any other Event of Default provided
with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the holders
of a majority of the then aggregate outstanding amount of the Notes of such
Series may declare the principal amount (or, if the Notes of that Series have
a Pass-Through Rate of 0%, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled
by the holders of more than 50% of the Percentage Interests of the Notes of
such Series.
If, following an Event of Default with respect to any Series of
Notes, the Notes of such Series have been declared to be due and payable, the
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such a declaration. In
addition, the Trustee may not sell or otherwise liquidate the collateral
securing the Notes of a Series following an Event of Default, unless (a) the
holders of 100% of the Percentage Interests of the Notes of such Series
consent to such sale, (b) the proceeds of such sale or liquidation are
sufficient to pay in full the principal of and accrued interest, due and
unpaid, on the outstanding Notes of such Series at the date of such sale or
(c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the
Trustee obtains the consent of the holders of 66K% of the Percentage Interests
of each Class of Notes of such Series.
Except as otherwise specified in the related Prospectus Supplement,
in the event the principal of the Notes of a Series is declared due and
payable, as described above, the holders of any such Notes issued at a
discount from par may be entitled to receive no more than an amount equal to
the unpaid principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying
with such request or direction. Subject to such provisions for indemnification
and certain limitations contained in the Indenture, the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series shall
have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee with respect to the Notes of such Series, and
the holders of a majority of the then aggregate outstanding amount of the
Notes of such Series may, in certain cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of all the holders of the outstanding Notes of
such Series affected thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement,
each Agreement may be amended by the Depositor, the Master Servicer and the
Trustee, without the consent of any of the Securityholders, (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or (iii) to make
any other revisions with respect to matters or questions arising under the
Agreement which are not inconsistent with the provisions thereof, provided
that such action will not adversely affect in any material respect the
interests of any Securityholder. In addition, to the extent provided in the
related Agreement, an Agreement may be amended without the consent of any of
the Securityholders, to change the manner in which the Security Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Securities of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any
of its provisions to such extent as may be necessary to maintain the
qualification of the related Trust Fund as a REMIC, provided that the Trustee
has received an opinion of counsel to the effect that such action is necessary
or helpful to maintain such qualification. Except as otherwise specified in
the related Prospectus Supplement, each Agreement may also be amended by the
Depositor, the Master Servicer and the Trustee with consent of holders of
Securities of such Series evidencing not less than 66% of the aggregate
Percentage Interests of each class affected thereby for the purpose of adding
any provisions to or changing in an manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of the
holders of the related Securities; provided, however, that no such amendment
may (i) reduce in any manner the amount of or delay the timing of, payments
received on Loans which are required to be distributed on any Security without
the consent of the holder of such Security, or (ii) reduce the aforesaid
percentage of Securities of any class of holders which are required to consent
to any such amendment without the consent of the holders of all Securities of
such class covered by such Agreement then outstanding. If a REMIC election is
made with respect to a Trust Fund, the Trustee will not be entitled to consent
to an amendment to the related Agreement without having first received an
opinion of counsel to the effect that such amendment will not cause such Trust
Fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling
and Servicing Agreement and Trust Agreement for each Series of Securities will
terminate upon the payment to the related Securityholders of all amounts held
in the Security Account or by the Master Servicer and required to be paid to
them pursuant to such Agreement following the later of (i) the final payment
of or other liquidation of the last of the Trust Fund Assets subject thereto
or the disposition of all property acquired upon foreclosure of any such Trust
Fund Assets remaining in the Trust Fund and (ii) the purchase by the Master
Servicer or, if REMIC treatment has been elected and if specified in the
related Prospectus Supplement, by the holder of the residual interest in the
REMIC (see "Certain Material Federal Income Tax Considerations" below), from
the related Trust Fund of all of the remaining Trust Fund Assets and all
property acquired in respect of such Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any
such purchase of Trust Fund Assets and property acquired in respect of Trust
Fund Assets evidenced by a Series of Securities will be made at the option of
the Master Servicer or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Securities of that Series, but the right of the Master
Servicer or, if applicable, such holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Trust Fund Assets
being less than the percentage specified in the related Prospectus Supplement
of the aggregate principal balance of the Trust Fund Assets at the Cut-off
Date for the Series. The foregoing is subject to the provision that if a REMIC
election is made with respect to a Trust Fund, any repurchase pursuant to
clause (ii) above will be made only in connection with a "qualified
liquidation" of the REMIC within the meaning of Section 860F(g)(4) of the
Code.
INDENTURE. The Indenture will be discharged with respect to a Series
of Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes
of such Series or, with certain limitations, upon deposit with the Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series,
the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of such Series (except for certain obligations relating
to temporary Notes and exchange of Notes, to register the transfer of or
exchange Notes of such Series, to replace stolen, lost or mutilated Notes of
such Series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay the
principal of and each installment of interest on the Notes of such Series on
the last scheduled Distribution Date for such Notes and any installment of
interest on such Notes in accordance with the terms of the Indenture and the
Notes of such Series. In the event of any such defeasance and discharge of
Notes of such Series, holders of Notes of such Series would be able to look
only to such money and/or direct obligations for payment of principal and
interest, if any, on their Notes until maturity.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Depositor, the Master Servicer
and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal laws and the appropriate laws
of the states in which Loans may be originated.
GENERAL
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien
is generally not prior to the lien for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order
of recording with a state or county office. There are two parties to a
mortgage, the mortgagor, who is the borrower and owner of the mortgaged
property, and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust formally
has three parties, the borrower-property owner called the trustor (similar to
a mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. A
security deed and a deed to secure debt are special types of deeds which
indicate on their face that they are granted to secure an underlying debt. By
executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage
and the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of
the beneficiary.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a
non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In addition to
any notice requirements contained in a deed of trust, in some states, the
trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to
certain other persons. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender.
After the reinstatement period has expired without the default having been
cured, the borrower or junior lienholder no longer has the right to reinstate
the loan and must pay the loan in full to prevent the scheduled foreclosure
sale. If the deed of trust is not reinstated, a notice of sale must be posted
in a public place and, in most states, published for a specific period of time
in one or more newspapers. In addition, some state laws require that a copy of
the notice of sale be posted on the property and sent to all parties having an
interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of
the parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to
conduct the sale of the property. In some states, mortgages may also be
foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and
a requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure in
which event the mortgagor's debt will be extinguished or the lender may
purchase for a lesser amount in order to preserve its right against a borrower
to seek a deficiency judgment in states where such judgment is available.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burden of
ownership, including obtaining hazard insurance and making such repairs at its
own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending
upon market conditions, the ultimate proceeds of the sale of the property may
not equal the lender's investment in the property. Any loss may be reduced by
the receipt of any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the
borrower of the borrower's defaults under the loan documents. Some courts have
been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for fair notice require that
borrowers under deeds of trust receive notice longer than that prescribed by
statute. For the most part, these cases have upheld the notice provisions as
being reasonable or have found that the sale by a trustee under a deed of
trust does not involve sufficient state action to afford constitutional
protection to the borrower.
When the beneficiary under a junior mortgage or deed of trust cures
the default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or
deed of trust. See "--Junior Mortgages; Rights of Senior Mortgagees" below.
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 imposes liability
for such costs on any and all "responsible parties," including owners or
operators. However, CERCLA excludes from the definition of "owner or operator"
a secured creditor who holds indicia of ownership primarily to protect its
security interest but does not "participate in the management" of the property
(the "secured creditor exclusion"). Thus, if a lender's activities begin to
encroach on the actual management of a contaminated facility or property, the
lender may incur liability as an "owner or operator" under CERCLA. Similarly,
if a lender forecloses and takes title to a contaminated facility or property,
the lender may incur CERCLA liability in various circumstances, including, but
not limited to, when it holds the facility or property as an investment
(including leasing the facility or property to a third party), or fails to
market the property in a timely fashion.
Whether actions taken by a lender would constitute such participation
in the management of a property, so that the lender would lose the protection
of the secured creditor exclusion, has been a matter of judicial
interpretation of the statutory language, and court decisions have
historically been inconsistent. In 1990, the United States Court of Appeals
for the Eleventh Circuit suggested, in UNITED STATES V. FLEET FACTORS CORP.,
that the mere capacity of the lender to influence a borrower's decisions
regarding disposal of hazardous substances was sufficient participation in the
management of the borrower's business to deny the protection of the secured
creditor exclusion to the lender, regardless of whether the lender actually
exercised such influence. Other judicial decisions did not interpret the
secured creditor exclusion as narrowly as did the Eleventh Circuit.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liabiltiy and Deposit Insurance Protection Act of
1996 (the "ASSET CONSERVATION ACT"), which took effect on September 30, 1996.
The Asset Conservation Act provides that in order to be deemed to have
participated in the management of a secured property, a lender must actually
participate in the operational affairs of the property or of the borrower. The
Asset Conservation Act also provides that participation in the management of
the property does not include "merely having the capacity to influence, or
unexercised right to control" operations. Rather, a lender will lose the
protection of the secured creditor exclusion only if it exercises
decision-making control over the borrower's environmental compliance and
hazardous substance handling and disposal practices, or assumes day-to-day
management of all operational functions of the secured property.
If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous
owner or operator, who crated the environmental hazard, but those persons or
entities may be bankrupt or otherwise judgment proof. The costs associated
with environmental cleanup may be substantial. It is conceivable that such
costs arising from the circumstances set forth above would result in a loss to
Certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder
of a security interest in an underground storage tank or real property
containing an underground storage tank is not considered an operator of the
underground storage tank as long as petroleum is not added to, stored in or
dispensed from the tank. Moreover, under the Asset Conservation Act, the
protections accorded to lenders under CERCLA are also accorded to holders of
security interests in underground petroleum storage tanks. It should be noted,
however, that liability for cleanup of petroleum contamination may be governed
by state law, which may not provide for any specific protection for secured
creditors.
The Asset Conservation Act specifically addresses the potential
liability of lenders who hold mortgages or similar conventional security
interests in real property, such as the Trust Fund does in connection with the
Home Equity Loans and the Home Improvement Contracts. The Asset Conservation
Act, however, does not clearly address the potential liability of lenders who
retain legal title to a property and enter into an agreement with the
purchaser for the payment of the purchase price and interest over the term of
the contract, such as the Trust Fund does in connection with the Installment
Contracts.
If a lender (including a lender under an Installment Contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a previous
owner or operator. However, such persons or entities may be bankrupt or
otherwise judgment proof, and the costs associated with environmental cleanup
and related actions may be substantial. Moreover, some state laws imposing
liability for addressing hazardous substances do not contain exemptions from
liability for lenders. Whether the costs of addressing a release or threatened
release at a property pledged as collateral for one of the Loans (or at a
property subject to an Installment Contract), would be imposed on the Trust
Fund, and thus occasion a loss to the Securityholders, therefore depends on
the specific factual and legal circumstances at issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption would
defeat the title of any purchaser from the lender subsequent to foreclosure or
sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states,
there is no right to redeem property after a trustee's sale under a deed of
trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment
is a personal judgment against the borrower equal in most cases to the
difference between the amount due to the lender and the fair market value of
the real property sold at the foreclosure sale. Other statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of
trust or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on
the debt without first exhausting such security; however, in some of these
states, the lender, following judgment on such personal action, may be deemed
to have elected a remedy and may be precluded from exercising remedies with
respect to the security. Consequently, the practical effect of the election
requirement, when applicable, is that lenders will usually proceed first
against the security rather than bringing a personal action against the
borrower. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous
other federal and state statutory provisions, including the Relief Act (as
defined below) and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon its
security. For example, in a proceeding under the federal Bankruptcy Code, a
lender may not foreclose on the Property without the permission of the
bankruptcy court. The rehabilitation plan proposed by the debtor may provide,
if the Property is not the debtor's principal residence and the court
determines that the value of the Property is less than the principal balance
of the mortgage loan, for the reduction of the secured indebtedness to the
value of the Property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate
of interest and alter the mortgage loan repayment schedule. The effect of any
such proceedings under the federal Bankruptcy Code, including but not limited
to any automatic stay, could result in delays in receiving payments on the
Loans underlying a Series of Securities and possible reductions in the
aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the
lien of a mortgage or secured party. Numerous federal and state consumer
protection laws impose substantive requirements upon mortgage lenders in
connection with the origination, servicing and enforcement of loans secured by
Single Family Properties. These laws include the federal Truth-in-Lending Act,
Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes and
regulations. These federal and state laws impose specific statutory
liabilities upon lenders who fail to comply with the provisions of the law. In
some cases, this liability may affect assignees of the loans or contracts.
DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, each
conventional Loan will contain a due-on-sale clause which will provide that if
the mortgagor or obligor sells, transfers or conveys the Property, the loan or
contract may be accelerated by the mortgagee or secured party. The Garn-St.
Germain Depository Institutions Act of 1982 (the "GARN-ST. GERMAIN ACT"),
subject to certain exceptions, preempts state constitutional, statutory and
case law prohibiting the enforcement of due-on-sale clauses. As a result,
due-on-sale clauses have become generally enforceable except in those states
whose legislatures exercised their authority to regulate the enforceability of
such clauses with respect to mortgage loans that were (i) originated or
assumed during the "window period" under the Garn-St. Germain Act which ended
in all cases not later than October 15, 1982, and (ii) originated by lenders
other than national banks, federal savings institutions and federal credit
unions. FHLMC has taken the position in its published mortgage servicing
standards that, out of a total of eleven "window period states," five states
(Arizona, Michigan, Minnesota, New Mexico and Utah) have enacted statutes
extending, on various terms and for varying periods, the prohibition on
enforcement of due-on-sale clauses with respect to certain categories of
window period loans. Also, the Garn-St. Germain Act does "encourage" lenders
to permit assumption of loans at the original rate of interest or at some
other rate less than the average of the original rate and the market rate.
As to loans secured by an owner-occupied residence, the Garn-St.
Germain Act sets forth nine specific instances in which a mortgagee covered by
the Act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred.
The inability to enforce a due-on-sale clause may result in transfer of the
related Property to an uncreditworthy person, which could increase the
likelihood of default or may result in a mortgage bearing an interest rate
below the current market rate being assumed by a new home buyer, which may
affect the average life of the Loans and the number of Loans which may extend
to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from such
bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments
are not timely made, and in some circumstances may provide for prepayment fees
or penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon the late charges which a lender
may collect from a borrower for delinquent payments. Certain states also limit
the amounts that a lender may collect from a borrower as an additional charge
if the loan is prepaid. Late charges and prepayment fees are typically
retained by servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. Examples of judicial remedies that have
been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes of the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have substituted their judgment for the lender's
judgment and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from temporary
financial disability. In other cases, courts have limited the right of a
lender to realize upon his security if the default under the security
agreement is not monetary, such as the borrower's failure to adequately
maintain the property or the borrower's execution of secondary financing
affecting the property. Finally, some courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under security
agreements receive notices in addition to the statutorily-prescribed minimums.
For the most part, these cases have upheld the notice provisions as being
reasonable or have found that, in some cases involving the sale by a trustee
under a deed of trust or by a mortgagee under a mortgage having a power of
sale, there is insufficient state action to afford constitutional protections
to the borrower.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("TITLE V") provides that state
usury limitations shall not apply to certain types of residential first
mortgage loans originated by certain lenders after March 31, 1980. The Office
of Thrift Supervision, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized the states to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects an application of the federal
law. Fifteen states adopted such a law prior to the April 1, 1993 deadline. In
addition, even where Title V is not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to
reimpose interest rate limits and/or to limit discount points or other
charges.
THE HOME IMPROVEMENT CONTRACTS
GENERAL. The Home Improvement Contracts, other than those Home
Improvement Contracts that are unsecured or secured by mortgages on real
estate (such Home Improvement Contracts are hereinafter referred to in this
section as "contracts") generally are "chattel paper" or constitute "purchase
money security interests" each as defined in the Uniform Commercial Code (the
"UCC"). Pursuant to the UCC, the sale of chattel paper is treated in a manner
similar to perfection of a security interest in chattel paper. Under the
related Agreement, the Depositor will transfer physical possession of the
contracts to the Trustee or a designated custodian or may retain possession of
the contracts as custodian for the Trustee. In addition, the Depositor will
make an appropriate filing of a UCC-1 financing statement in the appropriate
states to give notice of the Trustee's ownership of the contracts. Unless
otherwise specified in the related Prospectus Supplement, the contracts will
not be stamped or otherwise marked to reflect their assignment from the
Depositor to the Trustee. Therefore, if through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
contracts without notice of such assignment, the Trustee's interest in the
contracts could be defeated.
SECURITY INTERESTS IN HOME IMPROVEMENTS. The contracts that are
secured by the Home Improvements financed thereby grant to the originator of
such contracts a purchase money security interest in such Home Improvements to
secure all or part of the purchase price of such Home Improvements and related
services. A financing statement generally is not required to be filed to
perfect a purchase money security interest in consumer goods. Such purchase
money security interests are assignable. In general, a purchase money security
interest grants to the holder a security interest that has priority over a
conflicting security interest in the same collateral and the proceeds of such
collateral. However, to the extent that the collateral subject to a purchase
money security interest becomes a fixture, in order for the related purchase
money security interest to take priority over a conflicting interest in the
fixture, the holder's interest in such Home Improvement must generally be
perfected by a timely fixture filing. In general, a security interest does not
exist under the UCC in ordinary building material incorporated into an
improvement on land. Home Improvement Contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to
lose such characterization upon incorporation of such materials into the
related property, will not be secured by a purchase money security interest in
the Home Improvement being financed.
ENFORCEMENT OF SECURITY INTEREST IN HOME IMPROVEMENTS. So long as the
Home Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (I.E., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a contract
must give the debtor a number of days' notice, which varies from 10 to 30 days
depending on the state, prior to commencement of any repossession. The UCC and
consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor and commercial
reasonableness in effecting such a sale. The law in most states also requires
that the debtor be given notice of any sale prior to resale of the unit that
the debtor may redeem at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
CONSUMER PROTECTION LAWS. The so-called "Holder-in-Due Course" rule
of the Federal Trade Commission is intended to defeat the ability of the
transferor of a consumer credit contract which is the seller of goods which
gave rise to the transaction (and certain related lenders and assignees) to
transfer such contract free of notice of claims by the debtor thereunder. The
effect of this rule is to subject the assignee of such a contract to all
claims and defenses which the debtor could assert against the seller of goods.
Liability under this rule is limited to amounts paid under a contract;
however, the obligor also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought by the Trustee against such
obligor. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and lending pursuant to the
contracts, including the Truth in Lending Act, the Federal Trade Commission
Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal
Credit Opportunity Act, the Fair Debt Collection Practices Act and the Uniform
Consumer Credit Code. In the case of some of these laws, the failure to comply
with their provisions may affect the enforceability of the related contract.
APPLICABILITY OF USURY LAWS. Title V provides that, subject to the
following conditions, state usury limitations shall not apply to any contract
which is secured by a first lien on certain kinds of consumer goods. The
contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading
to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest
rates and finance charges by adopting before April 1, 1983 a law or
constitutional provision which expressly rejects application of the federal
law. Fifteen states adopted such a law prior to the April 1, 1983 deadline. In
addition, even where Title V was not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
loans covered by Title V.
INSTALLMENT CONTRACTS
The Loans may also consist of installment contracts. Under an
installment contract ("INSTALLMENT CONTRACT") the seller (hereinafter referred
to in this section as the "lender") retains legal title to the property and
enters into an agreement with the purchaser hereinafter referred to in this
section as the "borrower") for the payment of the purchase price, plus
interest, over the term of such contract. Only after full performance by the
borrower of the contract is the lender obligated to convey title to the
property to the purchaser. As with mortgage or deed of trust financing, during
the effective period of the Installment Contract, the borrower is generally
responsible for maintaining the property in good condition and for paying real
estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender in
such a situation does not have to foreclose in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the
borrower may be granted some grace period during which the Installment
Contract may be reinstated upon full payment of the default amount and the
borrower may have a post-foreclosure statutory redemption right. In other
states, courts in equity may permit a borrower with significant investment in
the property under an Installment Contract for the sale of real estate to
share in the proceeds of sale of the property after the indebtedness is repaid
or may otherwise refuse to enforce the forfeiture clause. Nevertheless,
generally speaking, the lender's procedures for obtaining possession and clear
title under an Installment Contract in a given state are simpler and less
time-consuming and costly than are the procedures for foreclosing and
obtaining clear title to a property subject to one or more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "RELIEF ACT"), a borrower who enters military
service after the origination of such borrower's Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such interest rate limitation
could have an effect, for an indeterminate period of time, on the ability of
the Master Servicer to collect full amounts of interest on certain of the
Loans. Any shortfall in interest collections resulting from the application of
the Relief Act could result in losses to the Securityholders. The Relief Act
also imposes limitations which would impair the ability of the Master Servicer
to foreclose on an affected Loan during the borrower's period of active duty
status. Moreover, the Relief Act permits the extension of a Loan's maturity
and the re-adjustment of its payment schedule beyond the completion of
military service. Thus, in the event that such a Loan goes into default, there
may be delays and losses occasioned by the inability to realize upon the
Property in a timely fashion.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the Loans comprising the Trust Fund for a Series
are secured by mortgages which are junior to other mortgages held by other
lenders or institutional investors, the rights of the Trust Fund (and
therefore the Securityholders), as mortgagee under any such junior mortgage,
are subordinate to those of any mortgagee under any senior mortgage. The
senior mortgagee has the right to receive hazard insurance and condemnation
proceeds and to cause the property securing the Loan to be sold upon default
of the mortgagor, thereby extinguishing the junior mortgagee's lien unless the
junior mortgagee asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior mortgage.
A junior mortgagee may satisfy a defaulted senior loan in full and, in some
states, may cure such default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In
most states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage, in such order as the mortgagee may
determine. Thus, in the event improvements on the property are damaged or
destroyed by fire or other casualty, or in the event the property is taken by
condemnation, the mortgagee or beneficiary under underlying senior mortgages
will have the prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness,
in most cases, may be applied to the indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon
a failure of the mortgagor to perform any of these obligations, the mortgagee
is given the right under certain mortgages to perform the obligation itself,
at its election, with the mortgagor agreeing to reimburse the mortgagee for
any sums expended by the mortgagee on behalf of the mortgagor. All sums so
expended by the mortgagee become part of the indebtedness secured by the
mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically
contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the borrower by the beneficiary
or lender are to be secured by the deed of trust or mortgage. Any amounts so
advanced after the Cut-off Date with respect to any mortgage will not be
included in the Trust Fund. The priority of the lien securing any advance made
under the clause may depend in most states on whether the deed of trust or
mortgage is called and recorded as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust
deed or mortgage, notwithstanding the fact that there may be junior trust
deeds or mortgages and other liens which intervene between the date of
recording of the trust deed or mortgage and the date of the future advance,
and notwithstanding that the beneficiary or lender had actual knowledge of
such intervening junior trust deeds or mortgages and other liens at the time
of the advance. In most states, the trust deed or mortgage lien securing
mortgage loans of the type which includes home equity credit lines applies
retroactively to the date of the original recording of the trust deed or
mortgage, provided that the total amount of advances under the home equity
credit line does not exceed the maximum specified principal amount of the
recorded trust deed or mortgage, except as to advances made after receipt by
the lender of a written notice of lien from a judgment lien creditor of the
trustor.
THE TITLE I PROGRAM
GENERAL. Certain of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "TITLE I
PROGRAM"). Under the Title I Program, the FHA is authorized and empowered to
insure qualified lending institutions against losses on eligible loans. The
Title I Program operates as a coinsurance program in which the FHA insures up
to 90% of certain losses incurred on an individual insured loan, including the
unpaid principal balance of the loan, but only to the extent of the insurance
coverage available in the lender's FHA insurance coverage reserve account. The
owner of the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under
the Title I Program include property improvement loans ("PROPERTY IMPROVEMENT
LOANS" or "TITLE I LOANS"). A Property Improvement Loan or Title I Loan means
a loan made to finance actions or items that substantially protect or improve
the basic livability or utility of a property and includes single family
improvement loans.
There are two basic methods of lending or originating such loans
which include a "direct loan" or a "dealer loan". With respect to a direct
loan, the borrower makes application directly to a lender without any
assistance from a dealer, which application may be filled out by the borrower
or by a person acting at the direction of the borrower who does not have a
financial interest in the loan transaction, and the lender may disburse the
loan proceeds solely to the borrower or jointly to the borrower and other
parties to the transaction. With respect to a dealer loan, the dealer, who has
a direct or indirect financial interest in the loan transaction, assists the
borrower in preparing the loan application or otherwise assists the borrower
in obtaining the loan from the lender. The lender may disburse proceeds solely
to the dealer or the borrower or jointly to the borrower and the dealer or
other parties to the transaction. With respect to a dealer Title I Loan, a
dealer may include a seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed
interest rates and generally provide for equal installment payments due
weekly, biweekly, semi-monthly or monthly, except that a loan may be payable
quarterly or semi-annually where a borrower has an irregular flow of income.
The first or last payments (or both) may vary in amount but may not exceed
150% of the regular installment payment, and the first payment may be due no
later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
must be negotiated and agreed to by the borrower and the lender and must be
fixed for the term of the loan and recited in the note. Interest on an insured
loan must accrue from the date of the loan and be calculated according to the
actuarial method. The lender must assure that the note and all other documents
evidencing the loan are in compliance with applicable federal, state and local
laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence
and diligence to determine whether the borrower and any co-maker is solvent
and an acceptable credit risk, with a reasonable ability to make payments on
the loan obligation. The lender's credit application and review must determine
whether the borrower's income will be adequate to meet the periodic payments
required by the loan, as well as the borrower's other housing and recurring
expenses, which determination must be made in accordance with the
expense-to-income ratios published by the Secretary of HUD unless the lender
determines and documents in the loan file the existence of compensating
factors concerning the borrower's creditworthiness which support approval of
the loan.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution (as is typically the case with
other federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
REQUIREMENTS FOR TITLE I LOANS. The maximum principal amount for
Title I Loans must not exceed the actual cost of the project plus any
applicable fees and charges allowed under the Title I Program; provided that
such maximum amount does not exceed $25,000 (or the current applicable amount)
for a single family property improvement loan. Generally, the term of a Title
I Loan may not be less than six months nor greater than 20 years and 32 days.
A borrower may obtain multiple Title I Loans with respect to multiple
properties, and a borrower may obtain more than one Title I Loan with respect
to a single property, in each case as long as the total outstanding balance of
all Title I Loans in the same property does not exceed the maximum loan amount
for the type of Title I Loan thereon having the highest permissible loan
amount.
Borrower eligibility for a Title I Loan requires that the borrower
have at least a one-half interest in either fee simple title to the real
property, a lease thereof for a term expiring at least six months after the
final maturity of the Title I Loan or a recorded land installment contract for
the purchase of the real property. In the case of a Title I Loan with a total
principal balance in excess of $15,000, if the property is not occupied by the
owner, the borrower must have equity in the property being improved at least
equal to the principal amount of the loan, as demonstrated by a current
appraisal. Any Title I Loan in excess of $7,500 must be secured by a recorded
lien on the improved property which is evidenced by a mortgage or deed of
trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender
is required to obtain, promptly upon completion of the improvements but not
later than 6 months after disbursement of the loan proceeds with one 6 month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and on any direct Title I Loan
where the borrower fails to submit a completion certificate.
FHA INSURANCE COVERAGE. Under the Title I Program, the FHA
establishes an insurance coverage reserve account for each lender which has
been granted a Title I contract of insurance. The amount of insurance coverage
in this account is a maximum of 10% of the amount disbursed, advanced or
expended by the lender in originating or purchasing eligible loans registered
with the FHA for Title I insurance, with certain adjustments. The balance in
the insurance coverage reserve account is the maximum amount of insurance
claims the FHA is required to pay to the Title I lender. Loans to be insured
under the Title I Program will be registered for insurance by the FHA and the
insurance coverage attributable to such loans will be included in the
insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. For each eligible loan
reported and acknowledged for insurance, the FHA charges a fee (the
"PREMIUM"). For loans having a maturity of 25 months or less, the FHA bills
the lender for the entire Premium in an amount equal to the product of 0.50%
of the original loan amount and the loan term. For home improvement loans with
a maturity greater than 25 months, each year that a loan is outstanding the
FHA bills the lender for a Premium in an amount equal to 0.50% of the original
loan amount. If a loan is prepaid during the year, the FHA will not refund or
abate the Premium paid for such year.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount of
the FHA insurance claims approved for payment relating to such insured loans
and (ii) the amount of insurance coverage attributable to insured loans sold
by the lender, and such insurance coverage may be reduced for any FHA
insurance claims rejected by the FHA. The balance of the lender's FHA
insurance coverage reserve account will be further adjusted as required under
Title I or by the FHA, and the insurance coverage therein may be earmarked
with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest to do
so. Originations and acquisitions of new eligible loans will continue to
increase a lender's insurance coverage reserve account balance by 10% of the
amount disbursed, advanced or expended in originating or acquiring such
eligible loans registered with the FHA for insurance under the Title I
Program. The Secretary of HUD may transfer insurance coverage between
insurance coverage reserve accounts with earmarking with respect to a
particular insured loan or group of insured loans when a determination is made
that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guaranty or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
such loan in accordance with the Title I regulations, will transfer from the
transferor's insurance coverage reserve account to the transferee's insurance
coverage reserve account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of such loan (whichever is
less). However, under the Title I Program not more than $5,000 in insurance
coverage shall be transferred to or from a lender's insurance coverage reserve
account during any October 1 to September 30 period without the prior approval
of the Secretary of HUD. Amounts which may be recovered by the Secretary of
HUD after payment of an insurance claim are not added to the amount of
insurance coverage in the related lender's insurance coverage reserve account.
CLAIMS PROCEDURES UNDER TITLE I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If
the lender chooses to proceed against the property under a security instrument
(or if it accepts a voluntary conveyance or surrender of the property), the
lender may file an insurance claim only with the prior approval of the
Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation
of the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be
filed with the FHA no later than 9 months after the date of default of such
loan. Concurrently with filing the insurance claim, the lender shall assign to
the United States of America the lender's entire interest in the loan note (or
a judgment in lien of the note), in any security held and in any claim filed
in any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid
a claim, the FHA may require the lender to repurchase the paid claim and to
accept a reassignment of the loan note. If the lender subsequently obtains a
valid and enforceable judgment against the borrower, the lender may resubmit a
new insurance claim with an assignment of the judgment. Although the FHA may
contest any insurance claim and make a demand for repurchase of the loan at
any time up to two years from the date the claim was certified for payment and
may do so thereafter in the event of fraud or misrepresentation on the part of
the lender, the FHA has expressed an intention to limit the period of time
within which it will take such action to one year from the date the claim was
certified for payment.
Under the Title I Program the amount of an FHA insurance claim
payment, when made, is equal to the Claimable Amount, up to the amount of
insurance coverage in the lender's insurance coverage reserve account. For the
purposes hereof, the "Claimable Amount" means an amount equal to 90% of the
sum of: (a) the unpaid loan obligation (net unpaid principal and the
uncollected interest earned to the date of default) with adjustments thereto
if the lender has proceeded against property securing such loan; (b) the
interest on the unpaid amount of the loan obligation from the date of default
to the date of the claim's initial submission for payment plus 15 calendar
days (but not to exceed 9 months from the date of default), calculated at the
rate of 7% per annum; (c) the uncollected court costs; (d) the attorney's fees
not to exceed $500; and (e) the expenses for recording the assignment of the
security to the United States.
The Secretary of HUD may deny a claim for insurance in whole or in
part for any violations of the regulations governing the Title I Program;
however, the Secretary of HUD may waive such violations if it determines that
enforcement of the regulations would impose an injustice upon a lender which
has substantially complied with the regulations in good faith.
OTHER LEGAL CONSIDERATIONS
The Loans are also subject to federal laws, including: (i) Regulation
Z, which requires certain disclosures to the borrowers regarding the terms of
the Loans; (ii) the Equal Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit Protection Act, in the
extension of credit; and (iii) the Fair Credit Reporting Act, which regulates
the use and reporting of information related to the borrower's credit
experience. Violations of certain provisions of these federal laws may limit
the ability of the Sellers to collect all or part of the principal of or
interest on the Loans and in addition could subject the Sellers to damages and
administrative enforcement.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Securities and is based on the opinion of Brown & Wood LLP, special counsel to
the Depositor (in such capacity, "TAX COUNSEL"). The summary is based upon the
provisions of the Code, the regulations promulgated thereunder, including,
where applicable, proposed regulations, and the judicial and administrative
rulings and decisions now in effect, all of which are subject to change or
possible differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change,
and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal
income taxation that may affect particular investors in light of their
individual circumstances. This summary focuses primarily upon investors who
will hold Securities as "capital assets" (generally, property held for
investment) within the meaning of section 1221 of the Code. Prospective
investors may wish to consult their own tax advisers concerning the federal,
state, local and any other tax consequences as relates specifically to such
investors in connection with the purchase, ownership and disposition of the
Securities.
The federal income tax consequences to holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a REMIC under the Internal Revenue Code of 1986, as amended (the
"CODE"); (iii) the Securities represent an ownership interest in some or all
of the assets included in the Trust Fund for a Series; or (iv) an election is
made to treat the Trust Fund relating to a particular Series of Certificates
as a partnership. The Prospectus Supplement for each Series of Securities will
specify how the Securities will be treated for federal income tax purposes and
will discuss whether a REMIC election, if any, will be made with respect to
such Series.
As used herein, the term "U.S. PERSON" means a citizen or resident of
the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States, any state thereof or the
District of Columbia (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations), an estate whose
income is subject to U.S. federal income tax regardless of its source, or a
trust with respect to which (i) a court within the United States is able to
exercise primary supervision over the administration of the trust and (ii) one
or more U.S. 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 section 7701(a)(19)(C)(v) of
the Code; and (ii) Securities held by a real estate investment trust will
constitute "real estate assets" within the meaning of section 856(c)(4)(A) of
the Code 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 section 856(c)(3)(B) of the Code.
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 through 1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994, as amended on June 11, 1996 (the "OID
REGULATIONS"). A holder should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such
as the Debt Securities.
In general, OID, if any, will equal the excess of the stated
redemption price at maturity of a Debt Security over its issue price. In the
opinion of Tax Counsel, a holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero if
it is less than a DE MINIMIS amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash
on or prior to the Closing Date, the issue price for such class will be
treated as the fair market value of such class on the Closing Date. The issue
price of a Debt Security also includes the amount paid by an initial Debt
Security holder for accrued interest that relates to a period prior to the
issue date of the Debt Security. The stated redemption price at maturity of a
Debt Security includes the original principal amount of the Debt Security, but
generally will not include distributions of interest if such distributions
constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are unconditionally
payable only if a late payment or nonpayment is expected to be penalized or
reasonable remedies exist to compel payment. Certain Debt Securities may
provide for default remedies in the event of late payment or nonpayment of
interest. In the opinion of Tax Counsel, the interest on such Debt Securities
will be unconditionally payable and constitute qualified stated interest, not
OID. However, absent clarification of the OID Regulations, where Debt
Securities do not provide for default remedies, the interest payments will be
included in the Debt Security's stated redemption price at maturity and taxed
as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments,
in which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the
shorter interval, will be included in the stated redemption price at maturity
and tested under the DE MINIMIS rule described below. In the case of a Debt
Security with a long first period which has non-DE MINIMIS OID, all stated
interest in excess of interest payable at the effective interest rate for the
long first period will be included in the stated redemption price at maturity
and the Debt Security will generally have OID. Holders of Debt Securities
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Debt Security.
Under the DE MINIMIS rule, OID on a Debt Security will be considered
to be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of
the Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (I.E., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of
each distribution included in the stated redemption price at maturity of the
Debt Security and the denominator of which is the stated redemption price at
maturity of the Debt Security. Holders generally must report DE MINIMIS OID
pro rata as principal payments are received, and such income will be capital
gain if the Debt Security is held as a capital asset. However, accrual method
holders may elect to accrue all DE MINIMIS OID as well as market discount
under a constant interest method.
Debt Securities may provide for interest based on a qualified
variable rate. Under the OID Regulations, interest is treated as payable at a
qualified variable rate and not as contingent interest if, generally, (i) such
interest is unconditionally payable at least annually, (ii) the issue price of
the debt instrument does not exceed the total noncontingent principal payments
and (iii) interest is based on a "qualified floating rate," an "objective
rate," or a combination of "qualified floating rates" that do not operate in a
manner that significantly accelerates or defers interest payments on such Debt
Security. In the case of Compound Interest Securities, certain Interest
Weighted Securities, and certain of the other Debt Securities, none of the
payments under the instrument will be considered qualified stated interest,
and thus the aggregate amount of all payments will be included in the stated
redemption price.
The Internal Revenue Service (the "IRS") issued regulations (the
"CONTINGENT REGULATIONS") governing the calculation of OID on instruments
having contingent interest payments. The Contingent Regulations represent the
only guidance regarding the views of the IRS with respect to contingent
interest instruments and specifically do not apply for purposes of calculating
OID on debt instruments subject to section 1272(a)(6) of the Code, such as the
Debt Securities. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, the Trustee intends to base its computation
on section 1272(a)(6) of the Code and the OID Regulations as described in this
Prospectus. However, because no regulatory guidance currently exists under
section 1272(a)(6) of the Code, there can be no assurance that such
methodology represents the correct manner of calculating OID.
The holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount. The
amount of OID includible in income by a holder will be computed by allocating
to each day during a taxable year a PRO RATA portion of the original issue
discount that accrued during the relevant accrual period. In the case of a
Debt Security that is not a Regular Interest Security and the principal
payments on which are not subject to acceleration resulting from prepayments
on the Loans, the amount of OID includible in income of a holder for an
accrual period (generally the period over which interest accrues on the debt
instrument) will equal the product of the yield to maturity of the Debt
Security and the adjusted issue price of the Debt Security, reduced by any
payments of qualified stated interest. The adjusted issue price is the sum of
its issue price plus prior accruals or OID, reduced by the total payments made
with respect to such Debt Security in all prior periods, other than qualified
stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "PAY-THROUGH SECURITY"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"PREPAYMENT ASSUMPTION"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments
is to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding
at the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method
is to increase the portions of OID required to be included in income by a
holder to take into account prepayments with respect to the Loans at a rate
that exceeds the Prepayment Assumption, and to decrease (but not below zero
for any period) the portions of original issue discount required to be
included in income by a holder of a Pay-Through Security to take into account
prepayments with respect to the Loans at a rate that is slower than the
Prepayment Assumption. Although original issue discount will be reported to
holders of Pay-Through Securities based on the Prepayment Assumption, no
representation is made to holders that Loans will be prepaid at that rate or
at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular
Interest Securities (or other regular interests in a REMIC) in a manner that
it believes to be appropriate, to take account of realized losses on the
Loans, although the OID Regulations do not provide for such adjustments. If
the Internal Revenue Service were to require that OID be accrued without such
adjustments, the rate of accrual of OID for a Class of Regular Interest
Securities could increase.
Certain classes of Regular Interest Securities may represent more
than one class of REMIC regular interests. Unless otherwise provided in the
related Prospectus Supplement, the Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the
purposes of computing OID, the separate regular interests were a single debt
instrument.
A subsequent holder of a Debt Security will also be required to
include OID in gross income, but such a holder who purchases such Debt
Security for an amount that exceeds its adjusted issue price will be entitled
(as will an initial holder who pays more than a Debt Security's issue price)
to offset such OID by comparable economic accruals of portions of such excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. In the opinion of Tax Counsel,
holders will be required to report income with respect to the related
Securities under an accrual method without giving effect to delays and
reductions in distributions attributable to a default or delinquency on the
Loans, except possibly to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income (including OID)
reported by a holder of such a Security in any period could significantly
exceed the amount of cash distributed to such holder in that period. The
holder will eventually be allowed a loss (or will be allowed to report a
lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is 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" below) the payments
on which consist solely or primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC or on Loans underlying
Pass-Through Securities ("INTEREST WEIGHTED SECURITIES"). The Issuer intends
to take the position that all of the income derived from an Interest Weighted
Security should be treated as OID and that the amount and rate of accrual of
such OID should be calculated by treating the Interest Weighted Security as a
Compound Interest Security. However, in the case of Interest Weighted
Securities that are entitled to some payments of principal and that are
Regular Interest Securities the IRS 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" below.
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 through
1278 of the Code. A Holder that acquires a Debt Security with more than a
prescribed DE MINIMIS amount of "market discount" (generally, the excess of
the principal amount of the Debt Security over the purchaser's purchase price)
will be required to include accrued market discount in income as ordinary
income in each month, but limited to an amount not exceeding the principal
payments on the Debt Security received in that month and, if the Securities
are sold, the gain realized. Such market discount would accrue in a manner to
be provided in Treasury regulations but, until such regulations are issued,
such market discount would in general accrue either (i) on the basis of a
constant yield (in the case of a Pay-Through Security, taking into account a
prepayment assumption) or (ii) in the ratio of (a) in the case of Securities
(or in the case of a Pass-Through Security, as set forth below, the Loans
underlying such Security) not originally issued with original issue discount,
stated interest payable in the relevant period to total stated interest
remaining to be paid at the beginning of the period or (b) in the case of
Securities (or, in the case of a Pass-Through Security, as described below,
the Loans underlying such Security) originally issued at a discount, OID in
the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a Security
(or, in the case of a Pass-Through Security, as described below, the
underlying Loans) with market discount over interest received on such Security
is allowed as a current deduction only to the extent such excess is greater
than the market discount that accrued during the taxable year in which such
interest expense was incurred. In general, the deferred portion of any
interest expense will be deductible when such market discount is included in
income, including upon the sale, disposition, or repayment of the Security (or
in the case of a Pass-Through Security, an underlying Loan). A holder may
elect to include market discount in income currently as it accrues, on all
market discount obligations acquired by such holder during the taxable year
such election is made and thereafter, in which case the interest deferral rule
will not apply.
PREMIUM. In the opinion of Tax Counsel, a holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity,
generally will be considered to have purchased the Security at a premium,
which it may elect to amortize as an offset to interest income on such
Security (and not as a separate deduction item) on a constant yield method.
The legislative history of the 1986 Act indicates that premium is to be
accrued in the same manner as market discount. Accordingly, it appears that
the accrual of premium on a class of Pay-Through Securities will be calculated
using the prepayment assumption used in pricing such class. If a holder makes
an election to amortize premium on a Debt Security, such election will apply
to all taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by such holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the Securities should consult their tax
advisers regarding the election to amortize premium and the application of
recently finalized regulations under Section 171 issued December 30, 1997.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit a holder of a Debt Security to elect to accrue all
interest, discount (including DE MINIMIS market or original issue discount)
and premium in income as interest, based on a constant yield method for Debt
Securities acquired on or after April 4, 1994. If such an election were to be
made with respect to a Debt Security with market discount, the holder of the
Debt Security would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such holder of the Debt Security acquires during the year
of the election or thereafter. Similarly, a holder of a Debt Security that
makes this election for a Debt Security that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that such holder owns or
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
GENERAL. In the opinion of Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement,
if a REMIC election is made with respect to a Series of Securities, in the
opinion of Tax Counsel (i) Securities held by a domestic building and loan
association will constitute "a regular or a residual interest in a REMIC"
within the meaning of section 7701(a)(19)(C)(xi) of the Code (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 section 7701(a)(19)(C)) of the Code; and (ii) Securities held by a real
estate investment trust will constitute "real estate assets" within the
meaning of section 856(c)(4)(A) of the Code, 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 section
856(c)(3)(B) of the Code (assuming, for both purposes, that at least 95% of
the REMIC's assets are qualifying assets). If less than 95% of the REMIC's
assets consist of assets described in clause (i) or (ii) above, then a
Security will qualify for the tax treatment described in clause (i) or (ii) in
the proportion that such REMIC assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of Tax Counsel, all of the expenses
of a REMIC will be taken into account by holders of the Residual Interest
Securities. In the case of a "single class REMIC," however, the expenses will
be allocated, under Treasury regulations, among the holders of the Regular
Interest Securities and the holders of the Residual Interest Securities on a
daily basis in proportion to the relative amounts of income accruing to each
holder on that day. In the case of a holder of a Regular Interest Security who
is an individual or a "pass-through interest holder" (including certain
pass-through entities but not including real estate investment trusts), such
expenses will be deductible only to the extent that such expenses, plus other
"miscellaneous itemized deductions" of the holder, exceed 2% of such Holder's
adjusted gross income. In addition, for taxable years beginning after December
31, 1990, the amount of itemized deductions otherwise allowable for the
taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation for taxable
years beginning after 1990) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the applicable amount, or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year. The
reduction or disallowance of this deduction may have a significant impact on
the yield of the Regular Interest Security to such a holder. In general terms,
a single class REMIC is one that either (i) would qualify, under existing
Treasury regulations, as a grantor trust if it were not a REMIC (treating all
interests as ownership interests, even if they would be classified as debt for
federal income tax purposes) or (ii) is similar to such a trust and which is
structured with the principal purpose of avoiding the single class REMIC
rules. Unless otherwise specified in the related Prospectus Supplement, the
expenses of the REMIC will be allocated to holders of the related residual
interest securities.
TAXATION OF THE REMIC
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC.
CALCULATION OF REMIC INCOME. In the opinion of Tax Counsel, the
taxable income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with
certain adjustments. In general, the taxable income or net loss will be the
difference between (i) the gross income produced by the REMIC's assets,
including stated interest and any original issue discount or market discount
on loans and other assets, and (ii) deductions, including stated interest and
original issue discount accrued on Regular Interest Securities, amortization
of any premium with respect to Loans, and servicing fees and other expenses of
the REMIC. A holder of a Residual Interest Security that is an individual or a
"pass-through interest holder" (including certain pass-through entities, but
not including real estate investment trusts) will be unable to deduct
servicing fees payable on the loans or other administrative expenses of the
REMIC for a given taxable year, to the extent that such expenses, when
aggregated with such holder's other miscellaneous itemized deductions for that
year, do not exceed two percent of such holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the
aggregate fair market value of the regular interests and the residual
interests on the Startup Day (generally, the day that the interests are
issued). That aggregate basis will be allocated among the assets of the REMIC
in proportion to their respective fair market values.
The OID provisions of the Code apply to loans of individuals
originated on or after March 2, 1984, and the market discount provisions apply
to loans originated after July 18, 1984. Subject to possible application of
the DE MINIMIS rules, the method of accrual by the REMIC of OID income on such
loans will be equivalent to the method under which holders of Pay-Through
Securities accrue original issue discount (I.E., under the constant yield
method taking into account the Prepayment Assumption). The REMIC will deduct
OID on the Regular Interest Securities in the same manner that the holders of
the Regular Interest Securities include such discount in income, but without
regard to the DE MINIMIS rules. See "Taxation of Debt Securities" above.
However, a REMIC that acquires loans at a market discount must include such
market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant
yield method. Although the law is somewhat unclear regarding recovery of
premium attributable to loans originated on or before such date, it is
possible that such premium may be recovered in proportion to payments of loan
principal.
PROHIBITED TRANSACTIONS AND CONTRIBUTIONS TAX. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited
transaction." For this purpose, net income will be calculated without taking
into account any losses from prohibited transactions or any deductions
attributable to any prohibited transaction that resulted in a loss. In
general, prohibited transactions include: (i) subject to limited exceptions,
the sale or other disposition of any qualified mortgage transferred to the
REMIC; (ii) subject to a limited exception, the sale or other disposition of a
cash flow investment; (iii) the receipt of any income from assets not
permitted to be held by the REMIC pursuant to the Code; or (iv) the receipt of
any fees or other compensation for services rendered by the REMIC. It is
anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition, subject
to a number of exceptions, a tax is imposed at the rate of 100% on amounts
contributed to a REMIC after the close of the three-month period beginning on
the Startup Day. The holders of Residual Interest Securities will generally be
responsible for the payment of any such taxes imposed on the REMIC. To the
extent not paid by such holders or otherwise, however, such taxes will be paid
out of the Trust Fund and will be allocated pro rata to all outstanding
classes of Securities of such REMIC.
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 section 511 of the
Code, 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" below. The Small Business Job Protection Act of 1996 has eliminated
the special rule permitting section 593 institutions ("thrift institutions")
to use net operating losses and other allowable deductions to offset their
excess inclusion income from REMIC residual certificates that have
"significant value" within the meaning of the REMIC Regulations, effective for
taxable years beginning after December 31, 1995, except with respect to
residual certificates continuously held by a thrift institution since November
1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual holder. First, alternative minimum
taxable income for such residual holder is determined without regard to the
special rule that taxable income cannot be less than excess inclusions.
Second, a residual holder's alternative minimum taxable income for a tax year
cannot be less than excess inclusions for the year. Third, the amount of any
alternative minimum tax net operating loss deductions must be computed without
regard to any excess inclusions. These rules are effective for tax years
beginning after December 31, 1986, unless a residual holder elects to have
such rules apply only to tax years beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal
to the excess, if any, of REMIC taxable income for the quarterly period
allocable to a Residual Interest Security, over the daily accruals for such
quarterly period of (i) 120% of the long term applicable federal rate on the
Startup Day multiplied by (ii) the adjusted issue price of such Residual
Interest Security at the beginning of such quarterly period. The adjusted
issue price of a Residual Interest at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Interest), increased by the
aggregate of the daily accruals for prior calendar quarters, and decreased
(but not below zero) by the amount of loss allocated to a holder and the
amount of distributions made on the Residual Interest Security before the
beginning of the quarter. The long-term federal rate, which is announced
monthly by the Treasury Department, is an interest rate that is based on the
average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--RESTRICTIONS ON OWNERSHIP AND
TRANSFER OF RESIDUAL INTEREST SECURITIEs" and "--Tax Treatment of Foreign
Investors" below.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL INTEREST
SECURITIES. As a condition to qualification as a REMIC, reasonable
arrangements must be made to prevent the ownership of a REMIC residual
interest by any "Disqualified Organization." Disqualified Organizations
include the United States, any State or political subdivision thereof, any
foreign government, any international organization, or any agency or
instrumentality of any of the foregoing, a rural electric or telephone
cooperative described in section 1381(a)(2)(C) of the Code, or any entity
exempt from the tax imposed by sections 1 through 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" below.
MARK TO MARKET RULES. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS recently finalized regulations
(the "MARK-TO-MARKET REGULATIONS") which provide that a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the possible application of the Mark-to-Market
Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in
a unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
GENERAL. As further specified in the related Prospectus Supplement,
if a REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under subpart E, part 1 of subchapter J of the Code and not as
an association taxable as a corporation (the Securities of such Series,
"PASS-THROUGH SECURITIES"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("STRIPPED SECURITIES"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
In the opinion of Tax Counsel, each holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the Trustee and the Servicer and
similar fees (collectively, the "SERVICING FEE")), at the same time and in the
same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and paid
directly its share of the Servicing Fees. In the case of Pass-Through
Securities other than Stripped Securities, such income will consist of a pro
rata share of all of the income derived from all of the Loans and, in the case
of Stripped Securities, such income will consist of a pro rata share of the
income derived from each stripped bond or stripped coupon in which the holder
owns an interest. The holder of a Security will generally be entitled to
deduct such Servicing Fees under section 162 or section 212 of the Code to the
extent that such Servicing Fees represent "reasonable" compensation for the
services rendered by the Trustee and the Servicer (or third parties that are
compensated for the performance of services). In the case of a noncorporate
holder, however, Servicing Fees (to the extent not otherwise disallowed, E.G.,
because they exceed reasonable compensation) will be deductible in computing
such holder's regular tax liability only to the extent that such fees, when
added to other miscellaneous itemized deductions, exceed 2% of adjusted gross
income and may not be deductible to any extent in computing such holder's
alternative minimum tax liability. In addition, for taxable years beginning
after December 31, 1990, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation in taxable
years beginning after 1990) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the applicable amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year.
DISCOUNT OR PREMIUM ON PASS-THROUGH SECURITIES. In the opinion of Tax
Counsel, the holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values,
determined as of the time of purchase of the Securities. In the typical case,
the Trustee (to the extent necessary to fulfill its reporting obligations)
will treat each Loan as having a fair market value proportional to the share
of the aggregate principal balances of all of the Loans that it represents,
since the Securities, unless otherwise specified in the related Prospectus
Supplement, will have a relatively uniform interest rate and other common
characteristics. To the extent that the portion of the purchase price of a
Pass-Through Security allocated to a Loan (other than to a right to receive
any accrued interest thereon and any undistributed principal payments) is less
than or greater than the portion of the principal balance of the Loan
allocable to the Security, the interest in the Loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of
a prescribed DE MINIMIS amount or a Stripped Security, a holder of a Security
will be required to report as interest income in each taxable year its share
of the amount of OID that accrues during that year in the manner described
above. OID with respect to a Loan could arise, for example, by virtue of the
financing of points by the originator of the Loan, or by virtue of the
charging of points by the originator of the Loan in an amount greater than a
statutory DE MINIMIS exception, in circumstances under which the points are
not currently deductible pursuant to applicable Code provisions. Any market
discount or premium on a Loan will be includible in income, generally in the
manner described above, except that in the case of Pass-Through Securities,
market discount is calculated with respect to the Loans underlying the
Certificate, rather than with respect to the Security. A holder that acquires
an interest in a Loan originated after July 18, 1984 with more than a DE
MINIMIS amount of market discount (generally, the excess of the principal
amount of the Loan over the purchaser's allocable purchase price) will be
required to include accrued market discount in income in the manner set forth
above. See "--Taxation of Debt Securities; Market Discount" and "--Premium"
above.
In the case of market discount on a Pass-Through Security
attributable to Loans originated on or before July 18, 1984, the holder
generally will be required to allocate the portion of such discount that is
allocable to a loan among the principal payments on the Loan and to include
the discount allocable to each principal payment in ordinary income at the
time such principal payment is made. Such treatment would generally result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described in the preceding
paragraph.
STRIPPED SECURITIES. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to
receive only principal payments on the Loans, or a right to receive certain
payments of both interest and principal. Certain Stripped Securities ("RATIO
STRIP SECURITIES") may represent a right to receive differing percentages of
both the interest and principal on each Loan. Pursuant to section 1286 of the
Code, the separation of ownership of the right to receive some or all of the
interest payments on an obligation from ownership of the right to receive some
or all of the principal payments results in the creation of "stripped bonds"
with respect to principal payments and "stripped coupons" with respect to
interest payments. Section 1286 of the Code applies the OID rules to stripped
bonds and stripped coupons. For purposes of computing original issue discount,
a stripped bond or a stripped coupon is treated as a debt instrument issued on
the date that such stripped interest is purchased with an issue price equal to
its purchase price or, if more than one stripped interest is purchased, the
ratable share of the purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (I.E., 1% interest on the Loan
principal balance) or the Securities are initially sold with a DE MINIMIS
discount (assuming no prepayment assumption is required), any non-DE MINIMIS
discount arising from a subsequent transfer of the Securities should be
treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a Loan by Loan basis, which could result in
some Loans being treated as having more than 100 basis points of interest
stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to apply
to Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "CASH FLOW BOND METHOD"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury
regulations, appear specifically to cover instruments such as the Stripped
Securities which technically represent ownership interests in the underlying
Loans, rather than being debt instruments "secured by" those loans.
Nevertheless, it is believed that the Cash Flow Bond Method is a reasonable
method of reporting income for such Securities, and it is expected that OID
will be reported on that basis unless otherwise specified in the related
Prospectus Supplement. In applying the calculation to Pass-Through Securities,
the Trustee will treat all payments to be received by a holder with respect to
the underlying Loans as payments on a single installment obligation. The IRS
could, however, assert that original issue discount must be calculated
separately for each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster
than the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a holder's recognition of income. If, however, the Loans prepay at
a rate slower than the Prepayment Assumption, in some circumstances the use of
this method may decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the Trustee intends, absent contrary authority, to report income to
Security holders as OID, in the manner described above for Interest Weighted
Securities.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS. The characterizations of the
Stripped Securities described above are not the only possible interpretations
of the applicable Code provisions. Among other possibilities, the Internal
Revenue Service could contend that (i) in certain Series, each non-Interest
Weighted Security is composed of an unstripped undivided ownership interest in
Loans and an installment obligation consisting of stripped principal payments;
(ii) the non-Interest Weighted Securities are subject to the contingent
payment provisions of the Proposed Regulations; or (iii) each Interest
Weighted Stripped Security is composed of an unstripped undivided ownership
interest in Loans and an installment obligation consisting of stripped
interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income
tax purposes.
CHARACTER AS QUALIFYING LOANS. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the character
of the Securities, for federal income tax purposes, will be the same as the
Loans. The IRS could take the position that the Loans character is not carried
over to the Securities in such circumstances. Pass-Through Securities will be,
and, although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of section
856(c)(4)(A) of the Code, and "loans secured by an interest in real property"
within the meaning of section 7701(a)(19)(C)(v) of the Code; and interest
income attributable to the Securities should be considered to represent
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of section 856(c)(3)(B) of the Code.
Reserves or funds underlying the Securities may cause a proportionate
reduction in the above-described qualifying status categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to
which a partnership election is made, in the opinion of Tax Counsel, a
holder's tax basis in its Security is the price such holder pays for a
Security, plus amounts of original issue or market discount included in income
and reduced by any payments received (other than qualified stated interest
payments) and any amortized premium. Gain or loss recognized on a sale,
exchange, or redemption of a Security, measured by the difference between the
amount realized and the Security's basis as so adjusted, will generally be
capital gain or loss, assuming that the Security is held as a capital asset
and will generally be long-term capital gain or loss if the holding period of
the security is one year or more. Non-corporate taxpayers are subject to
reduced maximum rates on long-term capital gains and are generally subject to
tax at ordinary income rates on short-term capital gains. The deductibility of
capital losses is subject to certain limitations. Prospective investors should
consult their own tax advisors concerning these tax law provisions.
In the case of a Security held by a bank, thrift, or similar
institution described in section 582 of the Code, however, gain or loss
realized on the sale or exchange of a Regular Interest Security will be
taxable as ordinary income or loss. In addition, gain from the disposition of
a Regular Interest Security that might otherwise be capital gain will be
treated as ordinary income to the extent of the excess, if any, of the amount
that would have been includible in the holder's income if the yield on such
Regular Interest Security had equaled 110% of the applicable federal rate as
of the beginning of such holder's holding period, over the amount of ordinary
income actually recognized by the holder with respect to such Regular Interest
Security.
MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a holder, other than a
holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to distributions
or the proceeds of a sale of certificates to or through brokers that represent
interest or original issue discount on the Securities. This withholding
generally applies if the holder of a Security (i) fails to furnish the Trustee
with its taxpayer identification number ("TIN"); (ii) furnishes the Trustee an
incorrect TIN; (iii) fails to report properly interest, dividends or other
"reportable payments" as defined in the Code; or (iv) under certain
circumstances, fails to provide the Trustee or such holder's securities broker
with a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that the holder is not subject to backup
withholding. Backup withholding will not apply, however, with respect to
certain payments made to holders, including payments to certain exempt
recipients (such as exempt organizations) and to certain Nonresidents (as
defined below). Holders should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued 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, (ii) the recipient is a controlled
foreign corporation to which the issuer is a related person) and will be
exempt from federal income tax, or (iii) the recipient is a bank receiving
interest described in section 881(c)(3)(A) of the Code. Upon receipt of
appropriate ownership statements, the issuer normally will be relieved of
obligations to withhold tax from such interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the issuer to withhold at a 30% rate (unless such rate were
reduced or eliminated by an applicable tax treaty) on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
Nonresidents. Holders of Pass-Through Securities and Stripped Securities,
including Ratio Strip Securities, however, may be subject to withholding to
the extent that the Loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject
to withholding if they are effectively connected with a United States business
conducted by the holder. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax
as "portfolio interest." It is clear that, to the extent that a payment
represents a portion of REMIC taxable income that constitutes excess inclusion
income, a holder of a Residual Interest Security will not be entitled to an
exemption from or reduction of the 30% (or lower treaty rate) withholding tax
rule. If the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only when
paid or distributed (or when the Residual Interest Security is disposed of).
The Treasury has statutory authority, however, to promulgate regulations which
would require such amounts to be taken into account at an earlier time in
order to prevent the avoidance of tax. Such regulations could, for example,
require withholding prior to the distribution of cash in the case of Residual
Interest Securities that do not have significant value. Under the REMIC
Regulations, if a Residual Interest Security has tax avoidance potential, a
transfer of a Residual Interest Security to a Nonresident will be disregarded
for all Federal tax purposes. A Residual Interest Security has tax avoidance
potential unless, at the time of the transfer the transferor reasonably
expects that the REMIC will distribute to the transferee residual interest
holder amounts that will equal at least 30% of each excess inclusion, and that
such amounts will be distributed at or after the time at which the excess
inclusions accrue and not later than the calendar year following the calendar
year of accrual. If a Nonresident transfers a Residual Interest Security to a
United States person, and if the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, then the transfer is
disregarded and the transferor continues to be treated as the owner of the
Residual Interest Security for purposes of the withholding tax provisions of
the Code. See "--Residential Interest Securities--EXCESS INCLUSIOns" above.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion is
based on the assumption that the terms of the Trust Agreement and related
documents will be complied with, and on counsel's conclusions that the nature
of the income of the Trust Fund will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or the issuance of
the Certificates has been structured as a private placement under an IRS safe
harbor, so that the Trust Fund will not be characterized as a publicly traded
partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income
tax purposes, in the opinion of Tax Counsel, the Trust Fund would be subject
to corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the
Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust Fund will agree,
and the Noteholders will agree by their purchase of Notes, to treat the Notes
as debt for federal income tax purposes. In such a circumstance, Tax Counsel
is, except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, INDEXED SECURITIES, ETC. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified
stated interest" under the OID regulations, and that any OID on the Notes
(I.E., any excess of the principal amount of the Notes over their issue price)
does not exceed a DE MINIMIS amount (I.E., 0.25% of their principal amount
multiplied by the number of full years included in their term), all within the
meaning of the OID regulations. If these conditions are not satisfied with
respect to any given series of Notes, additional tax considerations with
respect to such Notes will be disclosed in the applicable Prospectus
Supplement.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except
as discussed in the following paragraph, in the opinion of Tax Counsel, the
Notes will not be considered issued with OID. The stated interest thereon will
be taxable to a Noteholder as ordinary interest income when received or
accrued in accordance with such Noteholder's method of tax accounting. Under
the OID regulations, a holder of a Note issued with a DE MINIMIS amount of OID
must include such OID in income, on a PRO RATA basis, as principal payments
are made on the Note. It is believed that any prepayment premium paid as a
result of a mandatory redemption will be taxable as contingent interest when
it becomes fixed and unconditionally payable. A purchaser who buys a Note for
more or less than its principal amount will generally be subject,
respectively, to the premium amortization or market discount rules of the
Code.
A holder of a Note that has a fixed maturity date of not more than
one year from the issue date of such Note (a "SHORT-TERM NOTE") may be subject
to special rules. An accrual basis holder of a Short-Term Note (and certain
cash method holders, including regulated investment companies, as set forth in
section 1281 of the Code) generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis holders of a Short-Term Note would, in
general, be required to report interest income as interest is paid (or, if
earlier, upon the taxable disposition of the Short-Term Note). However, a cash
basis holder of a Short-Term Note reporting interest income as it is paid may
be required to defer a portion of any interest expense otherwise deductible on
indebtedness incurred to purchase or carry the Short-Term Note until the
taxable disposition of the Short-Term Note. A cash basis taxpayer may elect
under Section 1281 of the Code to accrue interest income on all nongovernment
debt obligations with a term of one year or less, in which case the taxpayer
would include interest on the Short-Term Note in income as it accrues, but
would not be subject to the interest expense deferral rule referred to in the
preceding sentence. Certain special rules apply if a Short-Term Note is
purchased for more or less than its principal amount.
SALE OR OTHER DISPOSITION. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the
holder's adjusted tax basis in the Note. The adjusted tax basis of a Note to a
particular Noteholder will equal the holder's cost for the Note, increased by
any market discount, acquisition discount, OID and gain previously included by
such Noteholder in income with respect to the Note and decreased by the amount
of bond premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such Note. Any
such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued
market discount not previously included in income. Capital losses generally
may be used only to offset capital gains.
FOREIGN HOLDERS. In the opinion of Tax Counsel, interest payments
made (or accrued) to a Noteholder who is a nonresident alien, foreign
corporation or other non-United States person (a "foreign person") generally
will be considered "portfolio interest", and generally will not be subject to
United States federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the
United States by the foreign person and the foreign person (i) is not actually
or constructively a "10 percent shareholder" of the Trust or the Seller
(including a holder of 10% of the outstanding Certificates) or a "controlled
foreign corporation" with respect to which the Trust or the Seller is a
"related person" within the meaning of the Code and (ii) provides the Owner
Trustee or other person who is otherwise required to withhold U.S. tax with
respect to the Notes with an appropriate statement (on Form W-8 or a similar
form), signed under penalties of perjury, certifying that the beneficial owner
of the Note is a foreign person and providing the foreign person's name and
address. If a Note is held through a securities clearing organization or
certain other financial institutions, the organization or institution may
provide the relevant signed statement to the withholding agent; in that case,
however, the signed statement must be accompanied by a Form W-8 or substitute
form provided by the foreign person that owns the Note. If such interest is
not portfolio interest, then it will be subject to United States federal
income and withholding tax at a rate of 30 percent, unless reduced or
eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or
other taxable disposition of a Note by a foreign person will be exempt from
United States federal income and withholding tax, provided that (i) such gain
is not effectively connected with the conduct of a trade or business in the
United States by the foreign person and (ii) in the case of an individual
foreign person, the foreign person is not present in the United States for 183
days or more in the taxable year.
BACKUP WITHHOLDING. Each holder of a Note (other than an exempt
holder such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the holder,
and remit the withheld amount to the IRS as a credit against the holder's
federal income tax liability.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might
be treated as equity interests in the Trust Fund. If so treated, the Trust
Fund might be treated as a publicly traded partnership that would not be
taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income", income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's
expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase
of Certificates, to treat the Trust Fund as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the
assets held by the Trust Fund, the partners of the partnership being the
Certificateholders, and the Notes being debt of the partnership. However, the
proper characterization of the arrangement involving the Trust Fund, the
Certificates, the Notes, the Trust Fund and the Servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
INDEXED SECURITIES, ETC. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series
of Securities includes a single class of Certificates. If these conditions are
not satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
PARTNERSHIP TAXATION. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal income
tax. Rather, in the opinion of Tax Counsel, each Certificateholder will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned on
the Loans (including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Loans. The Trust
Fund's deductions will consist primarily of interest accruing with respect to
the Notes, servicing and other fees, and losses or deductions upon collection
or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations
and the partnership agreement (here, the Trust Agreement and related
documents). The Trust Agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Trust Fund for each
month equal to the sum of (i) the interest that accrues on the Certificates in
accordance with their terms for such month, including interest accruing at the
Pass-Through Rate for such month and interest on amounts previously due on the
Certificates but not yet distributed; (ii) any Trust Fund income attributable
to discount on the Loans that corresponds to any excess of the principal
amount of the Certificates over their initial issue price (iii) prepayment
premium payable to the Certificateholders for such month; and (iv) any other
amounts of income payable to the Certificateholders for such month. Such
allocation will be reduced by any amortization by the Trust Fund of premium on
Loans that corresponds to any excess of the issue price of Certificates over
their principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Depositor. Based on the economic arrangement of the parties,
in the opinion of Tax Counsel, this approach for allocating Trust Fund income
should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of
income to be allocated to Certificateholders. Moreover, in the opinion of Tax
Counsel, even under the foregoing method of allocation, Certificateholders may
be allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis holders will
in effect be required to report income from the Certificates on the accrual
basis and Certificateholders may become liable for taxes on Trust Fund income
even if they have not received cash from the Trust Fund to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders
may be required to report on their tax returns taxable income that is greater
or less than the amount reported to them by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to
a Certificateholder that is a pension, profit sharing or employee benefit plan
or other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might be
disallowed to the individual in whole or in part and might result in such
holder being taxed on an amount of income that exceeds the amount of cash
actually distributed to such holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to
income and allocations to Certificateholders on an aggregate basis. If the IRS
were to require that such calculations be made separately for each Loan, the
Trust Fund might be required to incur additional expense but it is believed
that there would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining principal balance of the Loans at the time of purchase. If
so, in the opinion of Tax Counsel, the Loan will have been acquired at a
premium or discount, as the case may be. (As indicated above, the Trust Fund
will make this calculation on an aggregate basis, but might be required to
recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as
it accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
SECTION 708 TERMINATION. Pursuant to final Treasury regulations
issued May 9, 1997 under section 708 of the Code a sale or exchange of 50
percent or more of the capital and profits in the issuer entity within a
12-month tax period would cause a deemed contribution of assets of the issuer
entity (the "old partnership") to a new partnership (the "new partnership") in
exchange for interest in the new partnership. Such interests would be deemed
distributed to the partners of the old partnership in liquidation thereof,
which would not constitute a sale or exchange.
DISPOSITION OF CERTIFICATES. Generally, in the opinion of Tax
Counsel, capital gain or loss will be recognized on a sale of Certificates in
an amount equal to the difference between the amount realized and the seller's
tax basis in the Certificates sold. A Certificateholder's tax basis in a
Certificate will generally equal the holder's cost increased by the holder's
share of Trust Fund income (includible in income) and decreased by any
distributions received with respect to such Certificate. In addition, both the
tax basis in the Certificates and the amount realized on a sale of a
Certificate would include the holder's share of the Notes and other
liabilities of the Trust Fund. A holder acquiring Certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in
such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Receivables would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Trust Fund does not expect to have any
other assets that would give rise to such special reporting requirements.
Thus, to avoid those special reporting requirements, the Trust Fund will elect
to include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount
of income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Trust Fund's taxable income and losses will be determined monthly and the tax
items for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates owned
by them as of the close of the last day of such month. As a result, a holder
purchasing Certificates may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Certificateholders.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to reflect
that higher (or lower) basis unless the Trust Fund were to file an election
under section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Trust Fund
will not make such election. As a result, Certificateholders might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and
the fiscal year of the Trust will be the calendar year. The Trustee will file
a partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust Fund and will report each Certificateholder's allocable
share of items of Trust Fund income and expense to holders and the IRS on
Schedule K-1. The Trust Fund will provide the Schedule K-l information to
nominees that fail to provide the Trust Fund with the information statement
described below and such nominees will be required to forward such information
to the beneficial owners of the Certificates. Generally, holders must file tax
returns that are consistent with the information return filed by the Trust
Fund or be subject to penalties unless the holder notifies the IRS of all such
inconsistencies .
Under section 6031 of the Code, any person that holds Certificates as
a nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes (i)
the name, address and taxpayer identification number of the nominee and (ii)
as to each beneficial owner (x) the name, address and identification number of
such person, (y) whether such person is a United States person, a tax-exempt
entity or a foreign government, an international organization, or any wholly
owned agency or instrumentality of either of the foregoing, and (z) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish directly to
the Trust Fund information as to themselves and their ownership of
Certificates. A clearing agency registered under section 17A of the Securities
Exchange Act of 1934, as amended, is not required to furnish any such
information statement to the Trust Fund. The information referred to above for
any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail
to provide the Trust Fund with the information described above may be subject
to penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Trust Fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear
whether the Trust Fund would be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes with
respect to non-U.S. persons because there is no clear authority dealing with
that issue under facts substantially similar to those described herein.
Although it is not expected that the Trust Fund would be engaged in a trade or
business in the United States for such purposes, the Trust Fund will withhold
as if it were so engaged in order to protect the Trust Fund from possible
adverse consequences of a failure to withhold. The Trust Fund expects to
withhold on the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other
foreign holders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Trust to change its
withholding procedures. In determining a holder's withholding status, the
Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust on Form W-8 in order to assure appropriate crediting
of the taxes withheld. A foreign holder generally would be entitled to file
with the IRS a claim for refund with respect to taxes withheld by the Trust
Fund taking the position that no taxes were due because the Trust Fund was not
engaged in a U.S. trade or business. However, interest payments made (or
accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest will not be
considered "portfolio interest." As a result, Certificateholders will be
subject to United States federal income tax and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable treaty. In
such case, a foreign holder would only be entitled to claim a refund for that
portion of the taxes in excess of the taxes that should be withheld with
respect to the guaranteed payments.
BACKUP WITHHOLDING. Distributions made on the Certificates and
proceeds from the sale of the Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Certificateholder fails to comply
with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code. The New Regulations
described herein make certain modifications to the backup withholding and
information reporting rules. The New Regulations will generally be effective
for payments made after December 31, 2000, subject to certain transition
rules. Prospective investors are urged to consult their own tax advisors
regarding the New Regulations.
FASIT SECURITIES
GENERAL. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory
vehicle for the issuance of mortgage-backed and asset-backed securities.
Although the FASIT provisions of the Code became effective on September 1,
1997, no Treasury regulations or other administrative guidance has been issued
with respect to those provisions. Accordingly, definitive guidance cannot be
provided with respect to many aspects of the tax treatment of FASIT
Securityholders. Investors also should note that the FASIT discussions
contained herein constitutes only a summary of the federal income tax
consequences to holders of FASIT Securities. With respect to each Series of
FASIT Securities, the related Prospectus Supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT Securities will be classified as either FASIT Regular
Securities, which generally will be treated as debt for federal income tax
purposes, or FASIT Ownership Securities, which generally are not treated as
debt for such purposes, but rather as representing rights and responsibilities
with respect to the taxable income or loss of the related Series. The
Prospectus Supplement for each Series of Securities will indicate whether one
or more FASIT elections will be made for that Series and which Securities of
such Series will be designated as Regular Securities, and which, if any, will
be designated as Ownership Securities.
QUALIFICATION AS A FASIT. The Trust Fund underlying a Series (or one
or more designated pools of assets held in the Trust Fund) will qualify under
the Code as a FASIT in which the FASIT Regular Securities and the FASIT
Ownership Securities will constitute the "regular interests" and the
"ownership interests," respectively, if (i) a FASIT election is in effect,
(ii) certain tests concerning (A) the composition of the FASIT's assets and
(B) the nature of the Securityholders' interest in the FASIT are met on a
continuing basis, and (iii) the Trust Fund is not a regulated company as
defined in section 851(a) of the Code.
ASSET COMPOSITION. In order for a Trust Fund (on one or more
designated pools of assets held by a Trust Fund) to be eligible for FASIT
status, substantially all of the assets of the Trust Fund (or the designated
pool) must consist of "permitted assets" as of the close of the third month
beginning after the closing date and at all times thereafter (the "FASIT
QUALIFICATION TEST"). Permitted assets include (i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate, (iii) foreclosure property, (iv) certain
hedging instruments (generally, interest and currency rate swaps and credit
enhancement contracts) that are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on FASIT
interests, (v) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments, (vi) FASIT regular interests, and (vii) REMIC
regular interests. Permitted assets do not include any debt instruments issued
by the holder of the FASIT's ownership interest or by any person related to
such holder.
INTERESTS IN A FASIT. In addition to the foregoing asset
qualification requirements, the interests in a FASIT also must meet certain
requirements. All of the interests in a FASIT must belong to either of the
following: (i) one or more classes of regular interests or (ii) a single class
of ownership interest that is held by a fully taxable domestic corporation. In
the case of Series that include FASIT Ownership Securities, the ownership
interest will be represented by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it
is designated as a regular interest, (ii) it has a stated maturity no greater
than thirty years, (iii) it entitles its holder to a specified principal
amount, (iv) the issue price of the interest does not exceed 125% of its
stated principal amount, (v) the yield to maturity of the interest is less
than the applicable Treasury rate published by the IRS plus 5%, and (vi) if it
pays interest, such interest is payable at either (a) a fixed rate with
respect to the principal amount of the regular interest or (b) a permissible
variable rate with respect to such principal amount. Permissible variable
rates for FASIT regular interests are the same as those for REMIC regular
interest (I.E., certain qualified floating rates and weighted average rates).
See "--Taxation of Debt Securities--VARIABLE RAte DEBT SECURITIES" above.
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 "--TREATMENT OF HIGH-YIELD INTERESTs" below.
CONSEQUENCES OF DISQUALIFICATION. If a Series of FASIT Securities
fails to comply with one or more of the Code's ongoing requirements for FASIT
status during any taxable year, the Code provides that its FASIT status may be
lost for that year and thereafter. If FASIT status is lost, the treatment of
the former FASIT and the interests therein for federal income tax purposes is
uncertain. The former FASIT might be treated as a grantor trust, as a separate
association taxed as a corporation, or as a partnership. The FASIT Regular
Securities could be treated as debt instruments for federal income tax
purposes or as equity interests. Although the Code authorizes the Treasury to
issue regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the FASIT's income for a period of time
in which the requirements for FASIT status are not satisfied.
TAX TREATMENT OF FASIT REGULAR SECURITIES. Payments received by
holders of FASIT Regular Securities generally should be accorded the same tax
treatment under the Code as payments received on other taxable corporate debt
instruments and on REMIC Regular Securities. As in the case of holders of
REMIC Regular Securities, holders of FASIT Regular Securities must report
income from such Securities under an accrual method of accounting, even if
they otherwise would have used the case receipts and disbursements method.
Except in the case of FASIT Regular Securities issued with original issue
discount or acquired with market discount or premium, interest paid or accrued
on a FASIT Regular Security generally will be treated as ordinary income to
the Securityholder and a principal payment on such Security will be treated as
a return of capital to the extent that the Securityholder's basis is allocable
to that payment. FASIT Regular Securities issued with OID 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 "--Taxation of Debt Securities", "--Market Discount", and
"--Premium" above. High-Yield Securities may be held only by fully taxable
domestic corporations, other FASITs, and certain securities dealers. Holders
of High-Yield Securities are subject to limitations on their ability to use
current losses or net operating loss carryforwards or carrybacks to offset any
income derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "--Sale or Exchange" above. 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 "--Taxation of Debt
INSTRUMENTS--EFFECTS OF DEFAULT AND DELINQUENCIES" above.
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 section 7701(a)(19) of the Code to the
same extent that REMIC Securities would be so considered. See "Certain
Material Federal Income Tax Considerations--Taxation of Debt
Securities--STATUS AS REAL PROPERTY LOANs." In addition, FASIT Regular
Securities held by a financial institution to which section 585 of the Code
applies will be treated as evidences of indebtedness for purposes of section
582(c)(1) of the Code. FASIT Securities will not qualify as "Government
Securities" for either REIT or RIC qualification purposes.
TREATMENT OF HIGH-YIELD INTERESTS. High-Yield Interests are subject
to special rules regarding the eligibility of holders of such interests, and
the ability of such holders to offset income derived from their FASIT Security
with losses. High-Yield Interests may be held only by Eligible Corporations
other FASITs, and dealers in securities who acquire such interests as
inventory. If a securities dealer (other than an Eligible Corporation)
initially acquires a High-Yield Interest as inventory, but later begins to
hold it for investment, the dealer will be subject to an excise tax equal to
the income from the High-Yield Interest multiplied by the highest corporate
income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular Federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT Regular Security and that have the same features as High-Yield
Interests.
TAX TREATMENT OF FASIT OWNERSHIP SECURITIES. A FASIT Ownership
Security represents the residual equity interest in a FASIT. As such, the
holder of a FASIT Ownership Security determines its taxable income by taking
into account all assets, liabilities and items of income, gain, deduction,
loss and credit of a FASIT. In general, the character of the income to the
holder of a FASIT Ownership Interest will be the same as the character of such
income of the FASIT, except that any tax-exempt interest income taken into
account by the holder of a FASIT Ownership Interest is treated as ordinary
income. In determining that taxable income, the holder of a FASIT Ownership
Security must determine the amount of interest, original issue discount,
market discount and premium recognized with respect to the FASIT's assets and
the FASIT Regular Securities issued by the FASIT according to a constant yield
methodology and under an accrual method of accounting. In addition, holders of
FASIT Ownership Securities are subject to the same limitations on their
ability to use losses to offset income from their FASIT Security as are the
holders of High-Yield Interests. See "--TREATMENT OF HIGH-YIELD INTERESTs"
above.
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 "--Miscellaneous Tax
Aspects--BACKUP WITHHOLDINg" above. For purposes of reporting and tax
administration, holders of record of FASIT Securities generally will be
treated in the same manner as holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Certain Material Federal Income Tax Considerations," potential investors
should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the Securities. State and local
income tax law may differ substantially from the corresponding federal law,
and this discussion does not purport to describe any aspect of the income tax
laws of any state or locality. Therefore, potential investors should consult
their own tax advisors with respect to the various state and local tax
consequences of an investment in the Securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the
Code, which apply only to Securities of a Series that are not divided into
subclasses. If Securities are divided into subclasses the related Prospectus
Supplement will contain information concerning considerations relating to
ERISA and the Code that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively "PLANS") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Generally, ERISA applies to investments made by
Plans. Among other things, ERISA requires that the assets of Plans be held in
trust and that the trustee, or other duly authorized fiduciary, have exclusive
authority and discretion to manage and control the assets of such Plans. ERISA
also imposes certain duties on persons who are fiduciaries of Plans. Under
ERISA, any person who exercises any authority or control respecting the
management or disposition of the assets of a Plan is considered to be a
fiduciary of such Plan (subject to certain exceptions not here relevant).
Certain employee benefit plans, such as governmental plans (as defined in
ERISA Section 3(32)) and, if no election has been made under Section 410(d) of
the Code, church plans (as defined in ERISA Section 3(33)), are not subject to
ERISA requirements. Accordingly, assets of such plans may be invested in
Securities without regard to the ERISA considerations described above and
below, subject to the provisions of applicable state law. Any such plan which
is qualified and exempt from taxation under Code Sections 401(a) and 501(a),
however, is subject to the prohibited transaction rules set forth in Code
Section 503.
OnNovember 13, 1986, the United States Department of Labor (the
"DOL") issued final regulations concerning the definition of what constitutes
the assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation,
the underlying assets and properties of corporations, partnerships and certain
other entities in which a Plan makes an "equity" investment could be deemed
for purposes of ERISA to be assets of the investing Plan in certain
circumstances. However, the regulation provides that, generally, the assets of
a corporation or partnership in which a Plan invests will not be deemed for
purposes of ERISA to be assets of such Plan if the equity interest acquired by
the investing Plan is a publicly-offered security. A publicly-offered
security, as defined in the Labor Reg. Section 2510.3-101, is a security that
is widely held, freely transferable and registered under the Securities
Exchange Act of 1934, as amended.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("PARTIES IN INTEREST") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan. Because
the Loans may be deemed Plan assets of each Plan that purchases Securities, an
investment in the Securities by a Plan might be a prohibited transaction under
ERISA Sections 406 and 407 and subject to an excise tax under Code Section
4975 unless a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's
prohibited transaction rules certain transactions relating to the operation of
residential mortgage pool investment trusts and the purchase, sale and holding
of "mortgage pool pass-through certificates" in the initial issuance of such
certificates. PTE 83-1 permits, subject to certain conditions, transactions
which might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans related to the origination, maintenance and termination
of mortgage pools consisting of mortgage loans secured by first or second
mortgages or deeds of trust on single-family residential property, and the
acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans. If the general
conditions (discussed below) of PTE 83-1 are satisfied, investments by a Plan
in Securities that represent interests in a Pool consisting of Loans ("SINGLE
FAMILY SECURITIES") will be exempt from the prohibitions of ERISA Sections
406(a) and 407 (relating generally to transactions with Parties in Interest
who are not fiduciaries) if the Plan purchases the Single Family Securities at
no more than fair market value and will be exempt from the prohibitions of
ERISA Sections 406(b)(1) and (2) (relating generally to transactions with
fiduciaries) if, in addition, the purchase is approved by an independent
fiduciary, no sales commission is paid to the pool sponsor, the Plan does not
purchase more than 25% of all Single Family Securities, and at least 50% of
all Single Family Securities are purchased by persons independent of the pool
sponsor or pool trustee. PTE 83-1 does not provide an exemption for
transactions involving Subordinate Securities. Accordingly, unless otherwise
provided in the related Prospectus Supplement, no transfer of a Subordinate
Security or a Security which is not a Single Family Security may be made to a
Plan.
The discussion in this and the next succeeding paragraph applies only
to Single Family Securities. The Depositor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include: (i)
Securities issued in a Series consisting of only a single class of Securities;
and (ii) Securities issued in a Series in which there is only one class of
Trust Securities; provided that the Securities in the case of clause (i), or
the Securities in the case of clause (ii), evidence the beneficial ownership
of both a specified percentage of future interest payments (greater than 0%)
and a specified percentage (greater than 0%) of future principal payments on
the Loans. It is not clear whether a class of Securities that evidences the
beneficial ownership in a Trust Fund divided into Loan groups, beneficial
ownership of a specified percentage of interest payments only or principal
payments only, or a notional amount of either principal or interest payments,
or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events would be a "mortgage pass-through
certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Securityholders against
reductions in pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of the
aggregate principal balance of all covered pooled mortgage loans or the
principal balance of the largest covered pooled mortgage loan; (ii) the
existence of a pool trustee who is not an affiliate of the pool sponsor; and
(iii) a limitation on the amount of the payment retained by the pool sponsor,
together with other funds inuring to its benefit, to not more than adequate
consideration for selling the mortgage loans plus reasonable compensation for
services provided by the pool sponsor to the Pool. The Depositor believes that
the first general condition referred to above will be satisfied with respect
to the Securities in a Series issued without a subordination feature, or the
Securities only in a Series issued with a subordination feature, provided that
the subordination and Reserve Account, subordination by shifting of interests,
the pool insurance or other form of credit enhancement described herein (such
subordination, pool insurance or other form of credit enhancement being the
system of insurance or other protection referred to above) with respect to a
Series of Securities is maintained in an amount not less than the greater of
one percent of the aggregate principal balance of the Loans or the principal
balance of the largest Loan. See "Description of the Securities" herein. In
the absence of a ruling that the system of insurance or other protection with
respect to a Series of Securities satisfies the first general condition
referred to above, there can be no assurance that these features will be so
viewed by the DOL.
The Trustee will not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTE 83-1 have been satisfied, or as to the
availability of any other prohibited transaction exemptions. Each Plan
fiduciary should also determine whether, under the general fiduciary standards
of investment prudence and diversification, an investment in the Securities is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio.
On September 6, 1990, the DOL issued to Greenwich Capital Markets,
Inc. an individual exemption (Prohibited Transaction Exemption 90-59;
Exemption Application No. D-8374, 55 Fed. Reg. 36724) (the "UNDERWRITER
EXEMPTION") which applies to certain sales and servicing of "certificates"
that are obligations of a "trust" with respect to which Greenwich Capital
Markets, Inc. is the underwriter, manager or co-manager of an underwriting
syndicate. The Underwriter Exemption provides relief which is generally
similar to that provided by PTE 83-1, but is broader in several respects.
The Underwriter Exemption contains several requirements, some of
which differ from those in PTE 83-l. The Underwriter Exemption contains an
expanded definition of "certificate" which includes an interest which entitles
the holder to pass-through payments of principal, interest and/or other
payments. The Underwriter Exemption contains an expanded definition of "trust"
which permits the trust corpus to consist of secured consumer receivables. The
definition of "trust", however, does not include any investment pool unless,
inter alia, (i) the investment pool consists only of assets of the type which
have been included in other investment pools, (ii) certificates evidencing
interests in such other investment pools have been purchased by investors
other than Plans for at least one year prior to the Plan's acquisition of
certificates pursuant to the Underwriter Exemption, and (iii) certificates in
such other investment pools have been rated in one of the three highest
generic rating categories of the four credit rating agencies noted below.
Generally, the Underwriter Exemption holds that the acquisition of the
certificates by a Plan must be on terms (including the price for the
certificates) that are at least as favorable to the Plan as they would be in
an arm's length transaction with an unrelated party. The Underwriter Exemption
requires that the rights and interests evidenced by the certificates not be
"subordinated" to the rights and interests evidenced by other certificates of
the same trust. The Underwriter Exemption requires that certificates acquired
by a Plan have received a rating at the time of their acquisition that is in
one of the three highest generic rating categories of Standard & Poor's, a
division of the McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc., (the "Exemption Rating
Agencies"). The Underwriter Exemption specifies that the pool trustee must not
be an affiliate of the pool sponsor, nor an affiliate of the Underwriter, the
pool servicer, any obligor with respect to mortgage loans included in the
trust constituting more than five percent of the aggregate unamortized
principal balance of the assets in the trust, or any affiliate of such
entities. Finally, the Underwriter Exemption stipulates that any Plan
investing in the certificates must be an "accredited investor" as defined in
Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933.
Any Plan fiduciary which proposes to cause a Plan to purchase
Securities should consult with its counsel concerning the impact of ERISA and
the Code, the applicability of PTE 83-1 and the Underwriter Exemption, and the
potential consequences in its specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Exemption which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans (the "Obligations") supporting payments to
certificateholders, and having a value equal to no more than twenty-five
percent (25%) of the total principal amount of the certificates being offered
by the trust, to be transferred to the trust within a 90-day or three-month
period following the closing date ("Pre-Funding Period"), instead of requiring
that all such Obligations be either identified or transferred on or before the
closing date. The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account
to the total principal amount of the certificates being offered
(the "PRE-FUNDING LIMIT") must not exceed twenty-five percent
(25%).
(2) All Obligations transferred after the closing date (the
"ADDITIONAL OBLIGATIONS") must meet the same terms and
conditions for eligibility as the original Obligations used to
create the trust, which terms and conditions have been approved
by an Exemption Rating Agency.
(3) The transfer of such Additional Obligations to the trust
during the Pre-Funding Period must not result in the
certificates to be covered by the Exemption receiving a lower
credit rating from an Exemption Rating Agency upon termination
of the Pre-Funding Period than the rating that was obtained at
the time of the initial issuance of the certificates by the
trust.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the AVERAGE INTEREST
RATE") for all of the Obligations in the trust at the end of the
Pre-Funding Period must not be more than 100 basis points lower
than the average interest rate for the Obligations which were
transferred to the trust on the closing date.
(5) Either:
(i) the characteristics of the Additional Obligations
must be monitored by an insurer or other credit support provider
which is independent of the depositor; or
(ii) an independent accountant retained by the
depositor must provide the depositor with a letter (with copies
provided to each Exemption Rating Agency rating the
certificates, the related underwriter and the related trustee)
stating whether or not the characteristics of the Additional
Obligations conform to the characteristics described in the
related prospectus or prospectus supplement and/or pooling and
servicing agreement. In preparing such letter, the independent
accountant must use the same type of procedures as were
applicable to the Obligations which were transferred to the
trust as of the closing date.
(6) The Pre-Funding Period must end no later than three months
or 90 days after the closing date or earlier in certain
circumstances if the pre-funding account falls below the minimum
level specified in the pooling and servicing agreement or an
event of default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the
pre-funding may be invested only in investments which are
permitted by the Exemption Rating Agencies rating the
certificates and must:
(i) be direct obligations of, or obligations fully
guaranteed as to timely payment of principal and interest by,
the United States or any agency or instrumentality thereof
(provided that such obligations are backed by the full faith and
credit of the United States); or
(ii) have been rated (or the obligor has been rated)
in one or the three highest generic rating categories by an
Exemption Rating Agency ("DOL PERMITTED INVESTMENTS").
(8) The related prospectus or prospectus supplement must
describe:
(i) any pre-funding account and/or capitalized
interest account used in connection with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the
Pre-Funding Limit for the trust; and
(iv) that the amounts remaining in the pre-funding
account at the end of the Pre-Funding Period will be remitted to
certificateholders as repayments of principal.
(9) The related pooling and servicing agreement must describe
the DOL Permitted Investments for the pre-funding account and/or
capitalized interest account and, if not disclosed in the
related prospectus or prospectus supplement, the terms and
conditions for eligibility of Additional Obligations.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify
which, if any, of the classes of Securities offered thereby constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of Securities that qualify as
"mortgage related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts, and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulations to the same
extent as, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any such entities. Under SMMEA,
if a state enacted legislation prior to October 4, 1991 specifically limiting
the legal investment authority of any such entities with respect to "mortgage
related securities", securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Approximately
twenty-one states adopted such legislation prior to the October 4, 1991
deadline. SMMEA provides, however, that in no event will the enactment of any
such legislation affect the validity of any contractual commitment to
purchase, hold or invest in securities, or require the sale or other
disposition of securities, so long as such contractual commitment was made or
such securities were acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and
loan associations and federal savings banks may invest in, sell or otherwise
deal in Securities without limitations as to the percentage of their assets
represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase certificates for their own account
without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal authority may prescribe. In this
connection, federal credit unions should review the National Credit Union
Administration ("NCUA") Letter to Credit Unions No. 96, as modified by Letter
to Credit Unions No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities and the
NCUA's regulation "Investment and Deposit Activities" (12 C.F.R. Part 703),
which sets forth certain restrictions on investment by federal credit unions
in mortgage related securities.
All depository institutions considering an investment in the
Securities (whether or not the class of Securities under consideration for
purchase constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on
the Securities Activities (to the extent adopted by their respective
regulators) (the "POLICY STATEMENT") setting forth, in relevant part, certain
securities trading and sales practices deemed unsuitable for an institution's
investment portfolio, and guidelines for (and restrictions on) investing in
mortgage derivative products, including "mortgage related securities", which
are "high-risk mortgage securities" as defined in the Policy Statement.
According to the Policy Statement such "high-risk mortgage securities" include
securities such as Securities not entitled to distributions allocated to
principal or interest, or Subordinated Securities. Under the Policy Statement,
it is the responsibility of each depository institution to determine, prior to
purchase (and at stated intervals thereafter), whether a particular mortgage
derivative product is a "high-risk mortgage security", and whether the
purchase (or retention) of such a product would be consistent with the Policy
Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to "prudent investor" provisions which may restrict or prohibit
investment in securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depositors institutions, either to purchase Securities or to
purchase Securities representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Securities constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will
be offered in Series. The distribution of the Securities may be effected from
time to time in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices to be determined at the
time of sale or at the time of commitment therefor. If so specified in the
related Prospectus Supplement, the Securities will be distributed in a firm
commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Greenwich Capital Markets, Inc. ("GCM") acting as
underwriter with other underwriters, if any, named therein. In such event, the
related Prospectus Supplement may also specify that the underwriters will not
be obligated to pay for any Securities agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Depositor. In connection
with the sale of the Securities, underwriters may receive compensation from
the Depositor or from purchasers of the Securities in the form of discounts,
concessions or commissions. The related Prospectus Supplement will describe
any such compensation paid by the Depositor.
Alternatively, the related Prospectus Supplement may specify that the
Securities will be distributed by GCM acting as agent or in some cases as
principal with respect to Securities that it has previously purchased or
agreed to purchase. If GCM acts as agent in the sale of Securities, GCM will
receive a selling commission with respect to each Series of Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related Trust Fund Assets as of the Cut-off Date. The
exact percentage for each Series of Securities will be disclosed in the
related Prospectus Supplement. To the extent that GCM elects to purchase
Securities as principal, GCM may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of
Securities of such Series.
The Depositor will indemnify GCM and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments GCM and any underwriters may be required to make
in respect thereof.
In the ordinary course of business, GCM and the Depositor may engage
in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's loans or private
asset backed securities, pending the sale of such loans or private asset
backed securities, or interests therein, including the Securities.
The Depositor anticipates that the Securities will be sold primarily
to institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Holders of Securities should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Securities of each Series, including certain
material federal income tax consequences with respect thereto, will be passed
upon for the Depositor by Brown & Wood LLP, New York, New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
AVAILABLE INFORMATION
The Depositor has filed with the SEC a Registration Statement under
the Securities Act of 1933, as amended, with respect to the Securities. This
Prospectus, which forms a part of the Registration Statement, and the
Prospectus Supplement relating to each Series of Securities contain summaries
of the material terms of the documents referred to herein and therein, but do
not contain all of the information set forth in the Registration Statement
pursuant to the Rules and Regulations of the SEC. For further information,
reference is made to such Registration Statement and the exhibits thereto.
Such Registration Statement and exhibits can be inspected and copied at
prescribed rates at the public reference facilities maintained by the SEC at
its Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at its Regional Offices located as follows: Midwest Regional Office, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and Northeast
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048.
In addition, the SEC maintains a Web site at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants, including the Depositor, that file electronically with the
Commission.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been
rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies (each, a "RATING AGENCY")
specified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy
of the value of the Trust Fund Assets and any credit enhancement with respect
to such class and will reflect such Rating Agency's assessment solely of the
likelihood that holders of a class of Securities of such class will receive
payments to which such Securityholders are entitled under the related
Agreement. Such rating will not constitute an assessment of the likelihood
that principal prepayments on the related Loans will be made, the degree to
which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination of the Series of
Securities. Such rating should not be deemed a recommendation to purchase,
hold or sell Securities, inasmuch as it does not address market price or
suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield
or that an investor purchasing a Security at a significant premium might fail
to recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn
entirely by the Rating Agency in the future if in its judgment circumstances
in the future so warrant. In addition to being lowered or withdrawn due to any
erosion in the adequacy of the value of the Trust Fund Assets or any credit
enhancement with respect to a Series, such rating might also be lowered or
withdrawn among other reasons, because of an adverse change in the financial
or other condition of a credit enhancement provider or a change in the rating
of such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any,
established with respect to a Series of Securities will be determined on the
basis of criteria established by each Rating Agency rating classes of such
Series. Such criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. Such analysis is often the basis
upon which each Rating Agency determines the amount of credit enhancement
required with respect to each such class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately reflect
future experience nor any assurance that the data derived from a large pool of
mortgage loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of Loans. No assurance can be given that
values of any Properties have remained or will remain at their levels on the
respective dates of origination of the related Loans. If the residential real
estate markets should experience an overall decline in property values such
that the outstanding principal balances of the Loans in a particular Trust
Fund and any secondary financing on the related Properties become equal to or
greater than the value of the Properties, the rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry. In additional, adverse economic conditions
(which may or may not affect real property values) may affect the timely
payment by mortgagors of scheduled payments of principal and interest on the
Loans and, accordingly, the rates of delinquencies, foreclosures and losses
with respect to any Trust Fund. To the extent that such losses are not covered
by credit enhancement, such losses will be borne, at least in part, by the
holders of one or more classes of the Securities of the related Series.
INDEX OF DEFINED TERMS
Accrual Securities...........................................................21
Additional Obligations.......................................................82
Agreement....................................................................10
APR..........................................................................13
Asset Conservation Act.......................................................49
Available Funds..............................................................20
Average Interest Rate........................................................82
Bankruptcy Bond..............................................................29
BIF..........................................................................36
Book-Entry Securities........................................................24
Cash Flow Bond Method........................................................69
Cede.........................................................................24
CEDEL........................................................................24
CEDEL Participants...........................................................25
CERCLA.......................................................................48
Certificates.................................................................10
Code.........................................................................58
Collateral Value.............................................................13
Combined Loan-to-Value Ratio.................................................13
Contingent Regulations.......................................................60
Cooperative..................................................................26
Cut-off Date.................................................................10
Debt Securities..............................................................59
Definitive Security..........................................................24
Detailed Description.........................................................11
Determination Date...........................................................20
DOL..........................................................................80
DOL Permitted Investments....................................................83
DTC..........................................................................24
Eligible Corporations........................................................77
Euroclear....................................................................24
Euroclear Participants.......................................................26
European Depositaries........................................................24
FASCO........................................................................15
FASIT Qualification Test.....................................................77
FDIC.........................................................................36
Financial Intermediary.......................................................25
Garn-St. Germain Act.........................................................51
GCM..........................................................................84
High-Yield Interest..........................................................77
Home Equity Loans............................................................11
Home Improvement Contracts...................................................11
Home Improvements............................................................11
HUD..........................................................................31
Indenture....................................................................18
Installment Contract.........................................................53
Insurance Proceeds...........................................................38
Insured Expenses.............................................................38
Interest Weighted Securities.................................................62
IO 77
IRS..........................................................................60
Liquidation Expenses.........................................................37
Liquidation Proceeds.........................................................37
Loan Rate....................................................................12
Mark-to-Market Regulations...................................................67
Mortgage.....................................................................35
NCUA.........................................................................84
New Regulations..............................................................70
Nonresidents.................................................................70
Notes........................................................................10
Obligations..................................................................83
OID..........................................................................59
OID Regulations..............................................................59
PABS Agreement...............................................................14
PABS Issuer..................................................................14
PABS Servicer................................................................14
PABS Trustee.................................................................14
Participants.................................................................24
Parties in Interest..........................................................80
Pass-Through Rate............................................................10
Pass-Through Securities......................................................67
Pay-Through Security.........................................................61
Permitted Investments........................................................37
Plans........................................................................80
Policy Statement.............................................................84
Pool.........................................................................10
Pool Insurance Policy........................................................29
Pool Insurer.................................................................29
Pooling and Servicing Agreement..............................................18
Pre-Funded Amount............................................................38
Pre-Funding Account..........................................................38
Pre-Funding Limit............................................................82
Pre-Funding Period...........................................................82
Premium......................................................................56
Prepayment Assumption........................................................61
Primary Insurer..............................................................41
Principal Prepayments........................................................22
Properties...................................................................11
Property Improvement Loans...................................................55
PTE 83-1.....................................................................80
Purchase Price...............................................................17
Rating Agency................................................................86
Ratio Strip Securities.......................................................68
RCRA.........................................................................49
Record Date..................................................................19
Refinance Loan...............................................................13
Regular Interest Securities..................................................59
Relevant Depositary..........................................................24
Relief Act...................................................................54
REMIC........................................................................19
Reserve Account..............................................................20
Residual Interest Security...................................................65
Retained Interest............................................................18
Rules........................................................................25
SAIF.........................................................................36
SEC..........................................................................15
Security Account.............................................................37
Security Owners..............................................................24
Security Register............................................................19
Sellers......................................................................10
Senior Securities............................................................27
Servicing Agreement .........................................................10
Servicing Fee................................................................67
Short-Term Note..............................................................73
Single Family Properties.....................................................11
Single Family Securities.....................................................82
Small Mixed-Use Properties...................................................13
SMMEA........................................................................85
Special Hazard Insurance Policy..............................................28
Special Hazard Insurer.......................................................28
Stripped Securities..........................................................67
Sub-Servicers................................................................10
Sub-Servicing Account........................................................36
Sub-Servicing Agreement......................................................38
Support Agreement............................................................23
Support Servicer.............................................................23
Tax Counsel..................................................................58
Terms and Conditions.........................................................26
TIN..........................................................................71
Title I Loans................................................................55
Title I Program..............................................................55
Title V......................................................................52
Trust Agreement..............................................................10
Trust Fund...................................................................10
Trust Fund Assets............................................................10
Trustee......................................................................18
U.S. Person..................................................................59
UCC..........................................................................52
Underwriter Exemption........................................................81
VA Guaranty Policy...........................................................31