FILED PURSANT TO RULE 424(B)5
FILE NO. 333-15539
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 20, 1997)
$996,964,000
(Approximate)
MERIT SECURITIES CORPORATION
Collateralized Bonds, Series 9
The Collateralized Bonds, Series 9 (the "Bonds"), will be secured, to the
extent described herein, by loans having, as of June 1, 1997 (the "Cut-off
Date"), an aggregate Scheduled Principal Balance of approximately $1,006,263,000
and a weighted average remaining term to stated maturity of approximately 333
months. Approximately 91% of the Loans are expected to be adjustable rate loans,
and approximately 9% of the Loans are expected to be level payment loans. MERIT
Securities Corporation (the "Issuer") will acquire the Collateral from Issuer
Holding Corp. (the "Participant").
Principal of and interest on the Bonds are payable on or about the 28th day
of each month, beginning July 28, 1997. Payments of interest at the Class
Interest Rates on each Payment Date will include interest accrued through the
applicable Accrual Period (as defined herein). Principal payments on the Bonds
will be allocated as described herein.
FOR A DISCUSSION OF CERTAIN SIGNIFICANT MATTERS AFFECTING AN INVESTMENT IN
THE BONDS, SEE "RISK FACTORS" ON PAGE 6 OF THE PROSPECTUS AND ON PAGE S-12
HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
[CAPTION]
Original Principal Class Interest Weighted Average Life Stated Maturity CUSIP
Amount(1) Rate at Pricing Speed(4) Date(5) Number
Class A-1 $775,000,000 (2) 2.4 years June 28, 2031 589962 BB4
Class A-2 $121,000,000 (2) 7.4 years June 28, 2031 589962 BC2
Class A-3 $ 32,120,000 (3) 9.8 years June 28, 2031 589962 BD0
Class B-1 $ 43,346,000 (3) 11.9 years June 28, 2031 589962 BE8
Class B-2 $ 15,298,000 (2) 14.7 years June 28, 2031 589962 BF5
Class B-3 $ 10,200,000 (2) 17.2 years June 28, 2031 589962 BG3
(1) Subject to a permitted variance of plus or minus 5% depending on the
Collateral actually pledged to secure the Bonds.
(2) The Class Interest Rates for the Class A-1, Class A-2, Class B-2 and
Class B-3 Bonds will initially equal, subject to the Applicable Cap, the per
annum rate equal to One-Month LIBOR, as determined on the applicable Floating
Rate Determination Date, plus, in each case, the Applicable Spread, accrued
during the applicable Accrual Period on the outstanding principal balance of the
Class A-1, Class A-2, Class B-2 and Class B-3 Bonds, respectively, immediately
prior to such Payment Date. The Applicable Spread is initially 0.40% for the
Class A-1 Bonds, 0.55% for the Class A-2 Bonds, 1.00% for the Class B-2 Bonds
and 1.75% for the Class B-3 Bonds. The Applicable Cap is 10.00% per annum for
the Class A-1 and Class A-2 Bonds, 10.50% per annum for the Class B-2 Bonds and
11.00% per annum for the Class B-3 Bonds. For the initial Payment Date, the
Class Interest Rates per annum will be 6.0875% for the Class A-1 Bonds, 6.2375%
for the Class A-2 Bonds, 6.6875% for the Class B-2 Bonds, and 7.4375% for the
Class B-3 Bonds. If the Issuer does not exercise its option to redeem the Bonds
when it is first permitted to do so, the Applicable Spread and Applicable Cap
will be increased as described herein.
(3) The Class Interest Rates for the Class A-3 and Class B-1 Bonds will be
calculated as described herein.
(4) Determined on the basis of an assumed pricing speed of 21% CPR (as
described herein), the assumption that there is no optional redemption of the
Bonds, and the other assumptions set forth herein under "Maturity and Prepayment
Considerations." Based on the same assumptions, but assuming optional
redemption, the approximate weighted average life would be 2.2 years for the
Class A-1 Bonds, 4.3 years for the Class A-2 Bonds, 4.3 years for the Class A-3
Bonds, 4.3 years for the Class B-1 Bonds, 4.3 years for the Class B-2 Bonds and
4.3 years for the Class B-3 Bonds.
(5) Determined on the basis of the assumptions set forth herein under
"Summary of Terms -- Stated Maturity Date."
The Class A-1, Class A-2 and Class B-2 Bonds will be purchased from the
Issuer and will be offered by the Underwriters from time to time to the public
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Affiliates of the Participant have agreed to purchase or
retain the Class A-3, Class B-1 and Class B-3 Bonds and may, from time to time,
offer the Class A-3, Class B-1 and Class B-3 Bonds for sale to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Issuer from the sale of the Bonds (based on the
Original Principal Amounts set forth above) are anticipated to be approximately
$993,140,784 before deducting expenses payable by the Issuer, estimated to be
approximately $300,000.
The Class A-1, Class A-2 and Class B-2 Bonds are offered when, as and if
delivered to and accepted by the Underwriters, subject to prior sale, withdrawal
or modification of the offer without notice, the approval of counsel and other
conditions. It is expected that delivery of the Bonds will be made only in
book-entry form through the book-entry facilities of The Depository Trust
Company, CEDEL and Euroclear on or about June 25, 1997.
LEHMAN BROTHERS WHEAT FIRST BUTCHER SINGER
The date of this Prospectus Supplement is June 20, 1997
There is currently no secondary market for the Bonds. The
Underwriters intend to establish a market in the Class A-1, Class A-2 and Class
B-2 Bonds but are not obligated to do so. There is no assurance that any such
market, if established, will continue or that any investor will be able to
sell any of such Bonds at a price equal to or greater than the price at which
they were purchased. It is not expected that there will be a secondary market
for the Class A-3, Class B-1 and Class B-3 Bonds.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY OF TERMS.....................................................S-1
RISK FACTORS........................................................S-12
Delinquencies................................................S-12
Cooperative Loans; Unrecognized Security Interests...........S-12
Credit Considerations Regarding Collateral for the Loans.....S-12
Loan Concentration...........................................S-12
Interest-Only Payments.......................................S-12
High Balance Loans...........................................S-12
Uncertain Timing of Principal................................S-13
Limited Recourse.............................................S-13
Non-Recourse.................................................S-13
The Status of the Loans in the Event of Insolvency...........S-13
DESCRIPTION OF THE BONDS............................................S-13
General......................................................S-13
Book-Entry Bonds.............................................S-14
The Trustee and Custodian....................................S-15
Payments of Principal and Interest...........................S-15
Issuance of Additional Subordinated Bonds....................S-20
Events of Default............................................S-20
Losses.......................................................S-21
Stated Maturity Date.........................................S-21
Optional Redemption..........................................S-21
SECURITY FOR THE BONDS..............................................S-22
The Collateral...............................................S-22
The Loans....................................................S-22
Selected Loan Data...........................................S-24
Mortgage Pool and Other Insurance for the Underlying
Mortgage Loans..........................................S-25
Additional Collateral........................................S-25
Cooperative Loans............................................S-25
Realizing Upon Cooperative Loan Security.....................S-26
Additional Information.......................................S-27
Substitution of Loans........................................S-27
Delivery of Mortgage Loans...................................S-28
Conversion Option............................................S-28
SERVICING OF THE COLLATERAL.........................................S-29
General......................................................S-29
Loan Servicing Activities....................................S-29
Advances.....................................................S-31
Forbearance and Modification Agreements......................S-32
Events of Default............................................S-32
Master Servicers.............................................S-32
Servicing and Other Compensation and Payment of Expenses.....S-32
Special Servicer.............................................S-33
MATURITY AND PREPAYMENT CONSIDERATIONS..............................S-33
Weighted Average Life of the Bonds...........................S-33
Factors Affecting Prepayments on the Loans...................S-33
Modeling Assumptions.........................................S-35
YIELD CONSIDERATIONS................................................S-38
General......................................................S-38
Subordination of the Class B-1, Class B-2 and
Class B-3 Bonds.........................................S-39
USE OF PROCEEDS.....................................................S-39
UNDERWRITING........................................................S-39
LEGAL MATTERS.......................................................S-40
RATINGS.............................................................S-40
ERISA CONSIDERATIONS................................................S-41
Annex I..............................................................I-1
The Class B-1, Class B-2 and Class B-3 Bonds are subordinate to the
Senior Bonds to the extent described herein. Investors should consider that, as
a result of such subordination, losses with respect to the Loans to the extent
not covered by the Overcollateralization Amount will be allocated to the Class
B-3, Class B-2 and Class B-1 Bonds (in that order) before any allocation of
losses is made to the Class A-1, Class A-2 and Class A-3 Bonds.
NEITHER THE COLLATERAL NOR THE BONDS WILL BE GUARANTEED OR INSURED
BY ANY GOVERNMENTAL AGENCY, THE ISSUER, THE PARTICIPANT, ANY AFFILIATE OF THE
PARTICIPANT, THE BOND ADMINISTRATOR, ANY MASTER SERVICER, ANY SERVICER, THE
TRUSTEE OR ANY OTHER PERSON. PAYMENTS ON THE BONDS WILL BE PAYABLE SOLELY FROM
THE COLLATERAL PLEDGED TO SECURE THE BONDS. THERE WILL BE NO RECOURSE TO THE
ISSUER OR ANY OTHER PERSON FOR ANY DEFAULT ON THE BONDS, EXCEPT AS SPECIFICALLY
SET FORTH HEREIN.
The Bonds offered by this Prospectus Supplement are part of a Series
of Collateralized Bonds being offered by the Issuer from time to time pursuant
to its Prospectus dated June 20, 1997, of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. The Prospectus contains
important information about the offering of the Bonds that is not contained
herein, and prospective investors are urged to read both this Prospectus
Supplement and the Prospectus in full. Sales of the Bonds may not be consummated
unless the purchaser has received both this Prospectus Supplement and the
Prospectus.
SUMMARY OF TERMS
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT, IN THE
ATTACHED PROSPECTUS AND IN THE INDENTURE (AS DEFINED BELOW). WHENEVER REFERENCE
IS MADE HEREIN TO A PERCENTAGE OF THE LOANS OR TO THE CHARACTERISTICS OF THE
LOANS, THE CALCULATION IS BASED ON THE PROJECTED SCHEDULED PRINCIPAL BALANCE OF
THE LOANS AS OF THE CUT-OFF DATE. WHENEVER REFERENCE IS MADE HEREIN TO THE
PRINCIPAL BALANCE OF THE BONDS, THE BALANCE IS CALCULATED BASED ON THE
OUTSTANDING PRINCIPAL BALANCE OF THE BONDS AS OF THE MOST RECENT PAYMENT DATE OR
THE CLOSING DATE, AS APPLICABLE. CAPITALIZED TERMS USED AND NOT DEFINED HEREIN
OR IN THE PROSPECTUS HAVE THE MEANINGS ASSIGNED TO THEM IN THE GLOSSARY
CONTAINED IN THE PROSPECTUS.
ISSUER.......................................... MERIT Securities
Corporation (the
"Issuer"), a limited
purpose finance
subsidiary of Issuer
Holding Corp. (the
"Participant"). See "The
Issuer" in the Prospectus.
THE BONDS....................................... Collateralized Bonds,
Series 9 (the "Bonds").
The Bonds will consist of
the following Classes:
APPROXIMATE ORIGINAL
CLASS DESIGNATION PRINCIPAL AMOUNT
Class A-1 Bonds Senior Bonds $775,000,000
Class A-2 Bonds Senior Bonds $121,000,000
Class A-3 Bonds Senior Bonds $32,120,000
Class B-1 Bonds Subordinated Bonds $43,346,000
Class B-2 Bonds Subordinated Bonds $15,298,000
Class B-3 Bonds Subordinated Bonds $10,200,000
The original principal
amount of each Class of
Bonds may be increased or
decreased by up to 5% on
the Closing Date,
depending upon the
Collateral actually
acquired by the Issuer and
pledged to the Trustee.
BOND PAYMENT STRUCTURE
CONSIDERATIONS................................ Unlike standard
corporate bonds, the
timing and amount of
principal payments on the
Bonds are not fixed and
will be determined by,
among other things, the
timing and amount of
principal payments
(including prepayments,
defaults, liquidations
and repurchases) on the
Loans, the timing and
amount of losses realized
on the Loans and the
principal payment
structure (including
redemption provisions) of
the Bonds. The timing and
amount of principal
payments on the Loans will
be affected by a variety
of economic, geographic,
legal, tax, and social
factors primarily
because the Loans are
generally prepayable by
the borrowers at any time.
Loan prepayments also
are affected by default
rates. See "Risk
Factors--Uncertain Timing
of Principal" and
"--Limited Recourse",
"Maturity and PrepaymenT
Considerations" and "Yield
Considerations" herein.
INDENTURE....................................... The Bonds will be issued
pursuant to an indenture
supplement to be dated as
of June 1, 1997 (the
"Indenture Supplement"),
to an indenture dated as
of November 1, 1994 (the
"Original Indenture"),
between the Issuer and the
Trustee (the Original
Indenture as so
supplemented, the
"Indenture").
TRUSTEE AND CUSTODIAN........................... Texas Commerce Bank
National Association, a
national banking
association, will act as
Trustee (the "Trustee")
for the Bonds pursuant
to the Indenture and as
Custodian for certain
of the Loan documents.
See "Description of the
Bonds--The Trustee and
Custodian" herein.
PARTICIPANT..................................... Issuer Holding Corp.
The Participant
acquired the Collateral
from various mortgage
banking institutions,
including Boston Safe
Deposit and Trust Company
S-1
("The Boston Company"),
Norwest Bank Minnesota,
N.A. ("Norwest"), The
Chase Manhattan Bank,
Dynex Financial, Inc.
("Dynex Financial"), an
affiliate of the Issuer,
and Household Bank f.s.b.
("Household").
SERVICERS AND MASTER
SERVICERS....................................... Approximately 30% of the
Loans are serviced by The
Boston Company (and
subserviced by its
affiliate, Mellon Mortgage
Company); approximately 8%
of the Loans are serviced
by Norwest; approximately
9% of the Loans are
serviced by Dynex Services
("Dynex Services"), an
affiliate of Dynex and the
Issuer; approximately 34%
of the Loans are
serviced by Chase
Manhattan Mortgage
Corporation ("Chase
Mortgage"); approximately
7% of the Loans are
serviced by Harbourton
Mortgage Co., L.P.
("Harbourton"), an
affiliate of Lehman
Brothers Inc., and the
balance of the loans are
serviced by other
servicers. The Boston
Company, Norwest, Dynex
Services, Chase Mortgage,
Harbourton and the other
servicers are referred to
collectively as the
"Servicers" and each as a
"Servicer".
Norwest will serve as
master servicer of
approximately 13% of the
Loans, which constitute
the Underlying Mortgage
Loans (as defined herein);
Dynex Capital ("Dynex"),
an affiliate of the
Issuer, will serve as
master servicer of the
balance of the Loans
(Dynex in such capacity,
together with Norwest, the
"Master Servicers" and
each a "Master Servicer").
See "Dynex Capital, Inc."
in the Prospectus.
Each Servicer will be
entitled to a Servicing
Fee and each Master
Servicer will be entitled
to a Master Servicing Fee
(each as defined herein)
from interest collected on
the Loans (except that the
Servicing Fee with respect
to approximately 9% of the
Loans is payable after the
payment of interest on the
Bonds to the extent
provided herein). As
described herein, the
Servicing Fee and Master
Servicing Fee will vary
among the Loans. On any
Payment Date, the
applicable Master Servicer
will be obligated to pay
interest ("Month End
Interest") through the end
of the preceding calendar
month with respect to
Loans that are prepaid in
full during the Prepayment
Period that begins in the
preceding calendar month.
See "Servicing of the
Collateral" herein.
ADVANCES........................................ On or before each Payment
Date, the applicable
Servicer generally will
be obligated (subject to
the limitations provided
in the applicable
servicing agreement) to
make cash advances
("Advances") with respect
to any delinquent Loan
in an amount equal to the
sum of (i) the Scheduled
Payment on such delinquent
Loan (net of the Servicing
Fee, except with respect
to approximately 9% of
the Loans for which
Advances are required
to be made only to the
extent of the interest
portion of a Scheduled
Payment (without
deduction for the
Servicing Fee)), (ii)
amounts for the payment of
real estate taxes,
assessments, insurance
premiums and property
protection expenses and
(iii) amounts to cover
expenses relating to
Foreclosure and
Liquidation, provided
that the applicable
Servicer has determined
in its good faith
business judgment that
such Advance is not a
Non-Recoverable Advance.
The applicable Master
Servicer will be obligated
to make any required
Advance if the Servicer
fails to make such
Advance. The Bond
Administrator will be
obligated to make any
required Advance if the
applicable Master
Servicer fails to do so.
The Trustee will be
obligated to make any
required Advance if the
Bond Administrator fails
to do so. Nevertheless,
none of the applicable
Master Servicer, the Bond
Administrator or the
Trustee is required to
S-2
make any Advance if it has
determined in its good
faith business judgment
that such Advance would
constitute a
Non-Recoverable Advance.
See "Servicing of the
Collateral-- Advances"
herein and in the
Prospectus.
BOND ADMINISTRATOR.............................. Dynex will act as Bond
Administrator, will be
entitled to a Bond
Administration Fee equal
to 0.02% per annum on the
aggregate Scheduled
Principal Balance of the
Loans and will be
responsible for the fees
of the Trustee.
DENOMINATIONS................................... The Bonds will be issued
as Book-Entry Bonds in
minimum denominations of
$100,000 and in integral
multiples of $1,000 in
excess thereof, except
that one Bond of each
Class may be issued in a
different denomination.
See "Description of the
Bonds--Book-Entry
Procedures" herein and
in the Prospectus.
PAYMENT DATE.................................... The 28th day of each month
(or if such day is not a
Business Day, then the
next succeeding Business
Day), beginning July 28,
1997.
CLOSING DATE.................................... On or about June 25, 1997.
CUT-OFF DATE.................................... June 1, 1997.
RECORD DATE..................................... The last Business Day of
the month preceding the
month in which the related
Payment Date is deemed to
occur.
ACCRUAL PERIOD.................................. With respect to each
Payment Date, the period
commencing on the 28th
day of the preceding
month through the 27th
day of the month in which
such Payment Date is
deemed to occur (except
that the first such
Accrual Period will be the
period from the Closing
Date through July 27,
1997).
COMPUTATION OF INTEREST......................... Interest will be computed
on the basis of a 360-day
year consisting of twelve
30-day months.
CLASS A-1, CLASS A-2, CLASS B-2
AND CLASS B-3 BONDS.......................... The Class Interest Rates
for the Class A-1, Class
A-2, Class B-2 and Class
B-3 Bonds will initially
equal, subject to the
Applicable Cap, the per
annum rate equal to
One-Month LIBOR, as
determined on the
applicable Floating Rate
Determination Date, plus,
in each case, the
Applicable Spread,
accrued during the
applicable Accrual
Period on the outstanding
principal balance of the
Class A-1, Class A-2,
Class B-2 and Class B-3
Bonds, respectively,
immediately prior to the
applicable Payment Date.
The Applicable Spread is
initially 0.40% for the
Class A-1 Bonds, 0.55%
for the Class A-2 Bonds,
1.00% for the Class B-2
Bonds and 1.75% for the
Class B-3 Bonds. The
Applicable Cap is 10.00%
per annum for the Class
A-1 and Class A-2 Bonds,
10.50% per annum for the
Class B-2 Bonds and 11.00%
per annum for the Class
B-3 Bonds. For the
initial Payment Date, the
Class Interest Rates per
annum will be 6.0875% for
the Class A-1 Bonds,
6.2375% for the Class A-2
Bonds, 6.6875% for the
Class B-2 Bonds, and
7.4375% for the Class B-3
Bonds. If the Issuer does
not exercise its option
to redeem the Bonds when
it is first permitted to
do so, the Applicable
Spread and the Applicable
Cap for the Class A-1
Bonds will be increased by
0.40% and the Applicable
Spread and the Applicable
Cap for the Class A-2,
Class B-2, and Class B-3
Bonds will be increased by
0.50%.
CLASS A-3 AND CLASS B-1 BONDS................... The Class Interest Rates
for the Class A-3 and
Class B-1 Bonds will
equal, subject to a cap
of 14% per annum, the per
annum rate equal to the
sum of (a) the per annum
rate, subject to a cap of
10.00%, equal to One-Month
S-3
LIBOR, as determined on
the applicable Floating
Rate Determination Date,
plus 0.55% for the Class
A-3 Bonds and 0.65% for
the Class B-1 Bonds (1.05%
and 1.15%, respectively,
if the Issuer does not
exercise its option to
redeem the Bonds when
first permitted to do so),
accrued during the
applicable Accrual Period
on the outstanding
principal balance of the
Class A-3 and Class B-1
Bonds, respectively,
immediately prior to the
applicable Payment Date
and (b) the excess of (i)
twelve times the amount
of interest at the per
annum rate equal to the
excess of (x) the weighted
average (by principal
balance) of the Net Rates
on the Loans over (y) the
weighted average (by
principal balance) of the
Class Interest Rates on
the Bonds (calculated, in
the case of the Class A-3
and Class B-1 Bonds,
solely by reference to
clause (a) above)
applicable to such
Payment Date, accrued
during the applicable
Accrual Period on a
notional principal
balance equal to the
aggregate outstanding
principal balance of the
Bonds immediately prior
to such Payment Date over
(ii) the sum of the
Interest Carryover
Amounts for all Classes of
Bonds for the prior
Payment Date, divided by
(iii) the sum of the
outstanding principal
balances of the Class A-3
and Class B-1 Bonds
immediately prior to such
Payment Date.
ONE-MONTH LIBOR................................. With respect to any
Accrual Period,
One-Month LIBOR is
expected to be
determined on the basis
(rounded to the nearest
five decimal places) of
the London Interbank
Offered Rate ("LIBOR")
for one-month Eurodollar
deposits appearing on the
BLOOMBERG Screen LIUS01M
Index Page as of 11:00
a.m., London time, on the
related Floating Rate
Determination Date. See
"Description of the
Bonds--Payments of
Principal and Interest"
herein.
FLOATING RATE
DETERMINATION DATE............................ The Floating Rate
Determination Date for
each Accrual Period after
the initial Accrual Period
will be the second London
Banking Day prior to the
commencement of the
applicable Accrual
Period. A "London Banking
Day" is any day on which
commercial banks and
foreign exchange markets
settle payments in London
and New York City.
PRINCIPAL PAYMENTS ON THE
BONDS......................................... On each Payment Date, the
Principal Payment Amount
(as defined herein) will
be applied sequentially
to pay the Class A-1,
Class A-2, Class A-3,
Class B-1, Class B-2 and
Class B-3 Bonds so that no
such payment will be made
to any such Class until
the prior Classes have
been paid in full.
Principal payments to a
Class will be made to the
Bondholders of such Class
PRO RATA in the proportion
that the outstanding
principal balance of each
Bond of such Class bears
to the aggregate
outstanding principal
balance of all Bonds of
such Class. See
"Description of the
Bonds--Payments of
Principal and Interest"
herein.
STATED MATURITY DATE............................ The Stated Maturity Date
for the Bonds is set forth
on the cover page hereof
and represents the date
that the Bonds are payable
in full. The Stated
Maturity Date for the
Bonds has been calculated
by adding approximately
four years to the latest
scheduled payment date on
the Loans included in the
Collateral originally
pledged to secure the
Bonds.
NON-RECOURSE OBLIGATIONS........................ The Bonds will be
non-recourse obligations
of the Issuer. In
accordance with the terms
of the Indenture, the
Bondholders will have no
rights or claims against
the Issuer directly for
the payment of principal
of and interest on the
Bonds and may look only to
the Collateral pledged
to the Trustee as security
S-4
for the Bonds to satisfy
the Issuer's obligations
to make interest and
principal payments on the
Bonds. None of the
Issuer, the Bond
Administrator, the
Participant, any
affiliate of the
Participant, any Master
Servicer, any Servicer,
the Trustee, any
governmental agency or
any other person has
guaranteed or insured the
Bonds. Each Bondholder
will be deemed, by
acceptance of its Bond, to
have agreed (to the extent
it may legally do so) not
to file or cause a filing
against the Issuer of an
involuntary petition
under any bankruptcy or
receivership law and to
treat its Bonds as debt
instruments for purposes
of federal and state
income tax, franchise
tax and any other tax
measured in whole or in
part by income.
SECURITY FOR THE BONDS.......................... The Collateral will be
pledged as a portion of
the Trust Estate securing
the Bonds. The Collateral
will consist of (i)
conventional, one- to
four-family, fully
amortizing first lien
mortgage loans (the
"Mortgage Loans") and a
small amount of
manufactured housing
installment sales
contracts (the
"Manufactured Home Loans"
and, collectively with
the Mortgage Loans, the
"Directly Held Loans") and
(ii) certificates (the
"Mortgage Certificates")
representing
substantially the entire
interest in mortgage loans
(the "Underlying
Mortgage Loans" and,
together with the Directly
Held Loans, the "Loans").
The Collateral is more
specifically described
under "Security for the
Bonds" herein and in the
Prospectus. In
addition, the Bonds
will be secured by the
assets deposited in
the Collateralization
Fund.
A. LOANS....................................... The Loans had an
aggregate Scheduled
Principal Balance as of
the Cut-off Date of
approximately
$1,006,263,000.
Approximately 91% of the
Loans are expected to
be adjustable rate
Loans (the "Adjustable
Rate Loans"), and
approximately 9% of the
Loans are expected to be
level payment loans (the
"Level Payment Loans").
Less than 1% of the
Directly Held Loans were
delinquent as of the
Cut-off Date by one or
more Scheduled Payments.
The Loans are expected to
have a weighted average
remaining term to stated
maturity of approximately
333 months. The Directly
Held Loans are expected to
have an average Scheduled
Principal Balance of
approximately $192,721.
The Underlying Mortgage
Loans are expected to have
an average Scheduled
Principal Balance of
approximately $190,554. Of
the Adjustable Rate Loans,
approximately 46% are
expected to have Loan
Rates that adjust after an
initial period (the
"Initial Period") by
reference to the Six-Month
LIBOR Index and
approximately 54% are
expected to have Loan
Rates that adjust by
reference to the One-Year
CMT Index (each an "Index"
as described herein),
subject to Periodic Rate
Caps and maximum and
minimum lifetime Loan
Rates, as described
herein. The Loans for
which the Loan Rate
adjusts by reference to
the Six-Month LIBOR Index
have semi-annual Interest
Adjustment Dates (as
defined herein); the Loans
for which the Loan Rate
adjusts by reference to
the One-Year CMT Index
have annual Interest
Adjustment Dates.
Approximately 29% of the
Loans provide for monthly
payments of interest at
the related Loan Rate but
no payments of principal
for the first 10 years
after origination (or, in
some cases, modification).
Following such 10-year
period, the monthly
payment on each such Loan
will be increased to an
amount sufficient to
amortize fully its
outstanding principal
balance over its remaining
term and to pay interest
at the related Loan Rate.
See "Risk Factors --
Interest Only Payments"
herein. Less than 3% of
the Loans are secured in
part by Additional Loan
Collateral, generally
consisting of marketable
securities. See "Security
for the Bonds--Additional
Collateral" herein.
S-5
Less than 1% of the Loans
are Unrecognized
Cooperative Loans (as
defined herein); the value
of the related collateral
may prove to be
substantially less, in the
event of foreclosure, than
the unpaid balance of the
related Loan. See "Risk
Factors--Cooperative
Loans; Unrecognized
Security Interests"
herein.
Approximately 41% of the
Adjustable Rate Loans
provide that the borrower
may, on certain dates and
subject to certain
conditions, as specified
in the related Loan,
convert the adjustable
rate of the related Loan
to a fixed rate.
MORTGAGE INSURANCE.............................. Approximately 6% of the
Loans are expected to have
original loan-to-value
ratios, giving effect to
Additional Loan
Collateral, in excess of
90%, and the weighted
average original
loan-to-value ratio,
giving effect, if
applicable, to Additional
Loan Collateral, is
expected to be
approximately 73%. At
least 22% of the Loans
with a loan-to-value
ratio (at origination),
giving effect to
Additional Loan
Collateral, greater than
80% will be covered by a
Primary Mortgage
Insurance Policy
(covering at least the
amount of the Loan in
excess of 75% of the
original fair market
value of the related
Mortgaged Premises)
unless such policy is
canceled with the consent
of the Master Servicer.
Certain of the Underlying
Mortgage Loans will be
covered by other limited
forms of credit
enhancement as described
herein. See "Security for
the Bonds--Mortgage Pool
and Other Insurance for
the Underlying Mortgage
Loans" herein.
LOAN RATE...................................... The Loan Rate of each Loan
is the per annum interest
rate required to be paid
by the borrower.
The Loan Rate of each
Adjustable Rate Loan will
adjust periodically on
specified dates (each such
date, an "Interest
Adjustment Date") to a
rate that is calculated in
accordance with the
related Index plus a fixed
percentage (the "Gross
Margin"), subject to, in
most cases, (i) a maximum
periodic increase or
decrease in the Loan Rate
of 1% or 2% per annum (a
"Periodic Rate Cap") and
(ii) any minimum and
maximum lifetime Loan
Rates.
With respect to the
Adjustable Rate Loans, as
of the Cut-off Date, (i)
the Loan Rates are
expected to range from
4.375% to 11.25% per
annum, and the weighted
average Loan Rate is
expected to be
approximately 7.15% per
annum, (ii) the Gross
Margins are expected to
range from 0.00% to 5.80%,
with a weighted average
Gross Margin of
approximately 2.61%, (iii)
the maximum lifetime Loan
Rates are expected to
range from 9.50% to 17.75%
per annum, and the
weighted average maximum
lifetime Loan Rate is
expected to be
approximately 12.34% per
annum and (iv) the minimum
lifetime Loan Rates are
expected to range from
0.00% to 11.25% per annum,
and the weighted average
minimum lifetime Loan Rate
is expected to be
approximately 3.12% per
annum. In no case will the
minimum lifetime Loan Rate
of an Adjustable Rate Loan
be less than the Gross
Margin of such Loan.
With respect to the Level
Payment Loans, as of the
Cut-off Date, the Loan
Rates are expected to
range from 6.75% to 13.00%
per annum and the weighted
average Loan Rate is
expected to be
approximately 9.78% per
annum.
S-6
ADMINISTRATIVE
COST RATE..................................... The Administrative Cost
Rate with respect to each
Loan will be equal to the
sum of (i) the related
Servicing Fee Rate, (ii)
the related Master
Servicing Fee Rate,
(iii) the rate used to
calculate premiums, if
any, on mortgage pool and
other insurance policies
and certain other
administrative expenses,
if any, applicable to
such Loan, (iv) the Bond
Administration Fee Rate
and (v) the fees of any
Special Servicer , in
each case attributable
to that Loan. For
purposes of calculating
the Administrative Cost
Rate, the rate used with
respect to the premium for
the FSA Insurance Policy
is a fixed percentage of
the outstanding principal
balance of each Mortgage
Loan, although the premium
for the FSA Insurance
Policy paid is equal to
such fixed percentage of
the outstanding principal
balance of the Bonds. As
of the Cut-off Date, the
weighted average
Administrative Cost Rate
is expected to be
approximately 0.35% per
annum.
NET RATE........................................ The Net Rate of each Loan
will be equal to the Loan
Rate for such Loan less
the Administrative Cost
Rate for such Loan.
B. MORTGAGE CERTIFICATES........................ The Underlying Mortgage
Loans are indirectly
pledged to secure the
Bonds through the pledge
of the Mortgage
Certificates, which
represent substantially
the entire interest in the
Underlying Mortgage Loans
and, in addition, provide
limited credit enhancement
for the Underlying
Mortgage Loans.
C. COLLATERAL PROCEEDS
ACCOUNT.................................. All collections on the
Collateral will be
remitted (net of certain
administrative fees and
expenses and payments and
reimbursements to the
applicable Servicer, the
applicable Master Servicer
and the Bond
Administrator) monthly to
the Collateral Proceeds
Account to be established
by the Trustee and will be
available for application
to the payment of interest
and principal due on the
Bonds, and for the
payment of certain
administrative fees and
expenses. On each
Payment Date, after
required payments are made
on the Bonds, any
Available Funds (as
defined herein)
remaining in the
Collateral Proceeds
Account on such Payment
Date shall be released
from the lien of the
Indenture and will not be
available for payment to
the Bondholders. See
"Security for the
Bonds--Collateral Proceeds
Account" in the
Prospectus.
D. CREDIT ENHANCEMENT;
SUBORDINATION........................... Credit enhancement for
the Senior Bonds will be
provided through (i)
limited
overcollateralization,
I.E., the pledge to the
Trustee on the Closing
Date of Collateral having
a principal amount in
excess of the original
principal balance of
the Bonds and the
deposit of other assets
in the Collateralization
Fund as described below
and (ii) the
subordination of the
Subordinated Bonds,
including the provisions
with respect to
preferential
distributions of
Available Funds
described herein. Credit
enhancement for the
Subordinated Bonds will
be provided through (i)
the limited
overcollateralization
described above and (ii)
in the case of the Class
B-1 and Class B-2 Bonds,
the subordination of the
Classes of Subordinated
Bonds with higher
numerical designations to
the Classes of
Subordinated Bonds with
lower numerical
designations, including
the provisions with
respect to preferential
distributions of Available
Funds as described herein.
On the Closing Date, the
Issuer will establish a
fund (the
"Collateralization Fund")
and deposit therein, as
additional security for
the Bonds, other assets
selected by the Issuer
(expected to consist of
loans) with a principal
balance equal to
approximately $13,649,207.
The Issuer may substitute
Eligible Investments for
the assets initially
deposited in the
Collateralization Fund.
The Issuer will not have
any other obligation to
make deposits to the
Collateralization Fund.
See "Description of the
Bonds -- Payments of
Principal and Interest"
herein.
S-7
The Overcollateralization
Amount, on the Closing
Date, is expected to equal
approximately 2.25% of the
aggregate of the Scheduled
Principal Balance of the
Loans and the deposits in
the Collateralization Fund
as of the Cut-off Date.
The actual percentage may
be lower or higher than
2.25%, depending on the
final requirements of the
Rating Agencies. The
Overcollateralization
Amount generally will be
reduced by Losses (as
defined herein) on the
Loans and, to the extent
that the
Overcollateralization
Amount would otherwise
exceed the Target
Overcollateralization
Amount (as defined
herein), by the
distribution of Principal
Payment Amounts to the
Issuer.
E. LOSSES...................................... Losses with respect to
the Loans will be
allocated first to the
Overcollateralization
Amount (including amounts
on deposit in the
Collateralization Fund),
second to the Subordinated
Bonds (in reverse order
of numerical
designation) and third to
the Senior Bonds (pro
rata, by outstanding
principal balance, with
respect to each Class of
the Senior Bonds).
PREPAYMENT AND YIELD
CONSIDERATIONS................................ The yield to maturity of,
and the aggregate amount
of payments on, the Bonds
will be related to the
rate and timing of
principal payments on
the Loans, which will be
affected by the
amortization schedules of
the Loans and the rate of
principal prepayments
thereon (including for
this purpose payments
resulting from
refinancings,
liquidations of the Loans
due to default,
casualties and
condemnations,
repurchases by the
Participant and
repurchases in
connection with an
optional redemption). NO
ASSURANCE CAN BE GIVEN AS
TO THE RATE OF PRINCIPAL
PAYMENTS OR PREPAYMENTS
ON THE LOANS.
If the purchaser of a Bond
offered at a discount from
its Parity Price
calculates the anticipated
yield to maturity of such
Bond based on an assumed
rate of payment of
principal that is faster
than that actually
received on the Loans, the
actual yield to maturity
will be lower than that so
calculated. Conversely, if
the purchaser of a Bond
offered at a premium over
its Parity Price
calculates the anticipated
yield to maturity of such
Bond based on an assumed
rate of payment of
principal that is slower
than that actually
received on the Loans, the
actual yield to maturity
will be lower than that so
calculated.
ADDITIONAL SUBORDINATED BONDS................... Without the consent of the
Bondholders, the Issuer
may issue additional
bonds of this Series to
the extent such bonds are
fully subordinated to
the Bonds (including the
Class B-1, Class B-2 and
Class B-3 Bonds) or may
pledge its interest in
the Loans, subject to the
indebtedness evidenced
by the Bonds (including
the Class B-1, Class B-2
and Class B-3 Bonds), to
secure bonds of other
series. Any such issuance
of additional bonds will
be conditioned upon
confirmation from the
Rating Agencies of the
then current ratings on
the Bonds (including the
Class B-1, Class B-2 and
Class B-3 Bonds).
SUBSTITUTION AND MODIFICATION OF
LOANS......................................... If a Loan is in material
default or a payment
default is imminent, the
related Servicer, with
the consent of the related
Master Servicer, may be
authorized to enter into a
forbearance or
modification agreement
with the borrower. The
terms of any such
forbearance or
modification agreement
may alter the scheduled
amortization of such Loan
and, consequently, may
affect the amount and
timing of payments on the
Bonds. In addition, under
certain circumstances, a
loan (a "Substitute Loan")
may be substituted for a
defaulted Loan or REO. The
terms of a Substitute
Loan may differ from those
of the Loan for which it
is substituted. In
particular, the Loan Rate
of a Substitute Loan may
S-8
be less than that of the
Loan for which it is
substituted and, indeed,
may be less than the then
current market interest
rate for loans with
similar characteristics.
Furthermore, a Bondholder
may prefer that such
defaulted Loan or REO be
liquidated rather than
have it replaced with a
Substitute Loan,
particularly if the
Substitute Loan has a
Loan Rate less than the
then current market
interest rate for loans
with similar
characteristics. See
"Security for the
Bonds--Substitution of
Collateral" in the
Prospectus.
Generally, as a condition
to any modification or
forbearance related to any
Loan or to the
substitution of a
Substitute Loan, the
applicable Master Servicer
is required to determine,
in its reasonable business
judgment, that such
modification, forbearance
or substitution will
maximize the recovery on
such Loan on a present
value basis.
ADDITIONAL INFORMATION.......................... On each Payment Date,
information will be
available with respect to
the outstanding principal
balance of each Class of
the Bonds and the
applicable Class Interest
Rate. The information
may be obtained by
telephone from the
corporate trust office
of the Trustee. As of
the date of this
Prospectus Supplement,
that telephone number is
(713) 216-2240. The Bond
Administrator will make
available on an ongoing
basis current information
relating to the
Collateral, including (i)
Loan delinquencies of 30
days, 60 days and 90 days
or over, (ii) Loans in
foreclosure, (iii) REO,
(iv) Losses on the Loans
and (v) the remaining
Overcollateralization
Amount.
BOOK-ENTRY REGISTRATION......................... The Bonds will initially
be issued in book-entry
form. Persons acquiring
beneficial ownership
interests in the Bonds
("beneficial owners") may
elect to hold their
interest through The
Depository Trust Company
("DTC") in the United
States, or CEDEL Bank,
S.A. ("CEDEL"), or the
Euroclear System
("Euroclear") in Europe.
Transfers within DTC,
CEDEL or Euroclear, as
the case may be, will be
made in accordance with
the usual rules and
operating procedures of
the relevant system. So
long as the Bonds are
Book-Entry Bonds (as
defined herein), such
Bonds will be evidenced
by one or more Bonds
registered in the name
of Cede & Co. ("Cede"),
as the nominee of DTC,
or one of the European =
Depositories (as defined
below). Cross-market
transfers between
persons holding directly
or indirectly through
DTC, on the one hand, and
counterparties holding
directly or indirectly
through CEDEL or
Euroclear, on the other,
will be effected in DTC
through Citibank N.A.
("Citibank") or Chase
Manhattan Bank ("Chase",
and together with
Citibank, the "European
Depositories"), the
depositories of CEDEL and
Euroclear, respectively,
and each a participating
member of DTC. No
beneficial owner will be
entitled to receive a
definitive certificate
representing such person's
interest, except in the
event that Definitive
Bonds (as defined
herein) are issued under
the limited
circumstances described
herein. All references
in this Prospectus
Supplement to any Bonds
reflect the rights of
beneficial owners only
as such rights may be
exercised through DTC
and its participating
organizations for so long
as such Bonds are held by
DTC. See "Description
of the Bonds--Book-Entry
Bonds" herein and Annex I
hereto.
OPTIONAL REDEMPTION............................. The Issuer may, at its
option, redeem a Class or
Classes of Bonds in whole,
but not in part, on any
Payment Date on or after
the earlier of (i) June
28, 2004, or (ii) the
Payment Date on which,
after taking into account
payments of principal to
be made on such Payment
Date, the aggregate
outstanding principal
balance of the Bonds is
less than 35% of the
aggregate principal
balance of the Bonds on
the Closing Date. If the
Issuer does not exercise
S-9
its option to redeem the
Bonds on the first Payment
Date on which it is
permitted to do so, the
Class Interest Rate for
each Class of the Bonds
will be increased as
described herein. In
addition, the Issuer may
redeem a Class or Classes
of Bonds in whole, but
not in part, at any time
upon a determination by
the Issuer, based upon
an opinion of counsel,
that a substantial risk
exists that the Bonds of
the Class to be redeemed
will not be treated for
federal income tax
purposes as evidences of
indebtedness. Any such
redemption will be paid in
cash at a price equal to
100% of the aggregate
outstanding principal
balance of the Class of
Bonds so redeemed, plus
accrued and unpaid
interest for the
applicable Accrual
Period. At the option of
the Issuer, an optional
redemption of a Class of
Bonds may be effected
without retiring such
Class of Bonds so that the
Issuer has the ability to
own or resell such Class
of Bonds. Upon redemption
and retirement of all the
Bonds, the Collateral
securing the Bonds will be
released from the lien of
the Indenture. See
"Description of the
Bonds-- Optional
Redemption" herein and
"Description of the
Bonds-- Redemption" in the
Prospectus.
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES.............................. Based on the facts as they
currently exist, in the
opinion of Arter & Hadden,
the Class A-1, Class A-2,
Class A-3, Class B-1 and
Class B-2 Bonds will be
taxable debt obligations
under the Internal Revenue
Code of 1986, as amended
(the "Code"), and
interest paid or accrued
thereon, including any
original issue discount,
will be taxable to
Bondholders. See
"Certain Federal Income
Tax Considerations" in
the Prospectus. No
election will be made to
treat the Issuer, the
Loans or the arrangement
by which the Bonds are
issued as a real estate
mortgage investment
conduit or financial asset
securitization investment
trust. Interest income
(including original issue
discount and market
discount) will accrue on
the Bonds as described in
"Certain Federal Income
Tax Consequences" in the
Prospectus. The Bonds may
be issued with original
issue discount for
federal income tax
purposes. See "Certain
Federal Income Tax
Consequences--Original
Issue Discount" in the
Prospectus. In
determining the rate of
accrual of original issue
discount, amortization
of bond premium or market
discount, if any, on the
Bonds, Bondholders
should use a prepayment
assumption of 21% CPR (as
described under "Maturity
and Prepayment
Considerations--Weighted
Average Life of the Bonds"
herein). No
representation, however,
is made herein as to the
rate at which prepayments
on the Loans actually will
occur.
Bonds owned by domestic
building and loan
associations and other
thrift institutions will
not be considered "loans
secured by an interest in
real property" or
"qualifying real property
loans." Bonds owned by a
REIT will not be treated
as "real estate assets"
nor will interest on the
Bonds be considered
"interest on obligations
secured by mortgages on
real property." By
acceptance of its Bond,
each Bondholder will be
deemed to have agreed to
treat its Bonds as debt
instruments for purposes
of federal and state
income tax, franchise tax
and any other tax measured
in whole or in part by
income.
LEGAL INVESTMENT................................ The Class A-1, Class A-2,
Class A-3 and Class B-1
Bonds will constitute
mortgage related
securities for purposes of
the Secondary Mortgage
Market Enhancement Act of
1984 ("SMMEA") for so long
as they are rated in one
of the two highest
rating categories by
one or more nationally
recognized statistical
rating organizations. As
such, the Bonds will be
legal investments for
certain entities to the
extent provided in
SMMEA, subject to state
laws overriding SMMEA.
S-10
A number of states have
enacted legislation
overriding the legal
investment provisions of
SMMEA. See "Legal
Investment" in the
Prospectus.
RATINGS......................................... It is a condition to
issuance that the Bonds be
rated by Moody's Investors
Service, Inc.
("Moody's"), and Fitch
Investors Service, L.P.
("Fitch" and, together
with Moody's, the "Rating
Agencies") as follows:
CLASS OF BONDS MOODY'S FITCH
Class A-1 Aaa AAA
Class A-2 Aaa AAA
Class A-3 Aaa AAA
CLASS OF BONDS FITCH
Class B-1 AA
Class B-2 A
Class B-3 BBB
A security rating is not a
recommendation to buy,
sell or hold the Bonds and
may be subject to revision
or withdrawal at any time
by the assigning Rating
Agency. A security rating
does not represent any
assessment of the
likelihood of principal
prepayments on the Loans
or of the degree to which
such prepayments might
differ from those
originally anticipated.
Also, a security rating
does not represent any
assessment of the yield to
maturity that investors
may experience. See
"Ratings" and "Maturity
and Prepayment
Considerations" herein.
ERISA CONSIDERATIONS............................ Fiduciaries of employee
benefit plans and certain
other retirement plans
and arrangements that
are subject to ERISA or
corresponding provisions
of the Code, including
individual retirement
accounts and annuities,
Keogh plans and collective
investment funds in which
such plans, accounts,
annuities or arrangements
are invested (any of the
foregoing a "Plan"),
persons acting on behalf
of a Plan, or persons
using the assets of a Plan
("Plan Investors"),
should review carefully
with their legal advisors
whether the purchase or
holding of the Bonds could
either give rise to a
transaction that is
prohibited under ERISA or
the Code or cause the
Collateral securing the
Bonds to be treated as
plan assets for purposes
of regulations of the
Department of Labor set
forth in 29 C.F.R.
2510.3-101 (the "Plan
Asset Regulations").
Although certain
exceptions from the
application of the
prohibited transaction
rules and the Plan Asset
Regulations exist, there
can be no assurance that
any such exception will
apply with respect to the
acquisition of a Bond.
See "ERISA
Considerations" herein
and in the Prospectus.
The Issuer believes that
the Bonds will be treated
as debt obligations
without significant equity
features for purposes of
the Plan Asset
Regulations. Accordingly,
a Plan that acquires a
Bond should not be treated
as having acquired a
direct interest in the
assets of the Issuer. See
"ERISA Considerations"
herein and in the
Prospectus. Nevertheless,
there can be no complete
assurance that such Bonds
will be treated as debt
obligations without
significant equity
features for purposes of
the Plan Asset
Regulations.
S-11
RISK FACTORS
Prospective Bondholders should consider the following factors (as
well as the factors set forth under "Risk Factors" in the Prospectus) in
connection with a purchase of the Bonds.
DELINQUENCIESS
Less than 1% of the Directly Held Loans were, as of the Cut-off
Date, delinquent by one or more Scheduled Payments.
COOPERATIVE LOANS; UNRECOGNIZED SECURITY INTERESTS
Less than 3% of the Loans were made in connection with a purchase or
refinancing of cooperative apartments ("Cooperative Loans"). Certain cooperative
housing corporations permit purchasers to obtain financing on only a portion, or
on none, of a cooperative apartment's purchase price. Less than 1% of the Loans
were made despite such restrictions and have not been recognized by the related
cooperative housing corporation (such loans, "Unrecognized Cooperative Loans").
As described under "Security for the Bonds--Realizing Upon
Cooperative Loan Security" herein, there are certain risks attendant to
foreclosure on Cooperative Loans. In the case of the Unrecognized Cooperative
Loans, such risks are increased. A cooperative housing corporation may declare
the borrower in default under the related lease or occupancy agreement because
of the unrecognized financing and terminate such lease or occupancy agreement.
The cooperative housing corporation will be under no obligation to recognize the
lien against the related cooperative shares and may actively oppose the efforts
to realize upon such collateral.
Investors should consider the risk that, in the event of a default
under an Unrecognized Cooperative Loan and resulting foreclosure, the related
collateral may have a value substantially lower than the unpaid principal
balance of the related Loan, or may have no value. Any Loss on an Unrecognized
Cooperative Loan would reduce the Overcollateralization Amount and, if the
Overcollateralization Amount was not adequate to cover the Loss, would be
allocated to the Bonds as described herein. See "Description of the Bonds --
Losses" herein.
CREDIT CONSIDERATIONS REGARDING COLLLATERAL FOR THE LOANS
Investors should review the information regarding the collateral for
the Loans set forth under "Risk Factors--Credit Considerations" in the
Prospectus.
LOAN CONCENTRATION
Approximately 48% of the Loans are expected to be secured by
properties located in California. Consequently, losses and prepayments on the
Collateral and resultant payments on the Bonds may be affected significantly by
changes in the housing markets and the regional economy of California, and also
by the occurrence of natural disasters (such as earthquakes, fires and floods)
in California. In addition, approximately 6% and 5% of the Loans are expected to
be secured by properties located in Massachusetts and Michigan, respectively.
INTEREST-ONLY PAYMENTS
Approximately 29% of the Loans provide for monthly payments of
interest at the related Loan Rate but no payments of principal for the first 10
years after origination (or, in some cases, modification). Following such
10-year period, the monthly payment on each such Loan will be increased to an
amount sufficient to amortize fully its outstanding principal balance over its
remaining term and to pay interest at the related Loan Rate.
Borrowers may view the absence of any obligation to make a payment
of principal during the first ten years of the term of the such Loans as a
disincentive to prepayment. To the extent that a recalculated monthly payment as
described above is substantially in excess of a borrower's previous monthly
payment providing solely for the payment of interest, such Loan may be subject
to an increased risk of loss and delinquency.
HIGH BALANCE LOANS
The average Scheduled Principal Balance of the Directly Held Loans
is approximately $192,721. Approximately 7% of the Directly Held Loans have
Scheduled Principal Balances in excess of $1,000,000. Loss and delinquency
experience on such higher balance loans may have a disproportionate effect on
the Collateral as a whole.
S-12
UNCERTAIN TIMING OF PRINCIPAL
Unlike standard corporate bonds, the timing and amount of principal
payments on the Bonds are not fixed and will be determined by, among other
things, the timing and amount of principal payments (including prepayments,
defaults, liquidations and repurchases) on the related Loans, the timing and
amount of losses realized on such Loans and the principal payment structure
(including redemption provisions) of the Bonds.
Faster prepayment rates, which are generally associated with a
declining interest rate environment, will have the effect of reducing the
weighted average life of the Bonds and increasing the reinvestment risk
associated with the inability to achieve comparable yields on the available
investment alternatives in such reduced interest rate environment. As a
consequence, the price of a bond that is trading at or above par will not
increase to the same degree as the price of a standard corporate bond with a
comparable interest rate if there is a significant decline in prevailing
interest rates. Conversely, slower prepayment rates, which are generally
associated with an increasing interest rate environment or declining real estate
values, will have the effect of increasing the weighted average life of the
Bonds and decreasing the amount of funds available to a Bondholder to reinvest
in higher yielding investment alternatives. See "Maturity and Prepayment
Considerations" and "Yield Considerations" herein and in the Prospectus. See
also "Risk Factors--Average Life and Yield Considerations" in the Prospectus.
LIMITED RECOURSE
The Collateral will not be guaranteed or insured by any governmental
agency, the Issuer, the Participant, any affiliate of the Participant, the Bond
Administrator, any Master Servicer, any Servicer, the Trustee or any other
person. The Class B-1, Class B-2 and Class B-3 Bonds will be particularly
sensitive to the loss experience of the Collateral. See "Yield Considerations --
Subordination of the Class B-1, Class B-2 and Class B-3 Bonds" herein.
NON-RECOURSE
The Bonds will be non-recourse obligations of the Issuer. In
accordance with the terms of the Indenture, the Bondholders will have no rights
or claims against the Issuer directly for the payment of principal of and
interest on the Bonds and may look only to the Collateral pledged to the Trustee
as security for the Bonds to satisfy the Issuer's obligations to make interest
and principal payments on the Bonds. None of the Issuer, the Bond Administrator,
the Participant, any affiliate of the Participant, any Master Servicer, any
Servicer, the Trustee, any governmental agency or any other person has
guaranteed or insured the Bonds. Each Bondholder will be deemed, by acceptance
of its Bond, to have agreed (to the extent it may legally do so) not to file or
cause a filing against the Issuer of an involuntary petition under any
bankruptcy or receivership law and to treat its Bonds as debt instruments for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income.
THE STATUS OF THE LOANS IN THE EVENT OF INSOLVENCY
The Issuer believes that the transfer of the Collateral by the
Participant to the Issuer constitutes an absolute and unconditional sale.
Nevertheless, in the event of the bankruptcy of the Participant, a trustee in
bankruptcy could attempt to recharacterize the sale of the Collateral as a
borrowing secured by a pledge of the Collateral. Such an attempt, even if
unsuccessful, could result in delays in payments on the Bonds. If such an
attempt were successful, the trustee in bankruptcy could elect to accelerate
payment of the Bonds and liquidate the Collateral, with the holders of the Bonds
entitled to no more than the then outstanding principal balance, if any, of such
Bonds together with interest at the applicable Class Interest Rate to the date
of payment. In the event of an acceleration of the Bonds, the holders of the
Bonds would lose the right to future distributions of interest, might suffer
reinvestment losses in a lower interest rate environment and may fail to recover
fully their initial investments.
DESCRIPTION OF THE BONDS
GENERAL
The Bonds consist of the following Classes: Class A-1, Class A-2,
Class A-3, Class B-1, Class B-2 and Class B-3. The following summary of the
provisions of the Bonds and the Indenture does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of the
Prospectus and the Indenture. Reference is made to the Prospectus for important
information in addition to that set forth herein regarding the terms and
conditions of the Bonds.
S-13
The Bonds will be non-recourse obligations of the Issuer. In
accordance with the terms of the Indenture, the Bondholders will have no rights
or claims against the Issuer directly for the payment of principal of and
interest on the Bonds and may look only to the Collateral pledged to the Trustee
as security for the Bonds to satisfy the Issuer's obligations to make interest
and principal payments on the Bonds. None of the Issuer, the Bond Administrator,
the Participant, any affiliate of the Participant, any Master Servicer, any
Servicer, the Trustee, any governmental agency or any other person has
guaranteed or insured the Bonds. Each Bondholder will be deemed, by acceptance
of its Bond, to have agreed (to the extent it may legally do so) not to file or
cause a filing against the Issuer of an involuntary petition under any
bankruptcy or receivership law and to treat its Bonds as debt instruments for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income.
BOOK-ENTRY BONDS
The Bonds will be Book-Entry Bonds, which will be represented by one
or more certificates registered in the name of a nominee of The Depository Trust
Company ("DTC"), and beneficial interests therein will be held by investors
through the book-entry facilities of DTC, as described herein, in minimum
denominations of $100,000 and integral multiples of $1,000 in excess thereof,
except that, for each Class of Bonds, one Bond may be issued in a different
denomination. The Issuer has been informed by DTC that its nominee will be Cede
& Co. ("Cede"). Accordingly, Cede is expected to be the holder of record of the
Book-Entry Bonds. No person acquiring a Book-Entry Bond (each, a "beneficial
owner") will be entitled to receive a physical certificate representing such
Bond. A beneficial owner's interest in a Bond will be evidenced by appropriate
entries on the books and records of one or more financial intermediaries
(including a DTC Participant). Payments on Book-Entry Bonds will be effected by
credits to accounts maintained on the books and records of such financial
intermediaries for the benefit of the beneficial owners. See "Description of the
Bonds--Book-Entry Procedures" in the Prospectus.
Beneficial owners may elect to hold their Book-Entry Bonds directly
through DTC in the United States, or CEDEL or Euroclear (in Europe) if they are
participants of such systems ("Participants"), or indirectly through
organizations which are Participants. 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 depositories
which in turn will hold such positions in customers' securities accounts in the
depositories' names on the books of DTC. Citibank will act as depository for
CEDEL and Chase will act as depository for Euroclear (in such capacities,
individually the "Relevant Depository" and collectively the "European
Depositories").
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in the DTC. For information with respect to
tax documentation procedures relating to the Bonds, see "Certain Federal Income
Tax Consequences -- Miscellaneous Tax Aspects -- Backup Withholding" in the
Prospectus and "Global Clearance, Settlement and Tax DocumentatioN Procedures --
Certain U.S. Federal Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC
rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or
indirectly through DTC, on the one hand, and directly or indirectly through
CEDEL Participants or Euroclear Participants, on the other, will be effected in
DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the Relevant Depository; 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 Depository 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 Depositories.
S-14
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant 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 participants of
Euroclear ("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 now 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 Morgan Guaranty Trust Company of New
York, Brussels Office (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 an office of a New York trust company
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.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Bonds 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.
THE TRUSTEE AND CUSTODIAN
Texas Commerce Bank National Association will act as Trustee for the
Bonds and custodian for certain of the Loan documents. As of the date of this
Prospectus Supplement, the mailing address of the Trustee's corporate trust
office is 601 Travis, 8th Floor, Houston, Texas 77002, and its telephone number
is (713) 216-4181.
PAYMENTS OF PRINCIPAL AND INTEREST
PAYMENT DATES
The Payment Dates for the Bonds will be the 28th day of each month
(or, if such day is not a Business Day, then the next succeeding Business Day),
commencing July 28, 1997. For accounting purposes, the Payment Date will be
deemed to occur on the 28th day of the month without regard to whether such day
is a Business Day.
PAYMENT AMOUNT
On each Payment Date, the amount payable on the Bonds (the "Payment
Amount") will equal the sum of (i) the Interest Payment Amount (as defined
below) and (ii) the Principal Payment Amount (as defined below).
S-15
INTEREST PAYMENTS
Interest on each Class of Bonds will be determined based on a
360-day year of twelve 30-day months. Interest payments on the Bonds on any
Payment Date will include interest accrued on the respective outstanding
principal balance at the respective Class Interest Rate during the applicable
Accrual Period.
Interest payments allocated to a Class of Bonds on any Payment Date
will be paid to the Holders of the Bonds of such Class PRO RATA in the
proportion that the outstanding principal balance of each Bond of such Class
bears to the aggregate outstanding principal balance of all Bonds of such Class.
See "Description of the Bonds -- Payments of Principal and Interest" in the
Prospectus.
On each Payment Date, the Interest Payment Amount will be applied in
the following order of priority:
First, to pay Current Interest and any Interest Carryover Amount
with respect to the Senior Bonds; PROVIDED, HOWEVER, that, if the
Interest Payment Amount is not sufficient to pay the full amount of
Current Interest and any Interest Carryover Amount on the Senior
Bonds, the Interest Payment Amount will be applied PRO RATA based on
the Current Interest and any Interest Carryover Amount otherwise
payable to each Class of the Senior Bonds;
Second, to pay Current Interest and any Interest Carryover Amount
with respect to the Class B-1 Bonds;
Third, to pay Current Interest and any Interest Carryover Amount
with respect to the Class B-2 Bonds;
Fourth, to pay Current Interest and any Interest Carryover Amount
with respect to the Class B-3 Bonds;
Fifth, to pay the Servicing Fee with respect to a portion of the
Loans as provided in the Indenture (approximately 9% at the
Cut-off Date); and
Sixth, any remainder to be released to the Issuer as Surplus.
PRINCIPAL PAYMENTS
Principal payments allocated to a Class of Bonds on any Payment Date
will be paid to the Holders of the Bonds of such Class PRO RATA in the
proportion that the outstanding principal balance of each Bond of such Class
bears to the aggregate outstanding principal balance of all Bonds of such Class.
See "Description of the Bonds--Payments of Principal and Interest" in the
Prospectus.
On each Payment Date, the product of the Bond Payment Percentage and
the Principal Payment Amount will be applied to pay principal of the Bonds in
the following order of priority:
First, to pay principal of the Senior Bonds, such principal to be
paid sequentially to the Class A-1, Class A-2 and Class A-3 Bonds,
in that order, so that no such payment will be made to any such
Class until all Classes with a lower numeral designation have been
paid in full; PROVIDED, HOWEVER, that, on any Payment Date on which
the aggregate principal balance of the Senior Bonds is equal to or
greater than the sum of (i) the aggregate Scheduled Principal
Balance of the Loans and (ii) the amount in the Collateralization
Fund, the Principal Payment Amount will be paid PRO RATA to the
Senior Bonds (based on principal balances) and not sequentially;
Second, to pay principal of the Class B-1 Bonds until paid in full;
Third, to pay principal of the Class B-2 Bonds until paid in full;
Fourth, to pay principal of the Class B-3 Bonds until paid in full;
and
Fifth, any remainder to be released to the Issuer as Surplus.
COLLATERALIZATION FUND
On the Closing Date, the Issuer will establish a fund (the
"Collateralization Fund") and deposit therein, as additional security for the
Bonds, other assets selected by the Issuer (expected to consist of loans) with a
principal balance equal to approximately $13,649,207. The Issuer may substitute
Eligible Investments for the assets initially deposited in the Collateralization
Fund. The Issuer will not have any other obligation to make deposits to the
Collateralization Fund See "Description of the Bonds -- Payments of Principal
and Interest" herein.
S-16
On each Payment Date, the Trustee is required: (a) to deposit in the
Collateralization Fund from the principal portion of the Available Funds an
amount equal to the Collateralization Deposit; (b) to apply interest earnings on
the loans or Eligible Investments on deposit in the Collateralization Fund to
pay interest on the Bonds if the portion of Available Funds attributable to
interest is less than Current Interest and any Interest Carryover Amount on the
Bonds; (c) to apply amounts in the Collateralization Fund to the payment of
principal of the Bonds if, after giving effect to the application of the portion
of Available Funds attributable to principal to pay the principal of the Bonds,
the aggregate principal balance of the Bonds equals or exceeds the aggregate
Scheduled Principal Balance of the Loans; and (d) to release from the
Collateralization Fund to the Issuer: (i) any interest earnings on loans or
Eligible Investments on deposit in the Collateralization Fund not required to be
applied as set forth in clause (b) above and (ii) the amount, if any, by which
the excess of (x) the sum of (A) the aggregate Scheduled Principal Balance of
the Loans and (B) the balance in the Collateralization Fund over (y) the
principal balance of the Bonds exceeds the Target Overcollateralization Amount.
Once released from the Indenture, such excess will not be available to make
payments on the Bonds. See "Description of the Bonds -- Payments of Principal
and Interest" herein. The loans that will be deposited in the Collateralization
Fund are not liquid assets; as a consequence, funds may not be available in the
Collateralization Fund on any Payment Date in sufficient amounts to make the
payments described above.
DEFINITIONS
"Available Funds": On each Payment Date, the sum of (a) all payments
or distributions received in respect of the Mortgage Certificates and deposited
in the Collateral Proceeds Account (which represent substantially all the
principal and interest (at the Net Rate) received in respect of the Underlying
Mortgage Loans during the related Due Period) and (b) the sum of the following:
(i) all payments of interest (including payments of Month
End Interest ) and principal with respect to the
Directly Held Loans and any amounts in respect of any
REO (including Liquidation Proceeds (net of liquidation
expenses) and Insurance Proceeds) collected with respect
to the related Due Period (or applicable prepayment
period, in the case of unscheduled payments and other
Liquidation Proceeds) with respect to Directly Held
Loans and deposited in the Collateral Proceeds Account;
(ii) any Advance of principal or interest due on a Directly
Held Loan during the related Due Period with respect to
Directly Held Loans deposited in the Collateral Proceeds
Account;
(iii) any Scheduled Payments with respect to the Directly
Held Loans due during, but collected prior to, the
related Due Period; and
(iv) all amounts received in connection with (A) the purchase
of any Directly Held Loan due to the delivery of
defective loan documentation or otherwise or (B) the
purchase of a converted Directly Held Loan;
less (c) the sum of the following:
(i) one-twelfth of the Administrative Cost Rate multiplied
by the Scheduled Principal Balance of each Directly Held
Loan (excluding, with respect to a portion of the Loans
(approximately 9% at the Cut-off Date), the Servicing
Fee payable to the related Servicer but including any
additional fees payable to a Special Servicer, if any,
with respect to certain defaulted Directly Held Loans);
(ii) all amounts required as reimbursement for any
Advances previously made on a Directly Held Loan upon
the Liquidation of such Directly Held Loan;
(iii) all amounts required to be reimbursed for any
Non-Recoverable Advances with respect to the Directly
Held Loans; and
(iv) from and after the occurrence of an Event of Default,
all sums due under the Indenture to the Trustee
associated with the disposition of all or a portion of
the Trust Estate or the exercise of any of the other
remedies set forth in the Indenture.
"Bond Percentage": On each Payment Date, the aggregate outstanding
principal balance of the Bonds divided by the sum of (i) the then aggregate
Scheduled Principal Balance of the Loans and (ii) the balance in the
Overcollateralization Fund, in each case as of such Payment Date (but not more
than 100%).
"Bond Payment Percentage": On each Payment Date, 100%; except that,
if on any Payment Date (a) the Overcollateralization Amount is greater than or
equal to the Target Overcollateralization Amount but only to the extent that the
S-17
Overcollateralization Amount continues to equal or exceed the Target
Overcollateralization Amount and (b) over the prior six months, the average
Unpaid Principal Balance of the Directly Held Loans delinquent 60 days or more
(including for this purpose any Directly Held Loans in foreclosure and REO) has
not exceeded 6% of the average aggregate Unpaid Principal Balance of all
Directly Held Loans, then the Bond Payment Percentage for such Payment Date will
be the Bond Percentage for such Payment Date.
"Class A-1, Class A-2, Class B-2 and Class B-3 Interest Rates": The
Class Interest Rates for the Class A-1, Class A-2, Class B-2 and Class B-3 Bonds
will initially equal, subject to the Applicable Cap, the per annum rate equal to
One-Month LIBOR, as determined on the applicable Floating Rate Determination
Date, plus, in each case, the Applicable Spread, accrued during the applicable
Accrual Period on the outstanding principal balance of the Class A-1, Class A-2,
Class B-2 and Class B-3 Bonds, respectively, immediately prior to the applicable
Payment Date. The Applicable Spread is initially 0.40% for the Class A-1 Bonds,
0.55% for the Class A-2 Bonds, 1.00% for the Class B-2 Bonds and 1.75% for the
Class B-3 Bonds. The Applicable Cap is 10.00% per annum for the Class A-1 and
Class A-2 Bonds, 10.50% per annum for the Class B-2 Bonds and 11.00% per annum
for the Class B-3 Bonds. For the initial Payment Date, the Class Interest Rates
per annum will be 6.0875% for the Class A-1 Bonds, 6.2375% for the Class A-2
Bonds, 6.6875% for the Class B-2 Bonds, and 7.4375% for the Class B-3 Bonds. If
the Issuer does not exercise its option to redeem the Bonds when it is first
permitted to do so, the Applicable Spread and the Applicable Cap for the Class
A-1 Bonds will be increased by 0.40% and the Applicable Spread and the
Applicable Cap for the Class A-2, Class B-2 and Class B-3 Bonds will be
increased by 0.50%.
"Class A-3 and Class B-1 Interest Rates": The Class Interest Rates
for the Class A-3 and Class B-1 Bonds will equal, subject to a cap of 14% per
annum, the per annum rate equal to the sum of (a) the per annum rate, subject to
a cap of 10.00%, equal to One-Month LIBOR, as determined on the applicable
Floating Rate Determination Date, plus 0.55% for the Class A-3 Bonds and 0.65%
for the Class B-1 Bonds (1.05% and 1.15%, respectively, if the Issuer does not
exercise its option to redeem the Bonds when first permitted to do so), accrued
during the applicable Accrual Period on the outstanding principal balance of the
Class A-3 and Class B-1 Bonds, respectively, immediately prior to the applicable
Payment Date and (b) the excess of (i) twelve times the amount of interest at
the per annum rate equal to the excess of (x) the weighted average (by principal
balance) of the Net Rates on the Loans over (y) the weighted average (by
principal balance) of the Class Interest Rates on the Bonds (calculated, in the
case of the Class A-3 and Class B-1 Bonds, solely by reference to clause (a)
above) applicable to such Payment Date, accrued during the applicable Accrual
Period on a notional principal balance equal to the aggregate outstanding
principal balance of the Bonds immediately prior to such Payment Date over (ii)
the sum of the Interest Carryover Amounts for all Classes of Bonds for the prior
Payment Date, divided by (iii) the sum of the outstanding principal balances of
the Class A-3 and Class B-1 Bonds immediately prior to such Payment Date.
"Collateral Value": With respect to each Loan that is not a Discount
Loan, the Scheduled Principal Balance of such Loan, and, with respect to each
Discount Loan, the Scheduled Principal Balance of such Loan multiplied by a
fraction, the numerator of which will equal the Net Rate of such Loan and the
denominator of which will equal 10%.
"Collateralization Deposit": On each Payment Date an amount equal to
the excess of (i) the aggregate of the Discount Principal Amounts for the
immediately preceding Payment Date (or the Cut-off Date, in the case of the
first Payment Date) over (ii) the aggregate of the Discount Principal Amounts
for such Payment Date.
"Current Interest": With respect to each Class of Bonds and each
Payment Date, the sum of (i) the interest accrued at the applicable Class
Interest Rate for the applicable Accrual Period on the outstanding principal
balance of such Class, (ii) the excess of (A) interest accrued at the applicable
Class Interest Rate with respect to prior Payment Dates over (B) the amount
actually paid to such Class with respect to interest on such prior Payment Dates
and (iii) interest on such excess at the applicable Class Interest Rate for such
Accrual Period less (iv) the Interest Carryover Amount for such Class.
"Discount Loan": Each Level Payment Loan with a Net Rate less than
10% per annum.
"Discount Principal Amount": With respect to each Discount Loan on
each Payment Date, an amount equal to the amount by which the Scheduled
Principal Balance of such Discount Loan exceeds its Collateral Value.
"Interest Carryover Amount": With respect to each Class of Bonds and
each Payment Date, the sum of (i) the product of (x) the outstanding principal
balance of such Class and (y) one twelfth of the excess of (A) the Class
Interest Rate for such Class over (B) the weighted average (by principal
balance) of the Net Rates on the Loans, in each case with respect to such
Payment Date, and (ii) any such product remaining unpaid with respect to Prior
Payment Dates, together with interest thereon at the applicable Class Interest
Rate.
S-18
"Interest Payment Amount": On each Payment Date, the sum of (i) the
portion of Available Funds attributable to interest on the Loans and (ii) any
interest earnings on the Collateralization Fund to the extent required to be
used to pay Current Interest and any Interest Carryover Amount on the Bonds.
"Overcollateralization Amount": On each Payment Date, before giving
effect to any payments to be made on such Payment Date, the excess, if any, of
(i) the sum of (A) the aggregate Scheduled Principal Balance of the Loans and
(B) the balance in the Collateralization Fund over (ii) the aggregate
outstanding principal balance of the Bonds. On the Closing Date, the
Overcollateralization Amount is expected to equal approximately 2.25% of the
aggregate of the Scheduled Principal Balance of the Loans and the deposits in
the Collateralization Fund as of the Cut-off Date. The actual percentage may be
lower or higher than 2.25%, depending on the final requirements of the Rating
Agencies.
"Principal Payment Amount": On each Payment Date, the sum of (i) the
excess of (A) the portion of Available Funds attributable to principal of the
Loans over (B) the Collateralization Deposit and (ii) any amount in the
Collateralization Fund to the extent required to be used to pay principal of the
Bonds.
"Target Overcollateralization Amount": On any Payment Date, an
amount equal to the greater of (i) product of (a) twice the percentage
represented by the initial Overcollateralization Amount and (b) the aggregate
Scheduled Principal Balance of the Loans and (ii) $100,000.
FLOATING RATE DETERMINATION
On the second London Banking Day prior to the commencement of each
Accrual Period after the initial Accrual Period (each a "Floating Rate
Determination Date"), the Bond Administrator will determine the arithmetic mean
of the LIBOR quotations for one-month Eurodollar deposits ("One-Month LIBOR")
for the succeeding Accrual Period on the basis of the offered LIBOR quotations
provided to the Bond Administrator as of 11:00 a.m. (London time) on such
Floating Rate Determination Date. As used herein with respect to a Floating Rate
Determination Date, "Reference Banks" means four leading banks 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 BLOOMBERG Screen LIUS01M Index Page on the Floating Rate Determination Date
in question and (iii) which have been designated as such by the Bond
Administrator and are able and willing to provide such quotations to the Bond
Administrator on each Floating Rate Determination Date; and "BLOOMBERG Screen
LIUS01M Index Page" means the display designated as page "LIUS01M" on the
BLOOMBERG Financial Markets Commodities News (or such other pages as may replace
such page on that service for the purpose of displaying LIBOR quotations of
major banks). If any Reference Bank should be removed from the BLOOMBERG Screen
LIUS01M Index Page or in any other way fails to meet the qualifications of a
Reference Bank, the Bond Administrator may, in its sole discretion, designate an
alternative Reference Bank.
On each Floating Rate Determination Date, One-Month LIBOR for the
next succeeding Accrual Period for the Bonds will be established by the Bond
Administrator as follows:
(i) If on any Floating Rate Determination Date two or
more of the Reference Banks provide offered One-Month LIBOR
quotations on the BLOOMBERG Screen LIUS01M Index Page, One-Month
LIBOR for the next applicable Accrual Period will be the arithmetic
mean of such offered quotations (rounding such arithmetic mean if
necessary to the nearest five decimal places).
(ii) If on any Floating Rate Determination Date only one
or none of the Reference Banks provides such offered quotations,
One-Month LIBOR for the next applicable Accrual Period will be the
higher of (x) One-Month LIBOR as determined on the previous Floating
Rate Determination Date and (y) the Reserve Interest Rate. The
"Reserve Interest Rate" will be the rate per annum that the Bond
Administrator determines to be either (A) the arithmetic mean
(rounding such arithmetic mean if necessary to the nearest five
decimal places) of the one-month Eurodollar lending rate that New
York City banks selected by the Bond Administrator are quoting, on
the relevant Floating Rate Determination Date, to the principal
London offices of at least two leading banks in the London interbank
market or (B) in the event that the Bond Administrator can determine
no such arithmetic mean, the lowest one-month Eurodollar lending
rate that the New York City banks selected by the Bond Administrator
are quoting on such Floating Rate Determination Date to leading
European banks.
(iii) If on any Floating Rate Determination Date the
Bond Administrator is required but is unable to determine the
Reserve Interest Rate in the manner provided in paragraph (ii)
above, One-Month LIBOR for the next applicable Accrual Period will
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be One-Month LIBOR as determined on the previous Floating Rate
Determination Date.
Notwithstanding the foregoing, One-Month LIBOR for the next
succeeding Accrual Period shall not be based on One-Month LIBOR for the previous
Accrual Period for two consecutive Floating Rate Determination Dates. If, under
the priorities described above, One-Month LIBOR for the next succeeding Accrual
Period would be based on One-Month LIBOR for the previous Floating Rate
Determination Date for the second consecutive Floating Rate Determination Date,
the Bond Administrator shall select an alternative index (over which the Bond
Administrator has no control) used for determining one-month Eurodollar lending
rates that is calculated and published (or otherwise made available) by an
independent third party.
The establishment of One-Month LIBOR (or an alternative index) by
the Bond Administrator and the Bond Administrator's subsequent calculation of
the Class Interest Rates for the relevant Accrual Period, in the absence of
manifest error, will be final and binding. The Class Interest Rates for any
applicable Accrual Period may be obtained by telephoning the Trustee at (713)
216-2240.
ISSUANCE OF ADDITIONAL SUBORDINATED BONDSS
Without the consent of the Bondholders, the Issuer may issue
additional bonds of this Series to the extent such bonds are fully subordinated
to the Bonds (including the Class B-1, Class B-2 and Class B-3 Bonds) or may
pledge its interest in the Loans, subject to the indebtedness evidenced by the
Bonds (including the Class B-1, Class B-2 and Class B-3 Bonds), to secure bonds
of other series. Any such issuance of additional bonds will be conditioned upon
confirmation from the Rating Agencies of the then current ratings on the Bonds
(including the Class B-1, Class B-2 and Class B-3 Bonds).
EVENTS OF DEFAULT
An Event of Default with respect to a Senior Bond means any one of
the following events (whatever the reason for such Event of Default and whether
it shall be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(i) On any Payment Date, default in the payment of Current
Interest on any Senior Bond when the same shall become
due and payable, which Default shall continue for a
period of five days; or
(ii) On the applicable Stated Maturity Date, default in the
payment in full of the outstanding principal balance of
any Senior Bond.
An Event of Default with respect to the all the Bonds means any one
of the following events (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of law
or pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(i) Default in the performance, or breach, of any
covenant or warranty of the Issuer in the Indenture (other than a
Default in the performance of or breach of any covenant or warranty
addressed in referred to in the preceding paragraph) or in Article
Nine of the Original Indenture, and continuance of such Default or
breach for a period of 60 days after there shall have been given, by
registered or certified mail, to the Issuer by the Trustee or by the
Holders of at least 66<W098>% in then outstanding principal balance
of the Bonds, a written notice specifying such Default or breach and
requiring it to be remedied and stating that such notice is a
"Notice of Default" under the Indenture; or
(ii) the entry of a decree or order by a court having
jurisdiction in the premises adjudging the Issuer bankrupt or
insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in
respect of the Issuer under the Federal Bankruptcy Code or any other
applicable federal or state law, or appointing a receiver,
liquidator, assignee, or sequestrator (or other similar official) of
the Issuer or of any substantial part of its property, or ordering
the winding up or liquidation of its affairs, and the continuance of
any such decree or order unstayed and in effect for a period of 90
consecutive days; or
(iii) the institution by the Issuer of proceedings to be
adjudicated as bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or
the filing by it of a petition or answer or consent seeking
reorganization or relief under the Federal Bankruptcy Code or any
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other similar applicable federal or state law, or the consent by it
to the filing of any such petition or to the appointment of a
receiver, liquidator, assignee, trustee or sequestrator (or other
similar official) of the Issuer or of any substantial part of its
property, or the making by it of an assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay
its debts generally as they become due, or the taking of corporate
action by the Issuer in furtherance of any such action.
Upon the occurrence of a Default with respect to any Class of Bonds
(without regard to the passage of time or giving of notice, or both) and the
continuance of such Default for 60 days, the Trustee is required to resign as
trustee for the Subordinated Bonds. The Issuer is required in such circumstances
to appoint one or more separate trustees for the Holders of the Subordinated
Bonds; PROVIDED, HOWEVER, that if the Issuer fails to appoint such separate
trustees within 15 days thereafter, the Trustee shall immediately petition a
court of competent jurisdiction to appoint such separate trustees.
Each Bondholder shall be deemed to have agreed (to the extent it may
legally do so), by its acceptance of its Bond, not to file, or join in filing,
any petition in bankruptcy or commence any similar proceeding in respect of the
Issuer and to treat its Bonds as debt instruments for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income.
Upon an Event of Default, the Holders of the Senior Bonds (and,
after the Senior Bonds have been paid in full, the Holders of the Class B-1
Bonds and, after the Class B-1 Bonds have been paid in full, the Holders of the
Class B-2 Bonds and, after the Class B-2 Bonds have been paid in full, the Class
B-3 Bonds) shall have the remedies described in the Indenture. See "The
Indenture--Events of Default" in the Prospectus. Funds collected by the Trustee
following an Event of Default will be applied in the order specified above under
"-- Payments of Principal and Interest".
ACCORDINGLY, SO LONG AS THE SENIOR BONDS ARE OUTSTANDING, THE
FAILURE TO PAY INTEREST ON OR PRINCIPAL OF THE SUBORDINATED BONDS PRIOR TO THE
MATURITY DATE WILL NOT CONSTITUTE AN EVENT OF DEFAULT.
LOSSES
For any Payment Date, the amount of Available Funds will be
dependent in part upon whether any Losses have been incurred on the Loans during
the most recent prepayment periods. Losses with respect to the Loans will be
allocated first to the Overcollateralization Amount (including amounts on
deposit in the Collateralization Fund), second to the Subordinated Bonds (in
reverse order of numerical designation) and third to the Senior Bonds (pro rata,
by outstanding principal balance, with respect to each Class of the Senior
Bonds).
STATED MATURITY DATE
The Stated Maturity Date for the Bonds is set forth on the cover
page hereof and represents the date that the Bonds are payable in full. The
Stated Maturity Date for the Bonds has been calculated by adding approximately
four years to the latest scheduled payment date on the Loans included in the
Collateral originally pledged to secure the Bonds.
The rate of payments (including payments attributable to
prepayments, defaults, liquidations, and repurchases) on the Loans will depend
on a number of factors, including the characteristics of such Loans, the
prevailing level of interest rates and other social and economic factors, and no
assurance can be given as to the actual payment experience. Because the rate of
payment (including payments attributable to prepayments, defaults, liquidations,
and repurchases) of principal on the Loans may exceed the scheduled rate of
payments, and could exceed such scheduled rate by a substantial amount, the
actual final payment of principal of the Bonds may be earlier or later, and
could be substantially earlier, than the Stated Maturity Date of such Class. See
"Maturity and Prepayment Considerations" herein and in the Prospectus.
OPTIONAL REDEMPTION
The Issuer may, at its option, redeem a Class or Classes of Bonds in
whole, but not in part, on any Payment Date on or after the earlier of (i) June
28, 2004, or (ii) the Payment Date on which, after taking into account payments
of principal to be made on such Payment Date, the aggregate outstanding
principal balance of the Bonds is less than 35% of the aggregate principal
balance of the Bonds on the Closing Date. If the Issuer does not exercise its
option to redeem the Bonds on the first Payment Date on which it is permitted to
do so, the Class Interest Rate for each Class of the Bonds will be increased as
described herein. In addition, the Issuer may redeem a Class or Classes of Bonds
in whole, but not in part, at any time upon a determination by the Issuer, based
upon an opinion of counsel, that a substantial risk exists that the Bonds of the
Class to be redeemed will not be treated for federal income tax purposes as
evidences of indebtedness. Any such redemption will be paid in cash at a price
equal to 100% of the aggregate outstanding principal balance of the Class of
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Bonds so redeemed, plus accrued and unpaid interest for the applicable Accrual
Period. At the option of the Issuer, an optional redemption of a Class of Bonds
may be effected without retiring such Class of Bonds so that the Issuer has the
ability to own or resell such Class of Bonds. Upon redemption and retirement of
all the Bonds, the Collateral securing the Bonds will be released from the lien
of the Indenture. See "Description of the Bonds -- Redemption" in the
Prospectus.
Any redemption of a Class of Bonds may have an adverse effect on the
yield of such Class, because such redemption would have the same effect on such
Class as a prepayment in full of the Loans. See "Yield Considerations" herein.
SECURITY FOR THE BONDS
THE COLLATERAL
The Collateral will consist of (i) the Directly Held Loans and (ii)
certificates (the "Mortgage Certificates") representing substantially the entire
interest in mortgage loans (the "Underlying Mortgage Loans" and, together with
the Directly Held Loans, the "Loans"). The Underlying Mortgage Loans are
indirectly pledged to secure the Bonds through the pledge of the Mortgage
Certificates, which represent substantially the entire interest in the
Underlying Mortgage Loans and, in addition, provide limited credit enhancement
for the Underlying Mortgage Loans. The Collateral to be pledged to secure the
Bonds will be acquired by the Issuer from the Participant.
THE LOANS
The Loans include both Adjustable Rate Loans, which provide for
adjustments in their Loan Rate as described below, and Level Payment Loans,
which have a fixed APR and provide for level monthly payments over its term
sufficient to amortize the principal balance in full. The Level Payment Loans
provide for allocation of payments according to either (i) the "actuarial"
method (each, an "Actuarial Loan") or (ii) the simple interest method (each, a
"Simple Interest Loan").
The portion of each monthly payment for any Actuarial Loan allocable
to principal will be equal to the total amount thereof less the portion
allocable to interest. In each month, the portion allocable to interest is a
precomputed amount equal to one month's interest on the principal balance
determined by reducing the initial principal balance by the principal portion of
all monthly payments that were due in prior months (whether or not timely made)
and all prior partial principal prepayments. Thus, each payment allocated to a
scheduled monthly payment of an Actuarial Loan will be applied to interest and
principal in accordance with such allocation whether such monthly payment is
received in advance of or subsequent to the date it is due. All payments
received on an Actuarial Loan (other than prepayments in full or in part) will
be applied when received to current and any previously unpaid monthly payments
in the order they were due.
Payments on a Simple Interest Loan will be applied first to interest
accrued through the date immediately preceding the date of receipt of payment
and then to unpaid principal. Accordingly, if an obligor pays an installment
less than one month after the previous payment, the portion of the payment
allocable to interest will be less than if the payment had been made when due,
the portion of the payment applied to reduce the principal balance will be
correspondingly greater, and the principal balance will be amortized more
rapidly than scheduled. Conversely, if an obligor pays an installment more than
one month after the previous payment, the portion of the payment allocable to
interest for the payment period will be greater than if the payment had been
made when due, the portion of the payment applied to reduce the principal
balance will be correspondingly less, and the principal balance will be
amortized more slowly than scheduled, in which case a larger portion of the
principal balance may be due on the final scheduled payment date.
Whenever reference is made herein to a percentage of the Loans or to
the characteristics of the Loans, the calculation is based on the aggregate
Scheduled Principal Balance of the Loans projected as of the Cut-off Date.
All the Loans will have an original term to maturity of not more
than 30 years. As of the Cut-off Date, the weighted average remaining term to
stated maturity of the Loans is expected to be approximately 333 months.
Approximately 91% of the Loans are expected to be Adjustable Rate Loans and
approximately 9% of the Loans are expected to be Level Payment Loans.
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Of the Adjustable Rate Loans, approximately 46% are expected to have
Loan Rates that adjust by reference to the Six-Month LIBOR Index and
approximately 54% are expected to have Loan Rates that adjust by reference to
the One-Year CMT Index.
The initial Loan Rate for each of the Adjustable Rate Loans is
expected to remain in effect for the "Initial Period" following its origination.
Thereafter, as specified in the related Note, the Loan Rate on each Adjustable
Rate Loan (other than a converted Loan) will adjust on each Interest Adjustment
Date applicable thereto to a rate that is calculated in accordance with (i) the
average of LIBOR for six-month Eurodollar deposits in the London market based on
quotations of major banks as published either by FNMA or THE WALL STREET JOURNAL
(the "Six-Month LIBOR Index") or (ii) the weekly average yield on U.S. Treasury
securities adjusted to a constant term of maturity of one year as published by
the Federal Reserve Board (the "One-Year CMT Index"). As specified in the
related Note, the Loan Rate of each Adjustable Rate Loan will be adjusted on
each Interest Adjustment Date to a rate equal to the sum (as rounded pursuant to
the applicable rounding convention) of the current Six-Month LIBOR Index or the
current One-Year CMT Index (each, an "Index") and a fixed percentage (the "Gross
Margin"), subject to, in most cases, (i) a maximum periodic increase or decrease
in the Loan Rate of 1% or 2% per annum (a "Periodic Rate Cap") and (ii) any
minimum and maximum lifetime Loan Rates. After an Adjustable Rate Loan has been
"fully indexed", adjustments in the Loan Rate will continue to be subject to
Periodic Rate Caps, and minimum and maximum lifetime Loan Rates, and,
accordingly, the Loan Rate on any such Adjustable Rate Loan, as adjusted on any
Interest Adjustment Date, may not equal the sum of the applicable Index and the
applicable Gross Margin. The Loans for which the Loan Rate adjusts by reference
to the Six-Month LIBOR Index have a semi-annual Interest Adjustment Date; the
Loans for which the Loan Rate adjusts by reference to the One-Year CMT Index
have an annual Interest Adjustment Date.
Substantially all the Adjustable Rate Loans were originated with an
initial Loan Rate below the sum of the applicable index and the applicable Gross
Margin. As of the Cut-off Date, it is expected that approximately 51% of the
Adjustable Rate Loans will have passed their first Interest Adjustment Date. The
weighted average next Interest Adjustment Date for the Adjustable Rate Loans as
of the Cut-off Date is approximately October 1997. No Adjustable Rate Loan will
be "fully indexed" until it bears interest at the applicable Index plus its
Gross Margin. Due to the application of Periodic Rate Caps and minimum and
maximum lifetime Loan Rates, the Loan Rate on any Adjustable Rate Loan, as
adjusted on any Interest Adjustment Date, may not equal the sum of the
applicable Index and the applicable Gross Margin. See "Maturity and Prepayment
Considerations -- Factors Affecting Prepayments on the Loans" herein.
With respect to the Adjustable Rate Loans, as of the Cut-off Date,
(i) the Loan Rates are expected to range from 4.375% to 11.25% per annum, and
the weighted average Loan Rate is expected to be approximately 7.15% per annum,
(ii) the Gross Margins are expected to range from 0.00% to 5.80%, with a
weighted average Gross Margin of approximately 2.61%, (iii) the maximum lifetime
Loan Rates are expected to range from 9.50% to 17.75% per annum, and the
weighted average maximum lifetime Loan Rate is expected to be approximately
12.34% per annum and (iv) the minimum lifetime Loan Rates are expected to range
from 0.00% to 11.25% per annum, and the weighted average minimum lifetime Loan
Rate is expected to be approximately 3.12% per annum. In no case will the
minimum lifetime Loan Rate of an Adjustable Rate Loan be less than the Gross
Margin of such Loan.
With respect to the Level Payment Loans, as of the Cut-off Date,
the Loan Rates are expected to range from 6.75% to 13.00% per annum and the
weighted average Loan Rate is expected to be approximately 9.78% per annum.
LESS THAN 1% OF THE DIRECTLY HELD LOANS WERE, AS OF THE CUT-OFF
DATE, DELINQUENT BY ONE OR MORE SCHEDULED PAYMENTS.
Approximately 48% of the Loans are expected to be secured by
properties located in California. Consequently, losses and prepayments on the
Collateral and resultant payments on the Bonds may be affected significantly by
changes in the housing markets and the regional economy of California, and also
by the occurrence of natural disasters (such as earthquakes, fires and floods)
in California. In addition, approximately 6% and 5% of the Loans are expected to
be secured by properties located in Massachusetts and Michigan, respectively.
UNDERWRITING POLICIES. Notwithstanding anything to the contrary in
the Prospectus, not all the Loans meet Dynex's various credit appraisal and
underwriting standards. The Loans are believed generally to have been originated
pursuant to underwriting standards that generally conform to the underwriting
guidelines of FNMA and FHLMC (where applicable), except that such Loans may have
original principal balances in excess of those permitted by FNMA or FHLMC, may
have been underwritten pursuant to "limited documentation" programs, and may
have been originated at debt-to-income and other ratios in excess of those
permitted by FNMA or FHLMC provided that compensating factors existed at the
time of origination.
S-23
Except as otherwise indicated, the Loans and related properties
securing the Loans have the characteristics set forth in the following tables as
of the Cut-off Date. Asterisks (*) in the following tables indicate values
between 0.0% and 0.5%. Whenever reference is made in the tables to a percentage
of the Loans, such percentage is based on the aggregate Scheduled Principal
Balance of the Loans as of the Cut-off Date. Percentages may not sum to 100% due
to rounding.
1) CURRENT SCHEDULED PRINCIPAL BALANCE
CURRENT SCHEDULED PERCENTAGE OF SCHEDULED
PRINCIPAL BALANCE PRINCIPAL BALANCE (%)
$ 1 - 100,000 11
100,001 - 150,000 3
150,001 - 203,150 4
203,151 - 250,000 11
250,001 - 300,000 12
300,001 - 350,000 9
350,001 - 400,000 8
400,001 - 450,000 5
450,001 - 500,000 5
500,001 - 550,000 3
550,001 - 600,000 5
600,001 - 650,000 5
650,001 - 700,000 2
700,001 - 800,000 3
800,001 - 900,000 3
900,001 - 1,000,000 6
1,000,001 - 2,000,000 5
2,000,001 - 3,300,000 1
---
Totals: 100
The average Scheduled Principal Balance for the Loans is approximately $192,439.
The maximum Scheduled Principal Balance of the Loans is approximately
$3,300,000. The minimum Scheduled Principal Balance of the Loans is
approximately $2,986.
2) CURRENT LOAN RATES
PERCENTAGE OF SCHEDULED
CURRENT LOAN RATES (%) PRINCIPAL BALANCE (%)
4.375 - 5.999 6
6.000 - 6.249 5
6.250 - 6.499 10
6.500 - 6.749 12
6.750 - 6.999 17
7.000 - 7.249 7
7.250 - 7.499 3
7.500 - 7.749 8
7.750 - 7.999 5
8.000 - 8.249 1
8.250 - 8.499 11
8.500 - 8.749 6
8.750 - 8.999 2
9.000 - 11.249 6
-
11.250 - 13.499 1
---
Totals: 100
The weighted average current Loan Rate of the Loans is approximately 7.39% per
annum. The weighted average current Loan Rate of the Level Payment Loans and the
Adjustable Rate Loans is approximately 9.78% and 7.15%, respectively.
3) GROSS MARGIN ON ADJUSTABLE RATE LOANS
PERCENTAGE OF SCHEDULED
GROSS MARGIN (%) PRINCIPAL BALANCE (%)
.000 - 1.749 *
1.750 - 2.749 29
2.750 - 2.999 51
3.000 - 3.249 19
3.250 - 3.499 *
3.500 - 3.749 *
3.750 - 4.500 1
5.750 - 5.999 1
---
Totals: 100
The weighted average Gross Margin of the Adjustable Rate Loans is approximately
2.61% per annum.
4) REMAINING TERM TO STATED MATURITY
REMAINING TERM PERCENTAGE OF SCHEDULED
(MONTHS) PRINCIPAL BALANCE (%)
75 - 320 20
321 - 325 5
326 - 330 2
331 - 335 3
336 - 340 2
341 - 345 4
346 - 350 17
351 - 355 43
356 - 360 4
---
Totals: 100
The weighted average remaining term to stated maturity of the Loans is
approximately 333 months.
5) ORIGINAL LOAN-TO-VALUE RATIO GIVING EFFECT TO THE MOST RECENT VALUATION OF
ADDITIONAL LOAN COLLATERAL(1)
ORIGINAL LOAN-TO- PERCENTAGE OF SCHEDULED
VALUE RATIO (%) PRINCIPAL BALANCE(%)
50.00 and below 10
50.01 - 55.00 3
55.01 - 60.00 4
60.01 - 65.00 7
65.01 - 70.00 9
70.01 - 75.00 15
75.01 - 80.00 35
80.01 - 85.00 2
85.01 - 90.00 9
90.01 - 100.00 6
---
Totals: 100
(1) After giving effect to the most recent valuation of Additional Loan
Collateral, the Loan-to-Value Ratio of a Loan is equal to the ratio (expressed
as a percentage of the original Scheduled Principal Balance of the Loan and the
fair market value of the property at the time of origination (and any Additional
Loan Collateral)). The fair market value for Mortgage Loans is the lower of (i)
the purchase price and (ii) the appraised value in the case of purchases and is
the appraised value in all other cases. The fair market value for Manufactured
Homes is the total amount of the related loan plus any cash downpayment and the
value of any trade-in. The weighted average original loan-to-value ratio, giving
effect to the most recent valuation of Additional Loan Collateral, is
approximately 72.55%.
6) STATE DISTRIBUTION OF PROPERTIES
PERCENTAGE OF
STATE SCHEDULED PRINCIPAL BALANCE (%)
California 48
Colorado 4
Connecticut 2
Florida 2
Illinois 3
Georgia 2
Maryland 2
Massachusetts 6
Michigan 5
New York 4
North Carolina 2
Pennsylvania 3
South Carolina 2
Texas 2
Virginia 2
Washington 2
Other* 10
---
Totals: 100
*Others may include: Alabama, Alaska, Arizona, Arkansas, Delaware, District of
Columbia, Hawaii, Idaho, Indiana, Kansas, Kentucky, Louisiana, Maine, Minnesota,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New
Mexico, Ohio, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Utah,
West Virginia, Wisconsin, Wyoming.
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Less than 10% of the Loans are secured by Manufactured Homes. The
average Scheduled Principal Balance of such Loans is approximately $37,509
and the current Scheduled Principal Balance of the largest such Loan is
approximately $92,229, the weighted average remaining term to stated maturity
of such Loans is 297 months, the weighted average current Loan Rate on such
Loans is approximately 9.78% per annum, and such Loans are secured by
properties located in Michigan (25%), Georgia (19%), South Carolina (16%),
North Carolina (15%), Texas (10%), Virginia (3%) and 17 other states in no one
of which more than 3% of such properties are located. See "Risk Factors--Credit
Considerations", "Security for the Bonds" and "Certain Legal Aspects of the
Collateral" in the Prospectus.
MORTGAGE POOL AND OTHER INSURANCE FOR THE UNDERLYING MORTGAGE LOANS
The Underlying Mortgage Loans are covered by mortgage pool insurance
policies issued by either General Electric Mortgage Insurance Corporation (as to
approximately 89% of the Underlying Mortgage Loans) or United Guaranty
Residential Insurance Company (as to approximately 11% of the Underlying
Mortgage Loans). The mortgage pool insurance policies provide coverage for
certain losses by reason of default on the Underlying Mortgage Loans equal to
various percentages, ranging from 8.00% to 8.75% of the initial principal
balances of the Underlying Mortgage Loans. Coverage is reduced as claims are
paid. In addition, the Underlying Mortgage Loans have limited coverage for
special hazard and bankruptcy risks.
The Directly Held Loans are not covered by any mortgage pool
insurance policy or any insurance with respect to special hazard or
bankruptcy risks.
ADDITIONAL COLLATERAL
Less than 3% of the Loans are secured by, in addition to real estate
or shares of stock in a cooperative housing corporation, additional collateral
("Additional Loan Collateral") generally consisting of marketable securities.
The Boston Company required that borrowers pledge Additional Loan
Collateral to secure a Loan to the extent that the loan-to-value ratio of such
Loan would otherwise have exceeded applicable underwriting guidelines.
Additional Loan Collateral may include publicly traded stocks, corporate and
municipal bonds, government securities, commercial paper, bank deposits, trust
accounts and mutual funds. The loan-to-value ratio of a Loan secured in part by
Additional Loan Collateral may, with respect to the real property securing such
loan, be greater than 100%.
All Additional Loan Collateral is valued on a daily basis; if the
market value of such collateral with respect to any Loan declines below
specified levels, the related borrower is required to pledge sufficient
Additional Loan Collateral to meet such levels. The lien on some of or all the
Additional Loan Collateral securing a Loan will generally be released if, within
five years after origination of such loan, the borrower meets certain
requirements and the loan-to-value ratio has been reduced due to (i) an increase
in the appraised value of the real property securing such Loan or (ii)
prepayment by the borrower of a portion of the loan balance. After five years
have elapsed following origination of a loan, all or part of the related
Additional Loan Collateral may be liquidated in order to reduce the outstanding
loan balance to a level within The Boston Company's loan-to-value guidelines.
The security interests in all Additional Loan Collateral pledged to
secure the Loans will be assigned to the Trustee. The Boston Company will
continue to hold such Additional Loan Collateral as custodian on behalf of the
Trustee.
Investors should consider that, due to changes in market conditions,
Additional Loan Collateral pledged to secure a Loan may not be readily
marketable at the time that the related borrower defaults on such Loan and
foreclosure proceedings are commenced.
Because Additional Loan Collateral is generally required to be
pledged to secure any Loan that would otherwise have a loan-to-value ratio above
80%, none of the Loans serviced by The Boston Company are covered by primary
mortgage insurance policies.
COOPERATIVE LOANS
The Loans include Cooperative Loans that were originated primarily
in the states of New York, Massachusetts, California and the District of
Columbia. Such loans are not secured by liens on real estate. The "owner" of a
S-25
cooperative apartment does not own the real estate constituting the apartment,
but owns shares of stock in a corporation which holds title to the building in
which the apartment is located, and by virtue of owning such stock is entitled
to a proprietary lease or occupancy agreement to occupy the specific apartment.
A Cooperative Loan is a loan secured by a lien on the shares and an assignment
of the lease or occupancy agreement. If the borrower defaults on a Cooperative
Loan, the lender's remedies are similar to the remedies which apply to a
foreclosure of a leasehold mortgage or deed of trust, in that the lender can
foreclose the loan and assume ownership of the shares and of the borrower's
rights as lessee under the related proprietary lease or occupancy agreement.
Typically, the lender and the cooperative housing corporation enter into a
recognition agreement that establishes the rights and obligations of both
parties in the event of a default by the borrower on its obligations under the
lease or occupancy agreement.
As described herein, less than 1% of the Loans are Unrecognized
Cooperative Loans. Investors should consider the risk that, in the event of a
default under an Unrecognized Cooperative Loan and resulting foreclosure, the
value of the related collateral may be substantially less than the unpaid
principal balance of the related Loan. See "Risk Factors--Cooperative Loans;
Unrecognized Security Interests" and "Security for the Bonds--Realizing Upon
Cooperative Loan Security" herein.
There are certain risks that arise as a result of the cooperative
form of ownership which differentiate Cooperative Loans from other types of
loans. For example, the power of the board of directors of most cooperative
housing corporations to reject a proposed purchaser of a unit owner's shares
(and prevent the sale of an apartment) for any reason (other than reasons based
upon unlawful discrimination), or for no reason, significantly reduces the
universe of potential purchasers in the event of a foreclosure. Moreover, in
buildings where the "sponsor" (I.E., the owner of the unsold shares in the
corporation) holds a significant number of unsold interests in apartments,
cooperative apartment owners run a special risk that the sponsor may go into
default on its proprietary leases or occupancy agreements, and thereby cause a
default under the underlying mortgage loan to the cooperative housing
corporation which is secured by a mortgage on the building. In such event, the
unit owners may be forced to make up any shortfall in income to the cooperative
housing corporation resulting from the sponsor's default or risk losing their
apartments in a foreclosure proceeding brought by the holder of the mortgage on
the building. Not only would the value attributable to the right to occupy a
particular apartment be adversely affected by such an occurrence, but the
foreclosure of a mortgage on the building in which the apartment is located
could result in a total loss of the shareholder's equity in the building (and a
corresponding loss of the lender's security for its Cooperative Loan) and right
to occupy the apartment.
REALIZING UPON COOPERATIVE LOAN SECURITY
The cooperative shares and proprietary lease or occupancy agreement
owned by the tenant-stockholder and pledged to the lender are, in almost all
cases, subject to restrictions on transfer as set forth in the certificate of
incorporation and by-laws of a cooperative housing corporation, as well as in
the proprietary lease or occupancy agreement. The proprietary lease or occupancy
agreement, even while pledged, may be canceled by the cooperative housing
corporation for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. Commonly, rent and other obligations and charges arising
under a proprietary lease or occupancy agreement which are owed to the
cooperative housing corporation are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative housing
corporation to terminate such lease or agreement in the event the borrower
defaults in the performance of covenants thereunder. Typically, the lender and
the cooperative housing corporation enter into a recognition agreement which
establishes the rights and obligations of both parties in the event of a default
by the tenant-stockholder on its obligations under the proprietary lease or
occupancy agreement. A default by the tenant-stockholder under the proprietary
lease or occupancy agreement will usually constitute a default under the
security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative housing corporation will take no action to terminate
such lease or agreement until the lender has been provided with an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative housing
corporation will recognize the lender's lien against proceeds from a sale of the
cooperative apartment, subject, however, to the cooperative housing
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corporation's right to sums due under such proprietary lease or occupancy
agreement or which have become liens on the shares relating to the proprietary
lease or occupancy agreement. The total amount owed to the cooperative housing
corporation by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the Cooperative Loan and accrued and unpaid
interest thereon.
Recognition agreements also provide that, in the event the lender
succeeds to the tenant-shareholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon its collateral for a Cooperative Loan,
the lender must obtain the approval or consent of the cooperative housing
corporation as required by the proprietary lease before transferring the shares
or assigning the proprietary lease.
In New York, lenders generally have realized upon the pledged shares
and proprietary lease or occupancy agreement given to secure a Cooperative Loan
by public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale. Generally, a
sale conducted according to the usual practice of banks selling similar
collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative housing corporation to receive sums
due under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Loans is based
upon the Collateral, as constituted at the close of business on the Cut-off
Date. Loans may be removed prior to closing as a result of incomplete
documentation or non-compliance with representations and warranties set forth in
the Agreement, if the Issuer deems such removal necessary or appropriate, and
the Issuer may substitute other Loans subject to certain terms and conditions
set forth in the Agreement. Neither the substitution of Loans nor the addition
of Loans not included originally are expected to cause material variances from
the information set forth herein.
A current report on Form 8-K will be available to purchasers of the
Bonds and will be filed with the Commission, together with the Indenture, within
fifteen days after the initial issuance of the Bonds. Also, the Issuer intends
to file certain additional yield tables and other computational materials with
the Commission in a report on Form 8-K. Such tables and materials were prepared
by the Underwriters at the request of certain prospective investors. Such tables
and assumptions may be based on assumptions that differ from the Modeling
Assumptions; see "Maturity and Prepayment Considerations" in this Prospectus
Supplement. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
On each Payment Date, information will be available with respect to
the outstanding principal balance of each Class of the Bonds and the applicable
Class Interest Rate. The information may be obtained by telephone from the
corporate trust office of the Trustee. As of the date of this Prospectus
Supplement, that telephone number is (713) 216-2240. The Bond Administrator will
make available on an ongoing basis current information relating to the
Collateral, including (i) Loan delinquencies of 30 days, 60 days and 90 days or
over, (ii) Loans in foreclosure, (iii) REO, (iv) Losses on the Loans and (v) the
remaining Overcollateralization Amount.
SUBSTITUTION OF LOANS
Under limited circumstances, the Issuer will be permitted to
substitute a loan for a Directly Held Loan initially pledged to the Trustee. The
Issuer will have the option to pledge to the Trustee, in substitution for a
defaulted Directly Held Loan or REO, a new loan (a "Substitute Loan"), to the
extent that the Master Servicer has determined, in its reasonable business
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judgment, that the present value of any potential Loss on such defaulted
Directly Held Loan or REO will be reduced through the substitution of a
Substitute Loan for such defaulted Directly Held Loan or REO, and provided that
such Substitute Loan (i) is secured by the property that secures the defaulted
Directly Held Loan or by such REO, (ii) has a Loan Rate that is not less than
the then current market rate for a loan having similar characteristics
(PROVIDED, HOWEVER, that a Substitute Loan may have a Loan Rate less than the
then current market rate so long as the aggregate Scheduled Principal Balance of
all such Substitute Loans on their respective dates of substitution does not
exceed 1.00% of the initial aggregate Scheduled Principal Balance of the Loans),
and (iii) has a maturity date that is not later than nine months prior to the
Maturity Date of the Bonds. The amount, if any, by which the Scheduled Principal
Balance of the defaulted Directly Held Loan or REO exceeds the Scheduled
Principal Balance of the Substitute Loan would constitute a Loss on such
Directly Held Loan or REO. Upon the pledge of a Substitute Loan, the Trustee
will release the defaulted Directly Held Loan or the REO from the lien of the
Indenture. See "Security for the Bonds--Substitution of Collateral" in the
Prospectus.
In addition, the Issuer may pledge to the Trustee a Loan in
substitution for a Directly Held Loan initially pledged (an "Original Loan") to
secure the Bonds in the event of a breach of a representation or warranty by the
Participant with respect to such Original Loan or in the case of defective or
incomplete documentation with respect to such Original Loan which materially and
adversely affects the value of such Original Loan. It is anticipated that any
substitution for an Original Loan will not materially change the characteristics
of the Loans as set forth above. If a Loan is not so pledged to the Trustee in
substitution for any such Original Loan, the Participant is obligated to
repurchase such Original Loan.
In certain cases, the Underlying Mortgage Loans may also be subject
to similar rights of substitution (or obligations to repurchase).
DELIVERY OF MORTGAGE LOANS
If the Note with respect to any Mortgage Loan proposed to be
included in the Collateral is not delivered on the Closing Date, the Issuer
intends to deposit cash on an interim basis with the Trustee in an amount equal
to the Scheduled Principal Balance of the Mortgage Loans not delivered, plus
applicable interest for one month on the amount of cash deposited. To the extent
the required documentation for any such Directly Held Loan is not delivered as
required by the Indenture, the related cash so deposited will be applied to pay
the Bonds and such Loan Mortgage shall be released from the lien of the
Indenture.
CONVERSION OPTION
Approximately 41% of the Adjustable Rate Loans are expected to be
convertible, upon the fulfillment of certain conditions, from an adjustable to a
fixed Loan Rate at the option of the borrower.
In order to be eligible to convert the adjustable Loan Rate on a
convertible Adjustable Rate Loan to a fixed Loan Rate, the borrower generally
must (a) execute and submit to the applicable Servicer certain conversion
documents, including a loan modification agreement, (b) pay the applicable
conversion fee and (c) not (i) be in default under the Note or the security
documents related to such Adjustable Rate Loan or (ii) have been delinquent
thirty days in making any payment under the Note in the previous twelve months.
Furthermore, the borrower must generally complete an updated credit review and,
if the Servicer believes the value of the related property may have declined,
provide an updated appraisal. Upon conversion, the scheduled payment will be
adjusted to provide for fully amortizing, level monthly payments until maturity.
Should interest rates decline so that the fixed Loan Rates applicable upon
conversion are significantly lower than the then current Loan Rates, or are
significantly lower than the applicable maximum lifetime Loan Rates on
convertible Adjustable Rate Loans, borrowers may have a significant financial
incentive to effect conversions.
The Participant has the option but is not obligated to purchase
Directly Held Adjustable Rate Loans which are converted to a fixed rate. The
Servicers and/or the Master Servicer of the Underlying Mortgage Loans in certain
cases have the option and in other cases are obligated to purchase converted
Underlying Mortgage Loans from the trustee for the applicable Mortgage
Certificates. If any converted Loan is purchased, the purchase price will be
equal generally to 100% of the Scheduled Principal Balance of such converted
Loan plus 30 days' interest thereon at the applicable Loan Rate in effect
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immediately prior to such conversion. Any converted Loan not so purchased will
remain pledged to secure the Bonds, but with a fixed Loan Rate. See "Maturity
and Prepayment Considerations" herein.
SERVICING OF THE COLLATERAL
GENERAL
Approximately 30% of the Loans are serviced by The Boston Company
(and subserviced by its affiliate, Mellon Mortgage Company); approximately 8% of
the Loans are serviced by Norwest; approximately 9% of the Loans are serviced by
Dynex Services ("Dynex Services"), an affiliate of Dynex and the Issuer;
approximately 34% of the Loans are serviced by Chase Manhattan Mortgage
Corporation ("Chase Mortgage"); approximately 7% of the Loans are serviced by
Harbourton Mortgage Co., L.P. ("Harbourton"), an affiliate of Lehman Brothers
Inc., and the balance of the loans are serviced by other servicers. The Boston
Company, Norwest, Dynex Services, Chase Mortgage, Harbourton and the other
servicers are referred to collectively as the "Servicers" and each as a
"Servicer".
Norwest will serve as master servicer of approximately 13% of the
Loans, which constitute the Underlying Mortgage Loans (as defined herein); Dynex
Capital ("Dynex"), an affiliate of the Issuer, will serve as master servicer of
the balance of the Loans (Dynex in such capacity, together with Norwest, the
"Master Servicers" and each a "Master Servicer"). See "Dynex Capital, Inc." in
the Prospectus.
LOAN SERVICING ACTIVITIES
The following provides selected information with respect to
servicing activities at the Boston Company and Chase Mortgage, which service
30% and 34%, respectively, of the Loans.
THE BOSTON COMPANY. The following information, particularly within
The Boston Company's knowledge, was requested of and provided by The Boston
Company, which is not affiliated with the Issuer or Dynex. Such information has
not been independently confirmed by the Issuer.
When a mortgagor fails to make a required payment on a mortgage loan
and does not cure the deficiency promptly, the loan is classified as delinquent.
In most cases, delinquencies are cured promptly, but if not, foreclosure
proceedings are generally commenced. The procedural steps necessary for
foreclosure vary from state to state, but generally, if the loan is not
reinstated within certain periods specified by the relevant mortgage loan
documents, the property securing the loan can be acquired by the lender. If a
mortgagee takes title to the mortgaged property through foreclosure but the
mortgaged property had a value lower than the outstanding amount of the debt,
the law in certain states permits such mortgagee to obtain a deficiency judgment
in the amount of the difference. The laws of certain other states restrict or
prohibit such deficiency judgments. It is anticipated that in most cases The
Boston Company will not seek deficiency judgments against defaulted mortgagors.
As of December 31, 1996, The Boston Company's total servicing
portfolio contained loans with an aggregate outstanding principal balance of
approximately $4.4 billion. The loans contained in The Boston Company's
servicing portfolio include fixed and adjustable rate loans, first and second
lien loans and one- to four-family loans, and therefore may differ significantly
from the Mortgage Loans. There can be no assurance, and no representation is
made, that the delinquency experience with respect to the Mortgage Loans 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 following tables set forth certain information concerning the
delinquency experience of The Boston Company with respect to all mortgage loans
serviced by it. The indicated periods of delinquency are based on the number of
days past due on a contractual basis.
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THE BOSTON COMPANY MORTGAGE LOAN PORTFOLIO(1)
(Dollar amounts in thousands)
DECEMBER 31, 1994(3) DECEMBER 31, 1995
-------------------- -----------------
NO. OF DOLLAR NO. OF DOLLAR
LOANS AMOUNT PERCENT LOANS AMOUNT PERCENT
Portfolio Principal Balance 10,428 $4,260,235 100.00% 9,884 $4,079,316 100.00%
Delinquent Loans
30-59 days delinquent 165 49,513 1.16 196 56,829 1.39
60-89 days delinquent 27 4,508 0.11 20 3,733 0.09
90+ days delinquent 5 615 0.01 9 1,311 0.03
Non-accrual Loans(2) 82 26,754 0.63 74 32,635 0.80
Total 279 81,390 1.91 299 94,508 2.32
Net Charge-offs -- 1,802 0.04 -- 1,154 0.03
REO 11 4,092 0.10 7 2,139 0.05
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
NO. OF DOLLAR NO. OF DOLLAR
LOANS AMOUNT PERCENT LOANS AMOUNT PERCENT
Portfolio Principal Balance 10,088 $4,355,536 100.00% 10,067 $4,356,699 100.00%
Delinquent Loans
30-59 days delinquent 115 45,378 1.04 125 46,771 1.12
60-89 days delinquent 16 3,827 0.09 26 5,827 0.13
90+ days delinquent 19 4,662 0.11 14 3,122 0.07
Non-accrual Loans(2) 57 21,815 0.50 48 20,525 0.46
Total 207 75,682 1.74 213 77,245 1.79
Net Charge-offs -- 1,738 0.04 -- 58 --
REO 7 3,132 0.07 8 3,504 0.05
(1) Percentages in the table are rounded to the nearest 0.01%; dollar amounts
are rounded to the nearest dollar.
(2) In general, a "Non-accrual Loan" is a Boston Company Mortgage Loan as to
which (i) payments are delinquent for a specified period (based on the
principal balance of such loan) or (ii) The Boston Company determines that
collection is in doubt.
(3) Information in the table for the year ended December 31, 1994 does not
include loans serviced for others totaling approximately $155 million,
but does include loans owned by The Boston Company and serviced by others
totaling approximately $140 million.
THE ABOVE DELINQUENCY STATISTICS REPRESENT THE RECENT EXPERIENCE OF
THE BOSTON COMPANY. THERE CAN BE NO ASSURANCE, HOWEVER, THAT THE DELINQUENCY
EXPERIENCE ON THE LOANS SERVICED BY THE BOSTON COMPANY WILL BE COMPARABLE. In
addition, the foregoing statistics include mortgage loans with a variety of
payment and other characteristics that may not correspond to those of the Loans
serviced by The Boston Company. Further, Loans serviced by the Boston Company
were not chosen from The Boston Company's portfolio on the basis of any
methodology which could or would make them representative of the total pool of
mortgage loans in The Boston Company's portfolio. The actual loss and
delinquency experience on the Loans serviced by the Boston Company will depend,
among other things, upon the value of the real estate and cooperative shares
securing such Loans, the ability of the mortgagors to make required payments and
the strength of employment and housing markets. If The Boston Company undertakes
litigation or retains outside attorneys or investigators the costs thereof will
be borne by the Trust Estate. The Boston Company will not be required to advance
funds for the conduct of such litigation or the hiring of such outside attorneys
or investigators, if it reasonably believes that such advances will not be
promptly reimbursed. See "Advances" below.
The Loans serviced by the Boston Company will be subserviced by a
designated servicing staff of the Mellon Mortgage Company in Denver, Colorado,
which is a wholly-owned subsidiary of Mellon Bank, N.A., a wholly-owned
subsidiary of Mellon Bank Corporation. The Subservicer originates, purchases and
services residential and commercial mortgage loans through approximately 80
offices throughout the United States.
CHASE MORTGAGE. The following information, particularly within Chase
Mortgage's knowledge, was requested of and provided by Chase Mortgage, which is
not affiliated with the Issuer or Dynex. Such information has not been
independently confirmed by the Issuer.
The loans contained in Chase Mortgage's servicing portfolio include
fixed and adjustable rate loans, first and second lien loans and one- to
four-family loans, and therefore may, differ significantly from the Loans
serviced by Chase Mortgage. There can be no assurance, and no representation is
made, that the delinquency experience with respect to the Loans serviced by
Chase Mortgage will be similar in 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 Loans serviced by Chase Mortgage.
The following table summarizes the foreclosure and delinquency
experience on conventional residential (fixed and adjustable rate) first trust
deed or mortgage loans (including loans originated by unaffiliated originators)
serviced or subserviced by Chase Mortgage as of the date indicated. Prior to
April 1, 1996, Chase Mortgage was known as Chemical Residential Mortgage
Corporation; however, the statistical information set forth below has been
restated to include corresponding information with respect to the corporation
formerly known as Chase Manhattan Mortgage Corporation, certain of the assets of
which Chemical Residential Mortgage Corporation purchased effective April 1,
1996.
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AS OF DECEMBER 31
(DOLLAR AMOUNTS IN THOUSANDS)
1994 1995 1996
---- ---- ----
Total Principal Balance (End of Period) $73,927,369 $93,123,505 $97,309,400
Total Number of Loans 678,883 876,107 889,959
Delinquencies
Period of Delinquency: 30-59 Days
Principal Balance $1,746,294 $2,022,700 $2,270,337
Number of Loans 16,241 19,453 22,847
Percent Delinquent by Number of Loans 2.39% 2.22% 2.57%
Period of Delinquency: 60-89 Days
Principal Balance $340,305 $369,325 $421,247
Number of Loans 3,170 3,639 4,248
Percentage Delinquent by Number of Loans 0.47% 0.42% 0.48%
Period of Delinquency: 90 Days or more
Principal Balance $240,348 $338,106 $254,405
Number of Loans 2,220 3,279 2,432
Percentage Delinquent by Number of Loans 0.33% 0.37% 0.27%
In Foreclosure
Principal Balance $525,454 $709,646 $718,869
Number of Loans 4,837 6,805 7,093
Percent in Foreclosure by Number of Loans 0.71% 0.78% 0.80%
----- ----- -----
Total Delinquent or in Foreclosure
Principal Balance $2,852,401 $3,439,777 $3,664,858
Number of Loans 26,468 33,176 36,820
Percent Delinquent or in Foreclosure by Number
of Loans 3.90% 3.79% 4.11%
THE ABOVE DELINQUENCY AND FORECLOSURE STATISTICS REPRESENT THE
RECENT EXPERIENCE OF CHASE MORTGAGE. THERE CAN BE NO ASSURANCE, HOWEVER, THAT
THE DELINQUENCY EXPERIENCE ON THE LOANS SERVICED BY CHASE MORTGAGE WILL BE
COMPARABLE. In addition, the foregoing statistics include mortgage loans on a
variety of payment and other characteristics that may not correspond to those of
the Loans serviced by Chase Mortgage. Further, the Loans serviced by Chase
Mortgage were not chosen from Chase Mortgage's portfolio on the bases of any
methodology which could or would make them representative of the total pool of
mortgage loans in Chase Mortgage's portfolio. The actual delinquency experience
on the Loans serviced by Chase Mortgage will depend, among other things, upon
the value of the real estate securing the Loans serviced by Chase Mortgage and
the ability of the released mortgagors to make required payments.
DYNEX SERVICES. Dynex Services has been servicing loans since
December 1996, but is not a FNMA or FHLMC approved servicer.
ADVANCES
On or before each Payment Date, the applicable Servicer generally
will be obligated (subject to the limitations provided in the applicable
servicing agreement) to make cash advances ("Advances") with respect to any
delinquent Loan in an amount equal to the sum of (i) the Scheduled Payment on
such delinquent Loan (net of the Servicing Fee, except with respect to
approximately 9% of the Loans for which Advances are required to be made only to
the extent of the interest portion of a Scheduled Payment (without deduction for
the Servicing Fee)), (ii) amounts for the payment of real estate taxes,
assessments, insurance premiums and property protection expenses and (iii)
amounts to cover expenses relating to Foreclosure and Liquidation, provided that
the applicable Servicer has determined in its good faith business judgment that
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such Advance is not a Non-Recoverable Advance. The applicable Master Servicer
will be obligated to make any required Advance if the Servicer fails to make
such Advance. The Bond Administrator will be obligated to make any required
Advance if the applicable Master Servicer fails to do so. The Trustee will be
obligated to make any required Advance if the Bond Administrator fails to do so.
Nevertheless, none of the applicable Master Servicer, the Bond Administrator or
the Trustee is required to make any Advance if it has determined in its good
faith business judgment that such Advance would constitute a Non-Recoverable
Advance.
FORBEARANCE AND MODIFICATION AGREEMENTS
To the extent set forth in the related Servicing Agreement, each
Servicer may, with the approval of the applicable Master Servicer in most cases,
enter into a forbearance or modification agreement with the borrower under a
Loan, provided that such Servicer and, if required, such Master Servicer have
determined in their good faith business judgment that granting such forbearance
or modification will maximize recovery on such Loan to the Trust Estate on a
present value basis. The interests of the applicable Master Servicer in
determining whether to enter into a forbearance or modification agreement (or in
establishing the terms of any such forbearance or modification agreement) may
conflict with the interests of Bondholders.
EVENTS OF DEFAULT
The applicable Master Servicer will generally have the right
pursuant to the related Servicing Agreement to terminate any related Servicer in
the event of a breach by such Servicer of any of its obligations under such
Servicing Agreement. In the event of such termination, the applicable Master
Servicer generally assumes certain of such Servicer's servicing obligations
under such Servicing Agreement, including the obligation to make Advances
(limited as provided herein under the heading "Servicing of the
Collateral--Advances"), until such time as a successor servicer is appointed. If
the applicable Master Servicer is unable to act as servicer, the applicable
Master Servicer will generally appoint or petition a court of competent
jurisdiction for the appointment of a suitable loan servicing institution to act
as successor servicer under such Servicing Agreement. Pending such appointment,
the applicable Master Servicer will be obligated to service the related Loans
subject to the same limitations as apply to the applicable Master Servicer's
obligation to fulfill the servicing responsibility of a terminated servicer. Any
successor servicer, including the applicable Master Servicer, will be entitled
generally to compensation arrangements similar to, and not in excess of, those
provided to the terminated Servicer.
MASTER SERVICERS
NORWEST. Norwest, a national banking association, will act as Master
Servicer with respect to approximately 13% of the Mortgage Loans. The principal
executive offices of Norwest are located at Sixth Street and Marquette Avenue,
Minneapolis, Minnesota. Norwest performs its master servicing activity
principally at 11000 Broken Land Parkway, Columbia, Maryland. As of January 1,
1997, Norwest acted as master servicer for approximately 200,000 mortgage loans
with an aggregate principal balance of approximately $24.5 billion.
DYNEX. Dynex, in its capacity as Master Servicer, will supervise the
servicing of approximately 87% of the Loans. Dynex has been master servicing
loans since November of 1993 but is not an approved FNMA or FHLMC servicer.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSESS
The primary compensation payable to each Servicer is the monthly
servicing fee (the "Servicing Fee") applicable to the Loans serviced by such
Servicer, which fee is expressed as one-twelfth of a fixed percentage per annum
(the "Servicing Fee Rate") multiplied by the Scheduled Principal Balance of each
such Loan on the first day of the Due Period preceding each Payment Date. In
addition to the Servicing Fees, late payment fees, loan assumption fees and
conversion fees with respect to the Loans, and any interest or other income
earned on collections with respect to the Loans pending remittance to the Master
Servicer will be paid to or retained by the related Servicer as additional
servicing compensation. Each Servicer is obligated to pay certain insurance
premiums and certain ongoing expenses associated with the related Loans and
incurred by the Servicer in connection with its responsibilities under its
Servicing Agreement.
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The Bond Administration Fee (which will include the Master Servicing
Fee for the Directly Held Loans for which Dynex is the Master Servicer) will be
equal to 0.02% per annum on the aggregate Scheduled Principal Balance of the
Loans.
The other Master Servicers' compensation will range from 0.07% to
0.08%. On each Payment Date, the applicable Master Servicer will be obligated
(without regard to the amount of its Master Servicing Fee) to pay interest
("Month End Interest") through the end of the preceding calendar month with
respect to Loans that are prepaid in full or liquidated during the portion of
the related Prepayment Period in the preceding calendar month. The Bond
Administrator will be responsible for the fees of the Trustee.
SPECIAL SERVICER
The Participant may appoint a Special Servicer acceptable to the
Rating Agencies to undertake some of or all the Servicer's obligations with
respect to Directly Held Loans that are in default. The Special Servicer, if
any, may be entitled to various fees, including, but not limited to, (i) a
special servicing fee expressed as a fixed percentage of the remaining Scheduled
Principal Balance of each specially serviced Loan, (ii) a performance fee
applicable to each liquidated Loan based upon the Liquidation Proceeds of such
Loan, or both. See "Servicing of the Collateral--Special Servicing Agreement" in
the Prospectus.
MATURITY AND PREPAYMENT CONSIDERATIONS
WEIGHTED AVERAGE LIFE OF THE BONDS
Weighted average life refers to the average amount of time that will
elapse from the date of delivery of a bond until each dollar of principal of
such bond will be repaid to the investor. The weighted average life of the Bonds
will be influenced by the rate at which principal of the Loans is paid, which
may be in the form of scheduled amortization or prepayments (for this purpose,
the term "prepayment" includes payments resulting from refinancings,
liquidations of the Loans due to defaults, casualties, indemnifications and
purchases by or on behalf of the Issuer, the Participant or the Servicers, as
the case may be).
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The prepayment assumption model used in this Prospectus
Supplement is based on a Constant Prepayment Rate ("CPR"). CPR represents a
constant rate of prepayment on the Loans each month relative to the aggregate
outstanding principal balance of the Loans. The Issuer does not make any
representations about the appropriateness of the CPR model.
FACTORS AFFECTING PREPAYMENTS ON THE LOANS
The rate of payments (including prepayments) on a pool of loans is
influenced by a variety of economic, geographic, social, tax, legal and other
factors. If prevailing interest rates fall significantly below the then current
Loan Rates on the Loans or significantly below the maximum lifetime Loan Rates
on the Adjustable Rate Loans, the rate of prepayments on such Loans would be
expected to increase. Conversely, if prevailing rates rise significantly above
the then current Loan Rates on the Loans or significantly above the maximum
lifetime Loan Rates on the Adjustable Rate Loans, the rate of prepayments would
be expected to decrease. Other factors affecting prepayment of Loans include
changes in borrowers' housing needs, job transfers, unemployment, borrowers' net
equity in the related properties and servicing decisions, as well as Loan terms
and the type of collateral securing a Loan. See "Security for the
Bonds--Selected Loan Data" herein. In addition, any purchase of a converted Loan
will have the same effect as a prepayment in full. The Loans may be prepaid, in
whole or in part, at any time by the borrowers; less than 19% of the Loans
provide for payment of a prepayment fee or penalty. NO ASSURANCE CAN BE GIVEN AS
TO THE RATE OF PRINCIPAL PAYMENTS OR PREPAYMENTS ON THE LOANS.
Approximately 91% of the Loans are expected to be Adjustable Rate
Loans. The Issuer is not aware of any publicly available statistics relating to
the principal prepayment experience of adjustable rate loans over an extended
period of time, and the Issuer's experience with respect to adjustable rate
loans is insufficient to draw any conclusions with respect to the expected
prepayment rates on the Adjustable Rate Loans. Defaults on Adjustable Rate Loans
leading to foreclosure and the ultimate liquidation of the related properties
may occur with greater frequency in their early years, although little data is
S-33
available with respect to the rate of default on Adjustable Rate Loans.
Increases in the required monthly payments on the Adjustable Rate Loans may
result in a default rate higher than that on loans with fixed Loan Rates. The
Issuer, at its option, may purchase, on any Payment Date, any Loan that is
delinquent in payment by 90 days or more. Any such purchase must be made at a
price equal to the outstanding principal balance of the related Loan plus
accrued and unpaid interest thereon at its Loan Rate through the Payment Date
following the date of purchase. See "Yield Considerations" and "Maturity and
Prepayment Considerations" in the Prospectus. Furthermore, the Issuer will have
the option to pledge to the Trustee a Substitute Loan in substitution for a
defaulted Loan or REO, as more particularly described in "Security for the
Bonds--Substitution of Loans" herein. The weighted average life of the Bonds may
increase to the extent that the Issuer exercises its option to pledge Substitute
Loans to the Trustee for defaulted Loans or REO, because such substitution will
be effected in lieu of foreclosure and disposition of the related properties or
REO and the payment of Liquidation Proceeds to Holders of the Bonds. See "Yield
Considerations" herein.
Approximately 29% of the Loans provide for monthly payments of
interest at the related Loan Rate but no payments of principal for the first ten
years after origination (or, in some cases, modification). Following such
10-year period, the monthly payment on each such Loan will be increased to an
amount sufficient to amortize fully its outstanding principal balance over its
remaining term and to pay interest at the related Loan Rate.
The Loan Rates on the Adjustable Rate Loans will adjust periodically
(although not on the same dates). Based on the current Six-Month LIBOR Index or
current One-Year CMT Index as applicable (which may not rise and fall
consistently with prevailing interest rates or other Adjustable Rate Loans based
on other indices), plus the Gross Margins for the Adjustable Rate Loans (which
may be different from the current margins on residential Adjustable Rate Loans).
As a result, the Loan Rates on the Adjustable Rate Loans at any time may not
equal the prevailing rates for similar Adjustable Rate Loans, and the rate of
prepayment may be lower or higher than would otherwise be anticipated. See "Risk
Factors--Uncertain Timing of Principal" herein.
Approximately 42% of the Adjustable Rate Loans are expected to
permit assumption by a subsequent purchaser of the related properties during a
specified period and subject to such purchaser's compliance with certain then
existing requirements and underwriting guidelines, except in the case of any
Adjustable Rate Loan that has converted to a fixed Loan Rate. The Level Payment
Loans and any Adjustable Rate Loan that has converted to a fixed Loan Rate will
be subject to "due-on-sale-clauses" and are not assumable. The weighted average
life of each Class of Bonds will be increased to the extent that the Adjustable
Rate Loans are assumed by purchasers of the related properties in connection
with sales of such properties. Conversely, the weighted average life of each
Class of Bonds will be decreased upon the sale of properties securing
non-assumable Loans, which will result in the prepayment of such Loans. See
"Maturity and Prepayment Considerations" in the Prospectus.
Approximately 41% of the Adjustable Rate Loans are expected to
provide that the borrower may, during a specified period of time, convert the
adjustable Loan Rate of the related Loan to a fixed Loan Rate. The conversion
option may be exercised during periods of rising interest rates as borrowers
attempt to limit their risk of higher rates. If borrowers were to exercise their
conversion rights in such an interest rate environment, a purchase of the
converted Loans would have the same effect on holders of the Bonds as a
prepayment at a time when prepayments generally would not be expected. The
availability of fixed rate loans at competitive interest rates during periods of
falling rates may also encourage borrowers to exercise the conversion option.
There can be no certainty as to the rate at which conversions will take place or
as to the rate of prepayments in stable or changing interest rate environments.
The average Scheduled Principal Balance of the Directly Held Loans
is approximately $192,721. Approximately 7% of the Directly Held Loans have
Scheduled Principal Balances in excess of $1,000,000. The Issuer is not aware of
any publicly available statistics relating to the prepayment experience of loans
with high balances and the Issuer's experience with other high balance loans is
insufficient to draw any conclusions with respect to the expected prepayment
rates on those Directly Held Loans. Prepayments on such Directly Held Loans may
have a disproportionate effect on the prepayment experience of the Loans.
The rate at which borrowers exercise their conversion rights and the
resulting purchase of converted Loans will affect the rate of payment of
principal and hence the weighted average life of the Bonds. See "Security for
the Bonds--Conversion Option" herein.
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In addition, defaults on Adjustable Rate Loans that lead to
foreclosure and the ultimate liquidation of the related Adjustable Rate Loans
may occur with greater frequency in their early years. Increases in the required
monthly payments on the Adjustable Rate Loans may result in a default rate
higher than that on loans with fixed interest rates. Prepayments, liquidations
and purchases of the Loans will result in payments of principal to Bondholders
of amounts that would otherwise be distributed over the remaining terms of the
Loans. See "Risk Factors--Credit Considerations" in the Prospectus.
MODELING ASSUMPTIONS
The following assumptions (the "Modeling Assumptions") have been
used in preparing the principal decrement tables on the following pages (the
"DEC Tables"). It has been assumed that the Adjustable Rate Loans consist of
nine assumed Adjustable Rate Loans and that the Level Payment Loans consist of
two assumed Level Payment Loans, each with the characteristics set forth in the
following tables:
ASSUMED ADJUSTABLE RATE LOANS:
Remaining Original
Term to Term to
Outstanding Stated Stated Next Interest
Principal Gross Periodic Maturity Maturity Adjustment
Index Balance Loan Rate Net Rate Margin Caps (in months) (in months) Date
- --------------------------------------------------------------------------------------------------------------
1 Yr CMT $ 45,143,846 6.50% 6.23% 2.74% 2.000% 344 360 11/01/97
1 Yr CMT $199,816,246 6.64% 6.24% 2.89% 2.000% 353 360 10/01/97
1 Yr CMT $140,163,521 6.87% 6.47% 2.82% 2.000% 352 360 11/01/97
1 Yr CMT $ 31,526,285 8.29% 7.89% 2.79% 2.000% 289 360 12/01/97
1 Yr CMT $ 77,650,298 6.05% 5.78% 2.76% 2.000% 354 360 12/01/97
6 mo LIBOR $ 34,335,928 8.61% 8.21% 2.90% 1.000% 324 360 10/01/97
6 mo LIBOR $ 65,204,504 8.57% 7.83% 2.85% 1.000% 283 360 09/01/97
6 mo LIBOR $ 64,372,504 8.43% 7.69% 2.77% 1.000% 288 360 10/01/97
6 mo LIBOR $252,852,673 7.33% 7.06% 2.00% 1.000% 343 360 09/01/97
ASSUMED LEVEL PAYMENT LOANS:
Remaining Term to Stated Original Term to Stated
Outstanding Principal Balance Loan Rate Net Rate Maturity (in months) Maturity (in months)
- ---------------------------------------------------------------------------------------------------------
$95,197,277 9.78% 9.76% 297 302
$13,649,207 10.23% 10.21% 306 310
It has been further assumed that:
(i) the One-Month LIBOR Index remains constant at 5.80%;
(ii) the Six-Month LIBOR Index remains constant at 6.00%
and the One-Year CMT Index remains constant at 6.00% per annum for
the assumed Adjustable Rate Loans; and the Loan Rate remains
constant until the next Interest Adjustment Date (for the respective
Adjustable Rate Loans), at which time the Loan Rate on such
Adjustable Rate Loans is adjusted to equal the index of the
respective Loan plus the applicable Gross Margin, subject to any
Periodic Rate Caps;
(iii) the assumed Adjustable Rate Loans are not
converted;
(iv) all Scheduled Payments on the assumed Loans are
received timely on the payment date for each Loan, commencing June
1, 1997, and prepayments on such Loans are received on the last day
of each month beginning June 30, 1997, and include 30 days of
interest thereon;
(v) the Scheduled Payments on the assumed Adjustable
Rate Loans are adjusted on the Payment Adjustment Date, subject to
any Periodic Rate Caps, to equal a fully amortizing payment as
described above;
(vi) there are no defaults or shortfalls on the assumed
Loans;
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(vii) the assumed Loans prepay monthly at the specified
constant percentages of CPR (the Scheduled Principal Balance of
assumed Loans are based on the Scheduled Principal Balance of the
Loans at May 1, 1997, adjusted for the June 1, 1997, payments and an
assumed prepayment rate of 21% of CPR);
(viii) the Closing Date for the Bonds is June 25, 1997;
(ix) cash distributions are received by the Bondholders
on the 28th day of each month, commencing in July 28, 1997;
(x) the initial principal amount of each Class of Bonds
is as set forth on the cover hereof;
(xi) there is no optional redemption of the Bonds
(except with respect to the line entitled "Weighted Average Life
with Redemption") and no increase in the Class Interest Rates of the
Bonds as a result of the Issuer's failure to redeem the Bonds when
it is permitted to do so;
(xii) there are no prepayment fees or penalties;
(xiii) there are no interest shortfalls resulting in an
Interest Carryover Amount;
(xiv) the Scheduled Payments on the assumed $45,143,846
One-Year CMT Loan and the $252,852,673 Six-Month LIBOR Loan consist
of interest only through February 2006 and January 2006,
respectively;
(xv) the Bond Payment Percentage remains constant at
100%; and
(xvi) the $13,649,207 Level Payment Loan represents the
loans deposited in the Collateralization Fund.
If the Bonds are redeemed when the Issuer has the option to do so,
the weighted average life of the Bonds will be shorter than the weighted average
life set forth on the line entitled "Weighted Average Life Without Redemption",
and using the Modeling Assumptions, the weighted average life of the Bonds would
be as set forth on the line entitled "Weighted Average Life With Redemption."
See "Description of the Bonds--Optional Redemption" herein.
There will be discrepancies between the Loans actually included in
the Collateral and the Modeling Assumptions. Any discrepancy may have an effect
upon the percentages of initial principal amount (and weighted average lives)
set forth in the DEC Tables. To the extent that the Loans actually included in
the Collateral have characteristics that differ from the Modeling Assumptions,
the Bonds are likely to have weighted average lives that are shorter or longer
than indicated by such tables. Other things being equal, to the extent that cash
is used to redeem Bonds because Loans are not delivered together with all the
required documentation to the Trustee or Loans are repurchased either because of
Loans becoming converted Loans or otherwise, the Bonds will have shorter
weighted average lives than indicated by the DEC Tables, which will adversely
affect the yield of such Bonds to the extent that they are purchased at a
premium.
There is no assurance that prepayment of the Loans will conform to
any of the percentages of CPR described in the DEC Tables. Among other things,
the DEC Tables assume that the Loans prepay at the indicated constant rates of
CPR, notwithstanding the fact that such Loans may vary substantially as to
geographic concentration of properties, interest rate and prepayment terms.
Variations in actual prepayment experience for the Loans will increase or
decrease the percentages of initial principal balance (and weighted average
lives) shown in the DEC Tables.
The DEC Tables indicate the projected weighted average life of each
Class of the Bonds and set forth the percentage of the initial balance of the
Bonds that would be outstanding after each of the dates shown at various
percentages of CPR. See "Maturity and Prepayment Considerations" in the
Prospectus.
The Weighted Average Life values included in the following DEC
Tables have been determined by (a) multiplying the amount of each principal
payment by the number of years from the date of delivery of the Bonds to the
related Payment Date, (b) summing the results and (c) dividing the sum by the
total principal to be paid on the applicable Class of Bonds. Asterisks(*) in the
following tables indicate values between 0.0% and 0.5%.
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PERCENTAGE OF ORIGINAL PRINCIPAL AMOUNT
June 28, Class A-1 Bonds at the following percentages of CPR
0% 15% 18% 21% 25% 30% 35%
--- ---- ---- ---- ---- ---- ---
Initial Percent 100 100 100 100 100 100 100
1998 99 80 76 72 67 60 54
1999 98 63 56 50 42 33 24
2000 97 48 40 33 24 14 5
2001 96 36 27 19 10 1 0
2002 95 26 17 9 0 0 0
2003 94 17 8 * 0 0 0
2004 92 9 1 0 0 0 0
2005 91 3 0 0 0 0 0
2006 89 0 0 0 0 0 0
2007 86 0 0 0 0 0 0
2008 83 0 0 0 0 0 0
2009 80 0 0 0 0 0 0
2010 76 0 0 0 0 0 0
2011 72 0 0 0 0 0 0
2012 68 0 0 0 0 0 0
2013 64 0 0 0 0 0 0
2014 59 0 0 0 0 0 0
2015 53 0 0 0 0 0 0
2016 48 0 0 0 0 0 0
2017 41 0 0 0 0 0 0
2018 34 0 0 0 0 0 0
2019 27 0 0 0 0 0 0
2020 18 0 0 0 0 0 0
2021 9 0 0 0 0 0 0
2022 2 0 0 0 0 0 0
2023 0 0 0 0 0 0 0
2024 0 0 0 0 0 0 0
2025 0 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average Life
Without Redemption(1) 17.3 3.3 2.8 2.4 2.0 1.6 1.3
With Redemption(2) 6.8 3.2 2.6 2.2 1.9 1.5 1.3
June 28, Class A-2 Bonds at the following percentages of CPR
0% 15% 18% 21% 25% 30% 35%
Initial Percent 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999 100 100 100 100 100 100 100
2000 100 100 100 100 100 100 100
2001 100 100 100 100 100 100 54
2002 100 100 100 100 100 45 3
2003 100 100 100 100 51 4 0
2004 100 100 100 60 15 0 0
2005 100 100 68 28 0 0 0
2006 100 86 38 1 0 0 0
2007 100 56 12 0 0 0 0
2008 100 31 0 0 0 0 0
2009 100 10 0 0 0 0 0
2010 100 0 0 0 0 0 0
2011 100 0 0 0 0 0 0
2012 100 0 0 0 0 0 0
2013 100 0 0 0 0 0 0
2014 100 0 0 0 0 0 0
2015 100 0 0 0 0 0 0
2016 100 0 0 0 0 0 0
2017 100 0 0 0 0 0 0
2018 100 0 0 0 0 0 0
2019 100 0 0 0 0 0 0
2020 100 0 0 0 0 0 0
2021 100 0 0 0 0 0 0
2022 100 0 0 0 0 0 0
2023 68 0 0 0 0 0 0
2024 19 0 0 0 0 0 0
2025 0 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average Life
Without Redemption(1) 26.4 10.4 8.7 7.4 6.2 5.0 4.2
With Redemption(2) 7.0 6.1 5.1 4.3 3.6 2.9 2.4
June 28, Class A-3 Bonds at the following percentages of CPR
0% 15% 18% 21% 25% 30% 35%
Initial Percent 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999 100 100 100 100 100 100 100
2000 100 100 100 100 100 100 100
2001 100 100 100 100 100 100 100
2002 100 100 100 100 100 100 100
2003 100 100 100 100 100 100 0
2004 100 100 100 100 100 6 0
2005 100 100 100 100 54 0 0
2006 100 100 100 100 0 0 0
2007 100 100 100 28 0 0 0
2008 100 100 70 0 0 0 0
2009 100 100 8 0 0 0 0
2010 100 73 0 0 0 0 0
2011 100 17 0 0 0 0 0
2012 100 0 0 0 0 0 0
2013 100 0 0 0 0 0 0
2014 100 0 0 0 0 0 0
2015 100 0 0 0 0 0 0
2016 100 0 0 0 0 0 0
2017 100 0 0 0 0 0 0
2018 100 0 0 0 0 0 0
2019 100 0 0 0 0 0 0
2020 100 0 0 0 0 0 0
2021 100 0 0 0 0 0 0
2022 100 0 0 0 0 0 0
2023 100 0 0 0 0 0 0
2024 100 0 0 0 0 0 0
2025 0 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average Life
Without Redemption(1) 27.7 13.5 11.4 9.8 8.1 6.6 5.5
With Redemption(2) 7.0 6.1 5.1 4.3 3.6 2.9 2.4
June 28, Class B-1 Bonds at the following percentages of CPR
0% 15% 18% 21% 25% 30% 35%
Initial Percent 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999 100 100 100 100 100 100 100
2000 100 100 100 100 100 100 100
2001 100 100 100 100 100 100 100
2002 100 100 100 100 100 100 100
2003 100 100 100 100 100 100 91
2004 100 100 100 100 100 100 32
2005 100 100 100 100 100 49 0
2006 100 100 100 100 84 10 0
2007 100 100 100 100 41 0 0
2008 100 100 100 75 10 0 0
2009 100 100 100 40 0 0 0
2010 100 100 68 13 0 0 0
2011 100 100 38 0 0 0 0
2012 100 78 14 0 0 0 0
2013 100 49 0 0 0 0 0
2014 100 25 0 0 0 0 0
2015 100 5 0 0 0 0 0
2016 100 0 0 0 0 0 0
2017 100 0 0 0 0 0 0
2018 100 0 0 0 0 0 0
2019 100 0 0 0 0 0 0
2020 100 0 0 0 0 0 0
2021 100 0 0 0 0 0 0
2022 100 0 0 0 0 0 0
2023 100 0 0 0 0 0 0
2024 100 0 0 0 0 0 0
2025 86 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average Life
Without Redemption(1) 28.3 16.1 13.7 11.9 9.9 8.1 6.8
With Redemption(2) 7.0 6.1 5.1 4.3 3.6 2.9 2.4
(1) In years, assuming no redemption of the Bonds.
(2) In years, assuming the Bonds are redeemed on the earliest possible Payment
Date using the Modeling Assumptions.
S-37
PERCENTAGE OF ORIGINAL PRINCIPAL AMOUNT
June 28, Class B-2 Bonds at the following percentages of CPR
0% 15% 18% 21% 25% 30% 35%
Initial Percent 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999 100 100 100 100 100 100 100
2000 100 100 100 100 100 100 100
2001 100 100 100 100 100 100 100
2002 100 100 100 100 100 100 100
2003 100 100 100 100 100 100 100
2004 100 100 100 100 100 100 100
2005 100 100 100 100 100 100 81
2006 100 100 100 100 100 100 11
2007 100 100 100 100 100 53 0
2008 100 100 100 100 100 * 0
2009 100 100 100 100 63 0 0
2010 100 100 100 100 15 0 0
2011 100 100 100 78 0 0 0
2012 100 100 100 32 0 0 0
2013 100 100 85 0 0 0 0
2014 100 100 41 0 0 0 0
2015 100 100 6 0 0 0 0
2016 100 66 0 0 0 0 0
2017 100 26 0 0 0 0 0
2018 100 0 0 0 0 0 0
2019 100 0 0 0 0 0 0
2020 100 0 0 0 0 0 0
2021 100 0 0 0 0 0 0
2022 100 0 0 0 0 0 0
2023 100 0 0 0 0 0 0
2024 100 0 0 0 0 0 0
2025 100 0 0 0 0 0 0
2026 0 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average Life
Without Redemption(1) 28.8 19.5 16.9 14.7 12.3 10.1 8.5
With Redemption(2) 7.0 6.1 5.1 4.3 3.6 2.9 2.4
June 28, Class B-3 Bonds at the following percentages of CPR
0% 15% 18% 21% 25% 30% 35%
Initial Percent 100 100 100 100 100 100 100
1998 100 100 100 100 100 100 100
1999 100 100 100 100 100 100 100
2000 100 100 100 100 100 100 100
2001 100 100 100 100 100 100 100
2002 100 100 100 100 100 100 100
2003 100 100 100 100 100 100 100
2004 100 100 100 100 100 100 100
2005 100 100 100 100 100 100 100
2006 100 100 100 100 100 100 100
2007 100 100 100 100 100 100 49
2008 100 100 100 100 100 100 6
2009 100 100 100 100 100 46 0
2010 100 100 100 100 100 9 0
2011 100 100 100 100 69 0 0
2012 100 100 100 100 31 0 0
2013 100 100 100 94 2 0 0
2014 100 100 100 53 0 0 0
2015 100 100 100 22 0 0 0
2016 100 100 66 0 0 0 0
2017 100 100 33 0 0 0 0
2018 100 91 6 0 0 0 0
2019 100 51 0 0 0 0 0
2020 100 18 0 0 0 0 0
2021 100 0 0 0 0 0 0
2022 100 0 0 0 0 0 0
2023 100 0 0 0 0 0 0
2024 100 0 0 0 0 0 0
2025 100 0 0 0 0 0 0
2026 86 0 0 0 0 0 0
2027 0 0 0 0 0 0 0
Weighted Average Life
Without Redemption(1) 29.1 22.1 19.6 17.2 14.6 12.0 10.1
With Redemption(2) 7.0 6.1 5.1 4.3 3.6 2.9 2.4
(1) In years, assuming no redemption of the Bonds.
(2) In years, assuming the Bonds are redeemed on the earliest possible Payment
Date using the Modeling Assumptions.
The DEC Tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Loans which may differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
YIELD CONSIDERATIONS
GENERAL
The yield to maturity of, and the aggregate amount of payments on,
the Bonds will be related to the rate and timing of principal payments on the
Loans which will be affected by the amortization schedules of the Loans and the
rate of principal prepayments thereon (including for this purpose payments
resulting from refinancings, liquidations of the Loans due to default,
casualties and condemnations, repurchases by the Participant and repurchases in
connection with an optional redemption). NO ASSURANCE CAN BE GIVEN AS TO THE
RATE OF PRINCIPAL PAYMENTS OR PREPAYMENTS ON THE LOANS.
The timing of changes in the rate of prepayments on the Loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a prepayment of principal of a
Loan, the greater will be the effect on the investor's yield to maturity. As a
result, 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 Bonds would not be fully offset
by a subsequent like reduction (or increase) in the rate of principal
prepayments.
If the purchaser of a Bond offered at a discount from its Parity
Price calculates the anticipated yield to maturity of such Bond based on an
assumed rate of payment of principal that is faster than that actually received
on the Loans, the actual yield to maturity will be lower than that so
calculated. Conversely, if the purchaser of a Bond offered at a premium over its
Parity Price calculates the anticipated yield to maturity of such Bond based on
an assumed rate of payment of principal that is slower than that actually
received on the Loans, the actual yield to maturity will be lower than that so
calculated.
S-38
Because the rate of principal payments (including prepayments) on
the Loans may significantly affect the weighted average life and other
characteristics of the Bonds, prospective investors are urged to consider their
own estimates as to the anticipated rate of future prepayments on the Loans and
the suitability of the Bonds to their investment objectives. For factors
affecting principal prepayments on the Loans, see "Maturity and Prepayment
Considerations" herein.
The Issuer at its option may pledge to the Trustee a Substitute Loan
in substitution for a defaulted Loan or REO, as more particularly described in
"Security for the Bonds--Substitution of Collateral" herein. The amount, if any,
by which the Scheduled Principal Balance of the defaulted Loan or REO exceeds
the Scheduled Principal Balance of the Substitute Loan would constitute a Loss
on such Loan or REO. Furthermore, to the extent that any Substitute Loan has
payment terms that differ from the original Loan such difference in payment
terms will affect the yield to maturity of investors in the Bonds. The Issuer's
ability to pledge Substitute Loans may result in an increase in the weighted
average life of the outstanding Bonds, because such substitution would be
effected in lieu of a foreclosure and disposition of the related properties or
REO and the resultant payment of Liquidation Proceeds to Holders of the Bonds.
Investors in the Bonds also should understand that the Class
Interest Rates on the Bonds will remain at a maximum rate equal to the then
applicable cap rate at levels of One-Month LIBOR which, together with the
Applicable Spread, would, absent the Applicable Cap on the Class Interest Rates,
result in Class Interest Rates above the Applicable Cap rate. Investors should
understand that the timing of changes in the level of One-Month LIBOR may affect
the actual yields to such investors even if the average level is consistent with
such investors' expectations. Each investor must make an independent decision as
to the appropriate LIBOR assumptions to be used in deciding whether to purchase
a Bond.
With respect to the Adjustable Rate Loans, a number of factors
affect the performance of the Six-Month LIBOR Index and the One-Year CMT Index
and may cause any such index to move in a manner different from other indices.
In a period of declining rates, the Six-Month LIBOR Index or the One-Year CMT
Index may remain higher than other market interest rates, which may result in a
higher level of prepayments of the Loans than of loans that adjust in accordance
with other indices.
A higher than expected rate of default could produce payment delays
and could lead to foreclosures. A foreclosure may produce proceeds upon sale
that are less than the Unpaid Principal Balance of such Loan plus interest
accrued thereon and the expenses of sale. Such a shortfall upon foreclosure
would result in a Loss on such Loan.
SUBORDINATION OF THE CLASS B-1, CLASS B-2 AND CLASS B-3 BONDS
On each Payment Date, the holders of any higher ranking Class of
Bonds will have a preferential right to receive amounts of interest and
principal, respectively, before any payments are made on any Class of Bonds
subordinate to such Class. As a result, the Class B-1, Class B-2 and Class B-3
Bonds will be more sensitive to the rate of delinquencies and defaults on the
Loans.
As more fully described herein, losses on the Loans will be
allocated to the Class B-3 Bonds, then to the Class B-2 Bonds, and then to the
Class B-1 Bonds, in that order, until the principal balance of each such Class
has been reduced to zero, before any losses will be allocated to the Senior
Bonds.
USE OF PROCEEDS
The Issuer will retain from the proceeds from the sale of the Bonds
an issuance fee that will be used to cover its expenses and to compensate it for
facilitating the issuance of the Bonds. The proceeds from the sale of the Bonds
net of the issuance fee will be used by the Issuer to purchase the Collateral
from the Participant.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement for the Class A-1, Class A-2 and Class B-2 Bonds dated as of the date
hereof (the "Underwriting Agreement") Lehman Brothers Inc. and Wheat, First
Securities, Inc. (the "Underwriters") and the Participant and the Issuer, the
Issuer has agreed to sell to the Underwriters, and the Underwriters have
S-39
severally agreed to purchase from the Issuer, the Class A-1, Class A-2 and Class
B-2 Bonds set forth below:
CLASS LEHMAN BROTHERS INC. WHEAT, FIRST SECURITIES, INC.
Class A-1 Bonds $725,000,000 $50,000,000
Class A-2 Bonds $121,000,000 $0
Class B-2 Bonds $15,298,000 $0
The distribution of the Class A-1, Class A-2 and Class B-2 Bonds
will be effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined, in each case, at the time of
sale. The Underwriters may effect such transactions by selling Class A-1, Class
A-2 and Class B-2 Bonds to or through dealers, and such dealers may receive from
the Underwriters, for whom 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-1, Class A-2 and Class B-2 Bonds may be deemed to be underwriters, and any
discounts, commissions or concessions received by them, and any profit on the
resale of the Class A-1, Class A-2 and Class B-2 Bonds purchased by them, may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended (the "Act").
The Underwriting Agreement provides that the Issuer and the
Participant will indemnify the Underwriters against certain civil liabilities,
including liabilities under the Act to the extent and under the circumstances
set forth therein.
Affiliates of the Participant have agreed to purchase or retain the
Class A-3, Class B-1 and Class B-3 Bonds. Such affiliates of the Participant
may, from time to time, offer such Classes of Bonds for sale to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale.
Certain of the Loans may have been the subject of financing
provided by an affiliate of the Underwriters. An affiliate of Lehman Brothers
Inc. is acting as Servicer with respect to a portion of the Loans.
LEGAL MATTERS
Certain legal matters relating to the Bonds will be passed upon for
the Issuer by Arter & Hadden, and certain legal matters relating to the Bonds
will be passed upon for the Underwriters by Brown & Wood LLP, Washington, D.C.
RATINGS
It is a condition to the issuance of the Bonds that the Bonds be
rated as set forth under "Ratings" in the Summary of Terms.
The ratings assigned to asset-backed bonds take into consideration
the credit quality of the related pool of assets, including any credit
enhancement, structural and legal aspects associated with such bonds and the
extent to which the payment stream on the related assets is adequate to make
payments required on such bonds. Ratings on such bonds do not, however,
constitute a statement regarding frequency of prepayments on the related loans.
As a result, the ratings do not address the possibility that the holders of the
Bonds might suffer a lower than anticipated yield.
A security rating is not a recommendation to buy, sell or hold Bonds
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. In the event that a rating initially assigned to the Bonds is
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to the Bonds. Each
security rating should be evaluated independently of any other security rating.
The Issuer has not requested a rating on the Bonds by any rating
agency other than Moody's (with respect to the Senior Bonds) and Fitch.
Nevertheless, there can be no assurance as to whether any other rating agency
will nonetheless issue a rating and, if it does, what such rating would be. A
rating assigned to the Bonds by a rating agency that has not been requested by
the Issuer to do so may be lower than the rating assigned by a Rating Agency
pursuant to the Issuer's request.
S-40
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement
plans and arrangements, including individual retirement accounts and annuities,
Keogh plans, and collective investment funds in which such plans, accounts,
annuities or arrangements are invested, that are subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or corresponding
provisions of the Code (any of the foregoing a "Plan"), persons acting on behalf
of a Plan, or persons using the assets of a Plan ("Plan Investors"), should
carefully review with their legal advisors whether the purchase or holding of
the Bonds could give rise to a transaction that is prohibited under ERISA or the
Code or cause the Collateral securing the Bonds to be treated as "plan assets"
for purposes of regulations of the Department of Labor set forth in 29 C.F.R.
2510.3-101 (the "Plan Asset Regulations"). Prospective investors should be aware
that, although certain exceptions from the application of the prohibited
transaction rules and the Plan Asset Regulations exist, there can be no
assurance that any such exception will apply with respect to the acquisition of
a Bond. See "ERISA Considerations" in the Prospectus.
If the Bonds are treated as equity for purposes of ERISA, the
purchaser of a Bond could be treated as having acquired a direct interest in the
Collateral securing the Bonds. In that event, the purchase, holding, or resale
of the Bonds could result in a transaction that is prohibited under ERISA or the
Code. Furthermore, regardless of whether the Bonds are treated as equity for
purposes of ERISA, the acquisition or holding of the Bonds by or on behalf of a
Plan could still be considered to give rise to a prohibited transaction if the
Issuer, the Trustee, any Master Servicer, any Servicer or any of their
respective affiliates is or becomes a party in interest or a disqualified person
with respect to such Plan. Nevertheless, one or more alternative exemptions may
be available with respect to certain prohibited transaction rules of ERISA that
might apply in connection with the initial purchase, holding and resale of the
Bonds, depending in part upon the type of Plan fiduciary making the decision to
acquire Bonds and the circumstances under which such decision is made. Those
exemptions include, but are not limited to: (i) Prohibited Transaction Class
Exemption ("PTCE") 95-60, regarding investments by insurance company general
accounts; (ii) PTCE 91-38, regarding investments by bank collective investment
funds; (iii) PTCE 90-1, regarding investments by insurance company pooled
separate accounts; or (iv) PTCE 84-14, regarding transactions negotiated by
qualified professional asset managers. Before purchasing Bonds, a Plan subject
to the fiduciary responsibility provisions of ERISA or described in Section
4975(e)(1) (and not exempt under Section 4975(g)) of the Code should consult
with its counsel to determine whether the conditions of any exemption would be
met. A purchaser of a Bond should be aware, however, that even if the conditions
specified in one or more exemptions are met, the scope of the relief provided by
an exemption might not cover all acts that might be construed as prohibited
transactions. See "ERISA Considerations" in the Prospectus.
The Issuer believes that the Bonds will be treated as debt
obligations without significant equity features for purposes of the Plan Asset
Regulations. Accordingly, a Plan that acquires a Bond should not be treated as
having acquired a direct interest in the assets of the Issuer. However, there
can be no complete assurance that the Bonds will be treated as debt obligations
without significant equity features for purposes of the Plan Asset Regulations.
S-41
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Collateralized Bonds, Series 9 (the "Global Securities") will be available only
in book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, CEDEL 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 through CEDEL and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of CEDEL and Euroclear and in accordance with
conventional eurobond practice (I.E., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Bonds will be effected on a delivery-against-payment basis
through the respective Depositories of CEDEL and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will
be subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
Relevant Depository which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is
important to establish at the time of the trade where both the purchaser's and
seller's accounts are located to ensure that settlement can be made on the
desired value date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between
DTC Participants will be settled using the procedures applicable to prior
asset-backed certificates issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between CEDEL Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
TRADING BETWEEN DTC, SELLER AND CEDEL OR EUROCLEAR PARTICIPANTS.
When Global Securities are to be transferred from the account of a DTC
Participant to the account of a CEDEL Participant or a Euroclear Participant,
the purchaser will send instructions to CEDEL or Euroclear through a CEDEL
Participant or Euroclear Participant at least one business day prior to
settlement. CEDEL or Euroclear will instruct the Relevant Depository, as the
case may be, to receive the Global
I-1
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 or a 360-day year of twelve 30
day months as applicable to the related class of Global Securities. 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 Relevant Depository to the DTC Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the CEDEL
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (I.E., the trade fails),
the CEDEL or Euroclear cash debt will be valued instead as of the actual
settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of
credit to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depository for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depository, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depository, as appropriate, to credit
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 or a 360-day year of twelve 30 day months as applicable to the related
class of Global Securities. 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 CEDEL
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the CEDEL Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the CEDEL Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date (I.E., the trade
fails), receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement date.
I-2
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), 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 (as defined below) 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 (as defined below), 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 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 (Holdership, 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 Certificate Holders or their 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 Holder 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
security (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 organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. 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.
I-3
MERIT SECURITIES CORPORATION
COLLATERALIZED BONDS
(Issuable in Series)
MERIT Securities Corporation (the "Issuer") may sell from time to
time under this Prospectus and related Prospectus Supplements various series
(each, a "Series") of its Collateralized Bonds (the "Bonds"). Capitalized terms
not otherwise defined herein have the meanings specified in the Glossary.
Each Series of Bonds will be secured by collateral (the
"Collateral") consisting of one or more of the following: (a) one- to
four-family, residential mortgage loans ("Mortgage Loans"), which may include
Second Lien Mortgage Loans, Mortgage Loans that are past due or non-performing
as of the Cut-off Date and REO Properties, and other assets evidencing interests
in mortgage loans (together with the Mortgage Loans, the "Mortgage Collateral"),
(b) mortgage loans secured by model homes leased to homebuilders ("Model Home
Loans"), (c) manufactured housing installment sales contracts ("Manufactured
Home Loans") and (d) installment sales contracts secured by heating, air
conditioning and other facilities installed in one- to four-family residential
properties ("Consumer Finance Loans"); PROVIDED, HOWEVER, that in no event will
the aggregate Scheduled Principal Balance as of the Cuf-off Date of the Model
Home Loans, Manufactured Home Loans or Consumer Finance Loans exceed 10% of the
aggregate Scheduled Principal Balance as of the Cuf-off Date of the Collateral.
A Series of Bonds may also be secured by certain debt service funds, Reserve
Funds, Insurance Policies, Servicing Agreements, Master Servicing Agreements,
Additional Collateral and other credit enhancement as specified in the related
Prospectus Supplement (together with the Collateral, the "Trust Estate"). Each
item of the Collateral for a Series of Bonds may be referred to herein as a
"Loan."
The Loans will have been originated by one or more Affiliates of the
Issuer, by various financial institutions, and by other entities engaged
generally in the business of originating or servicing residential mortgage loans
or installment sales contracts for manufactured housing and certain facilities
installed in residential properties. The Collateral may include fixed rate or
adjustable rate loans, as specified in the related Prospectus Supplement. See
"Security for the Bonds -- The Collateral" herein. The Mortgage Loans and
Manufactured Home Loans may be underwritten in accordance with underwriting
standards for "non-conforming credits," which include mortgagors whose
creditworthiness and repayment ability do not satisfy FNMA or FHLMC underwriting
guidelines. Mortgage Loans and Manufactured Home Loans underwritten pursuant to
underwriting standards for "non-conforming credits" will be likely to experience
rates of Delinquency and Foreclosure that are higher, and may be substantially
higher, than mortgage loans originated in accordance with FNMA or FHLMC
underwriting guidelines. As a result, Losses on such Loans may be higher than
losses on mortgage loans or installment sales contracts originated in accordance
with such guidelines. See "Risk Factors -- Credit Considerations -- Mortgage
Loans -- Underwriting Standards and Potential Delinquencies" herein. The
Collateral securing a Series will be serviced by one or more Servicers that are
subject to supervision by Dynex Capital, Inc. ("Dynex"), as Master Servicer. The
Master Servicer's and each Servicer's obligations will be limited to its
contractual, supervisory or servicing obligations. Unless otherwise specified in
the related Prospectus Supplement, each Servicer and the Master Servicer will be
obligated under certain circumstances to make Advances. See "Servicing of the
Collateral" herein.
The Prospectus Supplement or Supplements relating to a Series of
Bonds will set forth, among other things, the following information if
applicable to the Series: (i) the Class or Classes of Bonds and authorized
denominations of each Class of Bonds; (ii) the aggregate principal amount, Class
Interest Rate (or method of determining the Class Interest Rate), Payment Dates
and Stated Maturity Date for each Class of Bonds; (iii) the order of application
of principal and interest payments to one or more Classes of Bonds of the
Series, which may differ as to timing, sequential order, priority of payment or
amount of payments of principal or interest or both; (iv) certain information as
to the nature of the Collateral and any other assets securing such Series; (v)
the redemption features pertaining to the Series; (vi) additional information
with respect to the form of any credit enhancement securing one or more Classes
of Bonds; and (vii) additional information with respect to the plan of
distribution of Bonds of each Class. See "Description of the Bonds" herein.
Bonds of a Series will be characterized for federal income tax
purposes as debt instruments. No election will be made to treat any Series of
Bonds and the related Collateral as a real estate mortgage investment conduit (a
"REMIC") or a financial asset securitization investment trust ("FASIT") for
federal income tax purposes. See "Certain Federal Income Tax Consequences"
herein.
IT IS INTENDED THAT THE BONDS OF A SERIES WILL BE PAYABLE FROM THE
COLLATERAL PLEDGED TO SECURE THE BONDS OF THAT SERIES OR OTHER SERIES SOLD FROM
TIME TO TIME UNDER THIS PROSPECTUS. THE ISSUER HAS NO SIGNIFICANT ASSETS OTHER
THAN THOSE PLEDGED AS SECURITY FOR THE BONDS. THERE WILL BE NO RECOURSE TO THE
ISSUER. EXCEPT AS OTHERWISE PROVIDED IN A RELATED PROSPECTUS SUPPLEMENT, NEITHER
THE COLLATERAL NOR THE BONDS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY OR ANY OTHER PARTY.
UNDER CERTAIN CIRCUMSTANCES, THE ISSUER MAY PLEDGE ADDITIONAL
COLLATERAL TO THE TRUSTEE AND ISSUE ADDITIONAL BONDS OF A SERIES. ANY PLEDGE OF
ADDITIONAL COLLATERAL AND ISSUANCE OF ADDITIONAL BONDS MAY AFFECT THE TIMING AND
AMOUNT OF PAYMENTS ON ANY OUTSTANDING BONDS OF THAT SERIES AND AN INVESTOR'S
YIELD ON ANY SUCH OUTSTANDING BONDS. SEE "SECURITY FOR THE BONDS -- PLEDGE OF
ADDITIONAL COLLATERAL AND ISSUANCE OF ADDITIONAL BONDS" HEREIN.
SEE "RISK FACTORS" ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BEFORE PURCHASING BONDS OF A SERIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may not
be used to consummate sales offered hereby unless accompanied by a related
Prospectus Supplement.
THE DATE OF THIS PROSPECTUS IS JUNE 20, 1997
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY.....................................................1
RISK FACTORS...........................................................6
Credit Considerations..............................................6
Limited Obligations...............................................12
Limited Liquidity.................................................12
Bankruptcy or Insolvency of the Issuer............................12
Bankruptcy or Insolvency of IHC or a Participant..................12
Deficiency on Sale of Collateral..................................13
Modification and Substitution of Collateral.......................13
Pledge of Additional Collateral...................................13
Average Life and Yield Considerations.............................14
Limited Nature of Ratings.........................................14
Insurance and Credit Support Limitations..........................14
Lender Regulations................................................15
Limitations on Subordination......................................15
Original Issue Discount...........................................15
Legal Investment Considerations...................................15
Consolidated Tax Return...........................................15
DESCRIPTION OF THE BONDS..............................................16
General...........................................................16
Book-Entry Procedures.............................................16
Payments of Principal and Interest................................17
Redemption........................................................19
MATURITY AND PREPAYMENT CONSIDERATIONS................................19
YIELD CONSIDERATIONS..................................................19
SECURITY FOR THE BONDS................................................20
General...........................................................20
The Collateral....................................................20
The Mortgage Collateral...........................................20
The Model Home Loans..............................................23
The Manufactured Home Loans.......................................23
The Consumer Finance Loans........................................25
Substitution of Collateral........................................25
Pledge of Additional Collateral and Issuance of Additional Bonds..26
Master Servicer Custodial Account.................................26
Collateral Proceeds Account.......................................26
Reserve Fund or Accounts..........................................27
Other Funds or Accounts...........................................27
Investment of Funds...............................................27
Insurance on the Collateral.......................................27
Credit Enhancement................................................29
Bond Insurance and Surety Bonds...................................30
ORIGINATION OF THE COLLATERAL.........................................31
Mortgage Loans and Manufactured Home Loans........................31
Model Home Loans..................................................32
Consumer Finance Loans............................................32
Representations and Warranties....................................32
SERVICING OF THE COLLATERAL...........................................33
General...........................................................33
Payments on Collateral............................................34
Advances..........................................................34
Collection and Other Servicing Procedures.........................35
Defaulted Collateral..............................................36
Maintenance of Insurance Policies; Claims
Thereunder and Other Realization Upon Defaulted Collateral.......36
Evidence as to Servicing Compliance...............................37
Events of Default and Remedies....................................37
Master Servicing Agreement........................................37
Special Servicing Agreement.......................................38
THE INDENTURE.........................................................38
General...........................................................38
Modification of Indenture.........................................38
Events of Default.................................................39
Authentication and Delivery of Bonds..............................41
List of Bondholders...............................................41
Annual Compliance Statement.......................................41
Reports to Bondholders............................................41
Trustee's Annual Report...........................................41
Trustee...........................................................41
Satisfaction and Discharge of the Indenture.......................42
CERTAIN LEGAL ASPECTS OF THE COLLATERAL...............................42
Mortgage Loans and Model Home Loans...............................42
Manufactured Home Loans...........................................46
Consumer Finance Loans............................................50
Consumer Protection Laws..........................................52
Environmental Considerations......................................53
Enforceability of Certain Provisions..............................53
THE ISSUER............................................................53
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...............................54
General...........................................................54
Original Issue Discount...........................................55
Variable Rate Bonds...............................................59
Anti-Abuse Rule...................................................61
Interest Weighted Bonds and Non-VRDI Bonds........................61
Market Discount...................................................62
Amortizable Premium...............................................63
Gain or Loss on Disposition.......................................63
Miscellaneous Tax Aspects.........................................64
STATE TAX CONSIDERATIONS..............................................64
ERISA CONSIDERATIONS..................................................64
LEGAL INVESTMENT......................................................66
USE OF PROCEEDS.......................................................66
PLAN OF DISTRIBUTION..................................................66
LEGAL MATTERS.........................................................67
FINANCIAL INFORMATION.................................................67
ADDITIONAL INFORMATION................................................67
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................68
REPORTS TO BONDHOLDERS................................................68
Glossary..............................................................69
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus and by reference
to the information with respect to each Series of Bonds contained in the related
Prospectus Supplement and Indenture to be prepared and delivered in connection
with the offering of Bonds of such Series.
Capitalized terms used herein and not defined herein will have the
respective meanings assigned to them in the "Glossary."
ISSUER..................................................... MERIT Securities
Corporation, a
wholly-owned,
limited-purpose
financing subsidiary
of Issuer Holding
Corp. ("IHC"),
which is a
wholly-owned
subsidiary of Dynex
Capital, Inc.
("Dynex"), formerly
Resource Mortgage
Capital, Inc.
Neither IHC nor
Dynex has
guaranteed, or is
otherwise obligated
with respect to, the
Bonds of any Series.
See "The Issuer"
herein.
TITLE OF BONDS............................................. Collateralized
Bonds (the
"Bonds"), issuable
in Series, all as
more fully
described in the
related Prospectus
Supplement. The
Bonds may be issued
from time to time in
Series pursuant to
an indenture (the
"Original
Indenture") between
the Issuer and Texas
Commerce Bank
National
Association, as
trustee (the
"Trustee") (or such
other Trustee as
may be specified
in the related
Prospectus
Supplement), as
supplemented by an
indenture
supplement for each
Series (a "Series
Supplement") (the
Original Indenture
as so supplemented,
the "Indenture").
INTEREST PAYMENTS.......................................... The Bonds of each
Class of a Series
will bear interest
on their
outstanding
principal amounts
at the rate
specified, or
determined as
specified, in the
related Prospectus
Supplement (the
"Class Interest
Rate"). Unless
otherwise specified
in the related
Prospectus
Supplement, interest
on each Class of
Bonds will be paid
periodically on the
dates specified in
the related
Prospectus
Supplement (each,
a "Payment Date").
Each payment of
interest will
include all interest
either accrued
through the
Accounting Date
immediately
preceding the
Payment Date on
which it is made or
to another date
indicated in the
related Prospectus
Supplement. See
"Description of the
Bonds -- Payments of
Principal and
Interest" and
"Certain Federal
Income Tax
Consequences."
PRINCIPAL PAYMENTS......................................... To the extent
specified in the
related Prospectus
Supplement,
payments on the
Collateral securing
a Series, together
with withdrawals
from various debt
service funds and
Reserve Funds, if
any, will be
available to pay
principal of and
interest on the
Bonds of a Series.
The related
Prospectus
Supplement may
specify that the
payments received on
the Collateral will
be distributed (i)
so as to
prioritize certain
Classes of Bonds
of a Series,
(ii)
disproportionately
among the various
Classes of Bonds or
(iii) to secure one
or more Series sold
pursuant to this
Prospectus. On each
Payment Date for a
Series, provided
funds are available
therefor, principal
will be paid on the
Bonds in an amount
equal to the
Principal
Distribution Amount
or such other
amount as may be
specified in the
related Prospectus
Supplement. Unless
otherwise specified
in the related
Prospectus
Supplement, the
Principal
Distribution Amount
on any Payment
Date will equal
the amount by which
(i) the aggregate
Collateral Value of
the Collateral
securing the Series
as of the preceding
Payment Date (or,
with respect to the
first Payment
Date, as of the
related Cut-off
Date) exceeds (ii)
the aggregate
Collateral Value of
the Collateral
securing the Series
as of the current
Payment Date. See
"Description of the
Bonds -- Payments of
Principal and
Interest."
REDEMPTION AT OPTION OF
ISSUER.................................................. To the extent
specified in the
related Prospectus
Supplement, any
Class of Bonds may
be subject to
redemption at the
option of the Issuer
prior to its Stated
Maturity Date. See
"Description of the
Bonds --
Redemption."
SECURITY FOR THE
BONDS................................................... Each Series of
Bonds will be
secured by a Trust
Estate that
consists primarily
of Mortgage
Collateral and
that may also
include, to the
extent indicated
below, one or more
of the following
types of Collateral
other than Mortgage
Collateral. The
Trust Estate for
each Series of Bonds
will be more
specifically
described in the
related Prospectus
Supplement.
A. COLLATERAL....................................... MORTGAGE
COLLATERAL: The
Bonds of each
Series will be
secured in part by
(i) fixed or
adjustable rate,
conventional
mortgage loans
secured by mortgages
or deeds of trust on
single family (one-
to four-family)
attached or detached
residential
property ("Mortgage
Loans"), which may
include Second
Lien Mortgage
Loans and Mortgage
Loans that are
past due or
non-performing as
of the Cut-off
Date, and related
REO Properties and
(ii) other assets
evidencing
interests in
mortgage loans.
Mortgage Loans and
such other assets
are referred to
herein collectively
as "Mortgage
Collateral."
MODEL HOME LOANS:
The Bonds of a
Series may be
secured in part by
fixed or adjustable
rate, conventional
mortgage loans (the
"Model Home Loans")
made by the
Participant or its
Affiliate and, in
each case, secured
by a single family
(one- to
four-family)
attached or detached
residential property
that the Borrower
will lease to a
homebuilder for use
as a model home.
Model Home Loans may
not constitute more
than 10% of the
aggregate Scheduled
Principal Balance as
of the Cut-off Date
of the Collateral
securing a Series of
Bonds.
MANUFACTURED HOME
LOANS: The Bonds of
a Series may be
secured in part by
fixed or adjustable
rate, conventional
manufactured housing
installment sales
contracts (the
"Manufactured Home
Loans"), each of
which will be
secured by a new or
used Manufactured
Home, or by a
Manufactured Home
that has been
transferred from a
previous owner to a
new Borrower, and
may also be secured
by a lien on a
parcel of real
estate. Manufactured
Home Loans may not
constitute more than
10% of the aggregate
Scheduled Principal
Balance as of the
Cut-off Date of the
Collateral securing
a Series of Bonds.
CONSUMER FINANCE
LOANS: The Bonds of
a Series may be
secured in part by
fixed or adjustable
rate, conventional
facility installment
sales contracts (the
"Consumer Finance
Loans"), each of
which will be
secured by
residential heating
or air conditioning
facilities,
insulation
facilities or other
such facilities and
related materials
that will be
installed in single
family (one- to
four-family)
attached or detached
residential
property. Consumer
Finance Loans may
not constitute more
than 10% of the
aggregate Scheduled
Principal Balance as
of the Cut-off Date
of the Collateral
securing a Series of
Bonds.
The Mortgage
Collateral, any
Model Home Loans,
any Manufactured
Home Loans and any
Consumer Finance
Loans securing a
Series of Bonds are
herein referred to
collectively as
"Collateral." The
Collateral securing
the Bonds of a
Series will have an
aggregate Collateral
Value initially
equal to at least
the original
aggregate principal
amount of such
Bonds. Assuming no
Losses, scheduled
payments of
principal of and
interest on the
Collateral with
respect to a Series
(together with
payments from the
Reserve Funds for
such Series) net of
applicable
servicing, master
servicing,
administration and
guarantee fees and
insurance premiums,
if any, all as
specified in the
related Prospectus
Supplement, are
intended to be
sufficient to make
the required
payments of interest
on the Bonds of the
Series and to pay
the principal of
each Class of Bonds
not later than its
Stated Maturity
Date. See "Security
for the Bonds."
2
B. COLLATERAL PROCEEDS
ACCOUNT................................................ All distributions
(net of servicing
and master servicing
fees and other
credit enhancement
and administrative
costs described
herein) on the
Collateral will be
remitted to the
Collateral Proceeds
Account for the
Bonds and will be
available for
application to the
payment of
principal of and
interest on the
Bonds on the related
Payment Date to the
extent specified in
the Prospectus
Supplement. See
"Security for the
Bonds -- Collateral
Proceeds Account"
and " -- Master
Servicer Custodial
Account."
C. INSURANCE POLICIES..................................... If specified in the
Prospectus
Supplement for a
Series of Bonds,
the Issuer may
pledge to the
Trustee payments due
under certain
mortgage insurance,
hazard insurance and
other policies, if
any (collectively,
"Insurance
Policies"),
including (a)
mortgage Insurance
Policies consisting
of (i) Primary
Mortgage Insurance
Policies that will
insure (subject to
their provisions
and certain
limitations)
Mortgage Loans and
Model Home Loans
against all or a
portion of any loss
sustained by reason
of nonpayments by
the Borrowers,
(ii) one or more
Pool Insurance
Policies providing
coverage in
amounts described
in the related
Prospectus
Supplement or (iii)
a combination of
Primary Mortgage
Insurance and Pool
Insurance Policies,
(b) Standard Hazard
Insurance Policies
insuring Mortgaged
Premises or
Manufactured Homes
against losses due
to various causes,
including fire and
windstorm, (c)
Special Hazard
Insurance Policies
insuring Mortgage
Premises and
Manufactured Homes
against certain
losses that are not
covered by the
Standard Hazard
Insurance Policies
(including
earthquake,
landslides and
mudflows) in an
amount specified in
the related
prospectus
Supplement and (d)
Flood Insurance
against losses to
Mortgaged Premises
or Manufactured
Homes located in
certain flood areas.
D. RESERVE FUNDS.......................................... If specified in
the Prospectus
Supplement for a
Series, the Issuer
will deposit cash,
securities,
certificates of
deposit, letters
of credit or other
instruments or
documents acceptable
to the Rating
Agencies for such
Series in one or
more Reserve Funds
that may be used by
the Trustee to make
any required
payments of
principal or
interest on Classes
of Bonds of the
Series to the extent
that funds are not
otherwise
available. The
amount of any
deposit to the
Reserve Fund will be
specified in the
Prospectus
Supplement for the
Series. The Issuer
will have certain
rights on any
Payment Date to
cause the Trustee
to release funds
to the Issuer from
the Reserve Fund
provided that such
funds are not needed
on that Payment
Date to make a
required payment of
principal or
interest on the
Bonds. See
"Security for the
Bonds-- Reserve Fund
or Accounts."
E. CREDIT ENHANCEMENT..................................... If so specified in
the related
Prospectus
Supplement for a
Series, in addition
to, or in lieu of, a
Reserve Fund or
Insurance Policies,
the Trust Estate may
include one or any
combination of a
letter of credit,
guarantees, pledge
of additional
collateral by an
institution
acceptable to the
Rating Agencies or
other forms of
credit enhancement
to provide full or
partial coverage for
certain defaults and
losses relating to
the Collateral.
F. BOND INSURANCE......................................... To the extent
specified in the
related Prospectus
Supplement for a
Series, a financial
guaranty insurance
policy may be
acquired with
respect to one or
more Classes of
Bonds. Such policy
may be acquired for
the purposes of
guaranteeing timely
payment of interest
and timely or
ultimate payment of
principal on certain
Classes of Bonds.
G. SURPLUS AMOUNTS........................................ To the extent
specified in the
related Prospectus
Supplement, amounts
in the Collateral
Proceeds Account in
excess of the amount
required to pay
3
principal of and
interest on the
Bonds of a Series
and certain expenses
will be "Surplus."
All or a portion of
the Surplus may be
(i) distributed to
the Issuer and
released from the
lien of the
Indenture or (ii)
applied to cover
Losses for the
Series or other
Series on each
Payment Date.
SERVICING.................................................. The Collateral
securing a Series
will be serviced by
one or more
servicers specified
in the related
Prospectus
Supplement (each, a
"Servicer"). Each
Servicer must be
approved, and will
be supervised, by
the Master
Servicer. Each
Servicer of Model
Home Loans,
Manufactured Home
Loans or Consumer
Finance Loans will
perform the
servicing in a
manner consistent
with the applicable
Servicing Agreement
and the servicing
standards and
practices that
prudent lending
institutions follow
with respect to
loans of the same
type as the Model
Home Loans,
Manufactured Home
Loans and Consumer
Finance Loans.
Unless otherwise
specified in the
related Prospectus
Supplement, each
Servicer will be
obligated under a
Servicing Agreement
(i) to perform
customary servicing
functions and (ii)
to make limited
advances of funds
(each, an
"Advance") to cover
certain payments
not made by a
Borrower to the
extent the Advance
is deemed by the
Master Servicer to
be recoverable out
of future payments
on the Loan by the
Borrower, Insurance
Proceeds,
Liquidation
Proceeds or as
otherwise provided
in the related
Prospectus
Supplement. Any
Servicer may
delegate duties
under its Servicing
Agreement to a
Sub-Servicer, which
may be either an
Affiliate of the
Servicer or an
unrelated third
party. The Issuer
will assign to the
Trustee its rights
under each
Servicing Agreement
as security for the
Bonds of the Series.
See "Servicing of
the Collateral --
General."
MASTER SERVICER............................................ Except as otherwise
indicated in a
Prospectuc
Supplement, Dynex
will act as Master
Servicer (in such
capacity, the
"Master Servicer")
with respect to all
the Collateral
pursuant to a Master
Servicing Agreement
between the Master
Servicer and the
Issuer. The Master
Servicer will
administer and
supervise the
performance of the
Servicers under the
Servicing
Agreements and will
be obligated to
perform the
servicing
obligations of a
terminated servicer
or appoint a
successor servicer.
In addition, the
Master Servicer
will provide
certain reports to
the Trustee
regarding the
Collateral, provide
certain
administrative
functions with
respect to the Bonds
and, unless
otherwise specified
in the related
Prospectus
Supplement, make
limited Advances.
However, the Master
Servicer will not be
obligated to make an
Advance that it
deems to be a
Non-Recoverable
Advance. The Issuer
will assign to the
Trustee its rights
to enforce the
obligations of the
Master Servicer
under the Master
Servicing Agreement
as security for the
Bonds of the Series.
See "Servicing of
the Collateral --
Master Servicing
Agreement."
SPECIAL SERVICER........................................... If specified in the
related Prospectus
Supplement, the
Master Servicer may
appoint a special
servicer (the
"Special Servicer")
to service, and to
make certain
decisions and take
certain actions with
respect to,
delinquent or
defaulted
Collateral pledged
as security for a
Series. See
"Servicing of
Collateral --
Special Servicing
Agreement."
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES........................................ Based on the facts
as they exist on the
Closing Date, the
Bonds, when
beneficially owned
by someone other
than the
Participant or one
of its qualified
real estate
investment trust
("REIT")
subsidiaries (as
defined in section
856(i) of the
Code), will
constitute debt
instruments for
federal income tax
purposes. See
"Certain Federal
Income Tax
Consequences"
herein.
YIELD CONSIDERATIONS....................................... The Prospectus
Supplement for a
Series may specify
certain yield
considerations for
Bondholders of
Discount Bonds or
Premium Bonds. A
higher rate of
principal payments
on the Collateral
than was anticipated
when pricing the
Bonds of a
particular Class is
likely to have an
adverse effect on
4
the yield of any
Class of Bonds
("Premium Bonds")
that has a purchase
price greater than
the price at which
the yield to
maturity of such
Class is equal to
its coupon, after
giving effect to any
payment delay (its
"Parity Price"). A
lower rate of
principal payments
on the Collateral
than anticipated is
likely to have an
adverse effect on
the yield of any
Class of Bonds that
has a purchase
price less than its
Parity Price
("Discount Bonds").
It is possible under
certain
circumstances that
Bondholders of
Premium Bonds not
only will suffer a
lower than
anticipated yield
but, in extreme
cases, will fail to
recoup fully their
initial investments.
USE OF PROCEEDS............................................ The Issuer will
use the net
proceeds from the
sale of each Series
for one or more of
the following
purposes: (i) to
purchase the related
Collateral, (ii) to
repay indebtedness,
if any, that has
been incurred to
obtain funds to
acquire the
Collateral, (iii)
to establish any
Reserve Funds
described in the
related Prospectus
Supplement and
(iv) to pay costs
of structuring and
issuing the Bonds.
See "Use of
Proceeds."
LEGAL INVESTMENT........................................... The Bonds of any
Class offered by the
related Prospectus
Supplement may
constitute
"mortgage related
securities" under
the Secondary
Mortgage Market
Enhancement Act of
1984 ("SMMEA") so
long as they are
secured by first
liens on
residential real
property, including
Manufactured Homes,
and are rated in one
of the two highest
rating categories
by at least one of
the Rating Agencies
identified in such
Prospectus
Supplement. Any
such securities
would be "legal
investments" for
certain types of
institutional
investors to the
extent provided in
SMMEA, subject to
state laws
overriding SMMEA.
Institutions whose
investment
activities are
subject to review by
federal or state
regulatory
authorities should
consult with their
counsel or the
applicable
authorities to
determine whether
an investment in
such Class of Bonds
complies with
applicable
guidelines, policy
statements or
restrictions. See
"Legal Investment."
ERISA CONSIDERATIONS....................................... A fiduciary of an
employee benefit
plan and 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,
annuities or
arrangements are
invested, which is
subject to the
Employee Retirement
Income Security Act
of 1974, as amended
("ERISA"), or
Section 4975 of the
Code (each such
entity, a "Plan")
should carefully
review with its
legal advisors
whether the
purchase or
holding of Bonds
could give rise to
a transaction that
is prohibited or
is not otherwise
permissible either
under ERISA or under
Section 4975 of the
Code. Investors
are advised to
consult their
counsel and to
review "ERISA
Considerations"
herein. As
specified in the
related Prospectus
Supplement, Plans
may be prohibited
from acquiring
certain Classes of
Bonds.
RATING..................................................... Each Class of Bonds
offered by means of
this Prospectus and
the related
Prospectus
Supplement will
initially be rated
in one of the four
highest rating
categories by one
or more Rating
Agencies identified
in the Prospectus
Supplement. Such
ratings are
subject to review
and possible
revision from time
to time.
5
RISK FACTORS
Investors should consider, among other things, the following factors
in connection with an investment in the Bonds.
The Issuer is expected to have no significant assets other than the
Collateral. For that reason, prospective purchasers of the Bonds of a Series
must rely primarily upon payments of principal of and interest on the
Collateral, the security therefor and sources of credit enhancement identified
in the related Prospectus Supplement to provide for payments on the Bonds.
CREDIT CONSIDERATIONS
MORTGAGE LOANS
GENERAL. A Mortgage Loan typically is made based upon a
determination of the Borrower's ability to make Monthly Payments on his Mortgage
Loan and upon the value of the Mortgaged Premises secured thereby. The ability
of a Borrower to make Monthly Payments will be dependent on the availability of
jobs and general economic conditions. The value of an investment in Bonds of a
Series may be adversely affected by a decline in real estate values. If the
residential real estate market in the area of one or more of the Mortgaged
Premises should experience an overall decline in property values, the actual
rate of Delinquencies, Foreclosures and Losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, to the
extent that the Mortgage Loans are underwritten pursuant to underwriting
guidelines that are less stringent than the underwriting guidelines of FNMA and
FHLMC with respect to the Borrower's creditworthiness and repayment ability, the
rates of Delinquencies and Foreclosures experienced on the Mortgage Loans are
likely to be substantially higher than those experienced by mortgage loans
underwritten in accordance with FNMA and FHLMC underwriting guidelines. As a
result, Losses on the Mortgage Loans may be higher than those on mortgage loans
originated in accordance with such guidelines. See "-- Underwriting Standards
and Potential Delinquencies." To the extent that such losses are not covered by
applicable Insurance Policies, if any, or by any credit enhancement as described
in the related Prospectus Supplement, Holders of the Bonds of a Series will bear
all risk of Loss resulting from default by Borrowers and will have to look
primarily to the value of the Mortgaged Premises for recovery of the outstanding
principal and unpaid interest of the defaulted Mortgage Loans. As described in
the related Prospectus Supplement, the risk of Loss associated with such
Mortgage Loans may be allocated disproportionately among the Classes of Bonds
that comprise a Series to the extent that such losses are not covered by
applicable Insurance Policies, Additional Collateral or other credit
enhancement. Such Losses could result in an Event of Default. See "The Indenture
- -- Events of Default."
As further described in the applicable Prospectus Supplement,
Balloon Payment Mortgage Loans include Mortgage Loans that provide for
amortization of the principal amount over a certain period (for example, 30
years), although all remaining principal is due at the end of a shorter period
(for example, 15 years). The final balloon payment on such a Balloon Payment
Mortgage Loan will be treated as a prepayment of that Mortgage Loan. The ability
of a Borrower to make the final "balloon" payment may be dependent upon the
Borrower's ability to refinance the Balloon Payment Mortgage Loan or sell the
related Mortgaged Premises for an amount equal to or greater than the Unpaid
Principal Balance of the Mortgage Loan. Under certain circumstances (for
example, in a rising interest rate environment), a Borrower may be unable to
secure refinancing for such Mortgage Loan or to sell the related Mortgaged
Premises. Accordingly, Balloon Payment Mortgage Loans may be subject to a higher
risk of Delinquency, Foreclosure and Loss than certain other types of mortgage
loans. To the extent Losses on such Mortgage Loans exceed levels of available
credit enhancement, the holders of the Bonds of the related Series may
experience a loss. In addition, to the extent specified in the related
Prospectus Supplement, Losses on the Mortgage Loans in excess of available
credit enhancement may result in an Event of Default under the Indenture. See
"The Indenture -- Events of Default."
In addition, Adjustable Rate Mortgage Loans may be underwritten on
the basis of an assessment that the Borrower will have the ability to make
payments in higher amounts in later years and, in the case of certain Adjustable
Rate Mortgage Loans, after relatively short periods of time. Accordingly,
defaults on Adjustable Rate Mortgage Loans leading to Foreclosure and the
ultimate Liquidation of the related Mortgaged Premises may occur with greater
frequency in the early years of such Mortgage Loans, although little data is
available with respect to the rate of default on such loans. Increases in the
required monthly payments on such Mortgage Loans may result in a default rate
that is higher than that for fixed rate or Level Payment Mortgage Loans. A
higher default rate may result in an increase in Losses on the Mortgage Loans.
6
To the extent that Losses on the Mortgage Loans exceed levels of available
credit enhancement, the holders of the Bonds of the related Series may
experience a loss. In addition, to the extent specified in the related
Prospectus Supplement, Losses on the Mortgage Loans in excess of available
credit enhancement may result in an Event of Default under the Indenture. See
"The Indenture -- Events of Default."
As specified in the related Prospectus Supplement, in order to
maximize recoveries on defaulted Mortgage Loans, the Master Servicer will have
considerable flexibility under the Master Servicing Agreement to extend and
modify the terms of Mortgage Loans that are in default or as to which a payment
default is reasonably foreseeable, including, in particular, Balloon Payment
Mortgage Loans. In addition, the Master Servicer may receive a workout fee based
on receipts from or proceeds of such Mortgage Loans. While the Master Servicer
generally will be required to determine that any such extension or modification
is likely to produce a greater recovery on a present value basis than
Liquidation, there can be no assurance that such flexibility with respect to
extensions or modifications or payment of a workout fee to the Master Servicer
will increase the present value of receipts from or proceeds of Mortgage Loans
that are in default or as to which a default is reasonably foreseeable. To the
extent Losses on such Mortgage Loans exceed levels of available credit
enhancement, the holders of the Bonds of the related Series may experience a
loss. In addition, to the extent specified in the related Prospectus Supplement,
Losses on the Mortgage Loans in excess of available credit enhancement may
result in an Event of Default under the Indenture. See "The Indenture -- Events
of Default."
REO PROPERTIES AND DELINQUENT AND NON-PERFORMING MORTGAGE LOANS. As
set forth in the related Prospectus Supplement, the Collateral for a particular
Series may include, as of the Cut-off Date, REO Properties or Mortgage Loans
that are Delinquent or are non-performing. If so specified in the related
Prospectus Supplement, management of the REO Properties or servicing of such
Mortgage Loans may be transferred to a Special Servicer. Credit enhancement
provided with respect to a particular Series may not cover all Losses related to
REO Properties or to Delinquent or non-performing Mortgage Loans. Investors
should consider the risk that the inclusion of REO Properties or Delinquent or
non-performing Mortgage Loans in a Series may affect the rate of defaults and
prepayments on such Mortgage Collateral and the yield on the Bonds of the
Series. See "Security for the Bonds -- The Collateral."
SECOND LIEN MORTGAGE LOANS. An overall decline in the residential
real estate market could adversely affect the value of the property securing a
Second Lien Mortgage Loan such that the outstanding principal balance of the
Second Lien Mortgage Loan, together with any senior financing thereon, exceeds
the value of the Mortgaged Premises. Because a Mortgage Loan secured by a second
lien is subordinate to the rights of the first lien, such a decline would
adversely affect the position of the related Trust Estate as a junior lienholder
before having such an effect on the position of the related senior lien. A rise
in prevailing interest rates over a period of time, the general condition of a
Mortgaged Premises and other factors may also have the effect of reducing the
value of the Mortgaged Premises from its level at the time the Second Lien
Mortgage Loan was originated. As a result, the ratio of the Unpaid Principal
Balance of the Mortgage Loan to the value of the Mortgaged Premises may exceed
the ratio in effect at the time the Mortgage Loan was originated. Such an
increase may reduce the likelihood that, in the event of a default by the
Borrower, Liquidation Proceeds or other proceeds will be sufficient to satisfy
the Second Lien Mortgage Loan after satisfaction of any senior lien and the
payment of any Liquidation expenses.
Even assuming that the Mortgaged Premises provide adequate security
for the Second Lien Mortgage Loans, substantial delay could be encountered in
connection with the Liquidation of defaulted Mortgage Loans with corresponding
delays in the receipt of related proceeds available for payment to Bondholders,
thereby reducing the security for the Second Lien Mortgage Loans. In the event
that any Mortgaged Premises fail to provide adequate security for the related
Second Lien Mortgage Loans and any related credit enhancement has been
exhausted, Bondholders would experience a loss.
Liquidation expenses with respect to defaulted Mortgage Loans are
not likely to vary directly with the outstanding principal balance of the
Mortgage Loans at the time of default. Therefore, assuming that a Servicer or
Special Servicer took the same steps in realizing upon defaulted Second Lien
Mortgage Loans having small outstanding principal balances and upon defaulted
Mortgage Loans having larger outstanding principal balances, the amount realized
after expenses of Liquidation would be smaller as a percentage of the
outstanding principal balance of the smaller Mortgage Loans. Because the average
outstanding principal balances of the Second Lien Mortgage Loans in a Trust
Estate may be relatively small, realizations net of Liquidation expenses may
also be relatively small as percentages of the Unpaid Principal Balances of the
Second Lien Mortgage Loans.
7
UNDERWRITING STANDARDS AND POTENTIAL DELINQUENCIES. Mortgage Loans
originated under underwriting standards less stringent than the underwriting
guidelines of FNMA or FHLMC generally will bear higher rates of interest than
mortgage loans that are originated in accordance with FNMA and FHLMC
underwriting guidelines. The Mortgage Loans generally will be underwritten in
accordance with the underwriting standards described for Mortgage Loans under
"Origination of the Collateral -- Mortgage Loans and Manufactured Home Loans,"
which are intended to provide for the origination of single family mortgage
loans for non-conforming credits. A mortgage loan made to a "non-conforming
credit" means a mortgage loan that is ineligible for purchase by FNMA or FHLMC
due to borrower credit characteristics that do not meet FNMA or FHLMC
underwriting guidelines, including a loan made to a borrower whose
creditworthiness and repayment ability do not satisfy such FNMA or FHLMC
underwriting guidelines or a borrower who may have a record of major derogatory
credit items, such as default on a prior mortgage loan, credit write-offs,
outstanding judgments and prior bankruptcies. ACCORDINGLY, THE MORTGAGE LOANS
ARE LIKELY TO EXPERIENCE RATES OF DELINQUENCY AND FORECLOSURE THAT ARE HIGHER,
AND MAY BE SUBSTANTIALLY HIGHER, THAN MORTGAGE LOANS ORIGINATED IN ACCORDANCE
WITH FNMA OR FHLMC UNDERWRITING GUIDELINES. AS A RESULT, LOSSES ON THE MORTGAGE
LOANS ARE LIKELY TO BE HIGHER THAN LOSSES ON MORTGAGE LOANS ORIGINATED IN
ACCORDANCE WITH SUCH GUIDELINES.
Under the underwriting standards applicable to the Mortgage Loans,
the primary considerations in underwriting a Mortgage Loan, other than the
creditworthiness of the Borrower, are the value of the Mortgaged Premises and
the adequacy of such property as collateral in relation to the amount of the
Mortgage Loan. Because Delinquencies and Foreclosures are likely to be more
frequent for Mortgage Loans originated under underwriting standards for
non-conforming credits than for mortgage loans originated in accordance with
FNMA or FHLMC underwriting guidelines, changes in the values of the related
Mortgage Premises may have a greater effect on the Loss experience of the
Mortgage Loans than on mortgage loans originated in accordance with FNMA or
FHLMC underwriting guidelines. No assurance can be given that the values of
Mortgaged Premises have remained or will remain at the levels in effect on the
dates of origination of the related Mortgage Loans. If the values of the
Mortgaged Premises decline after the dates of origination of the Mortgage Loans,
the rate of Losses on the Mortgage Loans may increase, and such increase may be
substantial.
MODEL HOME LOANS
As further described in the related Prospectus Supplement, a Model
Home Loan is a mortgage loan made by the Participant or its Affiliate and
secured by Mortgaged Premises that are leased by the Borrower to a homebuilder
for use as a model home. The leases typically have a term shorter than that of
the related Model Home Loan. Because the Borrower of a Model Home Loan will have
no significant assets other than the Mortgaged Premises and the related lease
payments, the Borrower's ability to make payments of principal and interest on a
Model Home Loan will depend substantially on its receipt of lease payments from
the homebuilder and on its ability to sell the Mortgaged Premises. Thus, the
value of an investment in the Bonds of a Series secured by Model Home Loans
could suffer an adverse effect as a result of a decline in real estate values in
areas where one or more of the related Mortgaged Premises are located. Such a
decline might simultaneously affect adversely the homebuilder's ability to make
the required lease payments (and payments of required taxes, insurance,
utilities and maintenance) and the Borrower's ability to sell the Mortgaged
Premises at a price sufficient to pay the Unpaid Principal Balance and interest
on the Model Home Loan. Such a decline might also adversely affect the
Borrower's ability to sell the Mortgaged Premises even if the homebuilder
successfully fulfills its lease obligation. Accordingly, Model Home Loans may be
subject to a higher risk of Delinquency and Loss than certain other types of
mortgage loans.
In addition, although there are accepted industry standards for
underwriting mortgage loans generally, there are no such standards for
evaluating mortgage loans such as the Model Home Loans. Accordingly, the
Participant has developed its own guidelines for determining the
creditworthiness of homebuilders. There can be no assurance that the
creditworthiness standards applied by the Participant in determining the
eligibility of homebuilders for this program will not result in a greater rate
of Delinquencies than anticipated.
Homebuilder leases securing Model Home Loans that serve as security
for a Series of Bonds may require the homebuilder to make lease payments that
are adjusted from month-to-month based on current interest rates. Homebuilders
may be more likely to default on this type of lease obligation than they would
be on level-payment lease obligations, particularly as their lease obligations
increase. Default by a homebuilder on its lease obligations would render the
Borrower unable to make required Monthly Payments on the related Model Home
Loan.
8
To the extent that Losses on the Model Home Loans exceed the
available credit enhancement, the Holders of the Bonds of a Series secured by
Model Home Loans would experience a loss.
MANUFACTURED HOME LOANS
GENERAL. A Manufactured Home Loan typically is made based upon a
determination of the Borrower's ability to make Monthly Payments on the
Manufactured Home Loan and upon an investment analysis of the related
Manufactured Home designed to determine the permissible Loan size. The ability
of a Borrower to make Monthly Payments will be dependent on the availability of
jobs and general economic conditions. When a Borrower does default on a
Manufactured Home Loan, realization is generally accomplished through
repossession and resale of the related Manufactured Home. Manufactured homes
generally decline in value over time, which may not necessarily be the case with
respect to mortgaged premises securing mortgage loans, and so the Losses
incurred upon repossession and resale of or Foreclosure on Manufactured Homes
securing Manufactured Home Loans generally may be expected to be more severe
than the Losses that would be incurred upon Foreclosure on Mortgaged Premises
securing first lien Mortgage Loans (in each case, measured as a percentage of
the Unpaid Principal Balance of the related Loan). In addition, experience with
delinquencies and repossessions under manufactured housing installment sale
contracts indicates that recovery experience decreases with downturns in
regional or economic conditions. Thus, if economic conditions decline in areas
where Manufactured Homes are located, the actual rates of Delinquencies,
repossessions and Foreclosures with respect to the Manufactured Home Loans are
likely to increase, and, accordingly, Losses on the Manufactured Home Loans are
likely to increase, perhaps substantially.
To the extent that Losses are not covered by applicable Insurance
Policies, Additional Collateral or other credit enhancement as described in the
related Prospectus Supplement, Holders of the Bonds of a Series will bear all
risk of Loss resulting from default by Borrowers of Manufactured Home Loans, and
this risk of Loss may be allocated disproportionately among the Classes of Bonds
that comprise a Series . Such Losses could result in an Event of Default. See
"The Indenture -- Events of Default."
In addition, adjustable rate Manufactured Home Loans may be
underwritten on the basis of an assessment that the Borrower will have the
ability to make payments in higher amounts after a relatively short time.
Accordingly, defaults on adjustable rate Manufactured Home Loans leading to
repossession and resale (or Foreclosure, in the case of related Real Property)
may occur with greater frequency in the early years of such Loans, although
little data is available with respect to the rate of default on such loans.
Losses on Manufactured Home Loans that exceed levels of available credit
enhancement could result in an Event of Default under the Indenture. See "The
Indenture -- Events of Default."
UNDERWRITING STANDARDS AND POTENTIAL DELINQUENCIES. Manufactured
Home Loans are originated in accordance with credit underwriting standards that
are customary in the industry. These standards generally are more lenient than
those applied to borrowers under many conventional residential first lien
mortgage loans. ACCORDINGLY, THE MANUFACTURED HOME LOANS ARE LIKELY TO
EXPERIENCE RATES OF DELINQUENCY AND FORECLOSURE THAT ARE HIGHER, AND MAY BE
SUBSTANTIALLY HIGHER, THAN MORTGAGE LOANS ORIGINATED IN ACCORDANCE WITH SUCH
OTHER UNDERWRITING STANDARDS. AS A RESULT, LOSSES ON THE MORTGAGE LOANS ARE
LIKELY TO BE HIGHER THAN LOSSES ON MORTGAGE LOANS ORIGINATED IN ACCORDANCE WITH
SUCH GUIDELINES.
Under the underwriting standards applicable to the Manufactured Home
Loans, the primary considerations in underwriting a Manufactured Home Loan,
other than the creditworthiness of the Borrower, are the results of an
investment analysis of the Manufactured Home, which is used to determine the
allowable Loan size, and the adequacy of such property as collateral in relation
to the amount of the Manufactured Home Loan. Because Delinquencies and
Foreclosures are likely to be more frequent for Manufactured Home Loans than for
Mortgage Loans originated in accordance with more stringent underwriting
guidelines, decreases in the values of the related Manufactured Homes are likely
to have a greater effect on the Loss experience of such Manufactured Home Loans
than decreases in the values of Mortgaged Premises would be expected to have on
the Loss experience of such Mortgage Loans. It is unlikely that the values of
the Manufactured Homes securing Manufactured Home Loans have remained or will
remain at the levels in effect on the dates of origination of the related
Manufactured Home Loans. If the values of the Manufactured Homes decline after
the dates of origination of the Manufactured Home Loans, the rate of Losses on
the Manufactured Home Loans may increase, and the increases may be substantial.
9
SECURITY INTERESTS IN MANUFACTURED HOMES. Each Manufactured Home
Loan is secured by a security interest in a Manufactured Home. Perfection of
security interests in Manufactured Homes is subject to a number of state laws,
including, in some states, the Uniform Commercial Code (the "UCC") as adopted in
such states and, in other states, such states' motor vehicle titling statutes.
In some states, perfection of security interests in Manufactured Homes is
governed both by the applicable UCC and by motor vehicle titling statutes. The
steps necessary to perfect a security interest in a Manufactured Home will vary
from state to state. Because of the expense and administrative inconvenience
involved, the Participant will not amend any certificate of title to change the
lienholder specified therein or take any other steps to effect re-registration
of any Manufactured Home with the appropriate state motor vehicle authority. In
addition, the Participant will not deliver any certificate of title, note
thereon the Issuer's interest or file any UCC-3 financing statements or other
instruments evidencing the transfer to the Issuer of the security interest in
any Manufactured Home. In some states, in the absence of such an amendment to
the certificate of title or such a filing under the applicable UCC, it is
unclear whether the transfer of the security interest created by a Manufactured
Home Loan in the underlying Manufactured Home will be effective or whether the
security interest in the Manufactured Home will be perfected. In addition, in
the absence of notation of the interest in a Manufactured Home on the related
certificate of title, re-registration of the Manufactured Home with the
appropriate state motor vehicle authority, delivery of the certificate of title
or filing of an appropriate transfer instrument under the applicable UCC, it is
unclear whether the assignment to the Issuer of the security interest created by
a Manufactured Home Loan in the underlying Manufactured Home will be effective
against creditors of the Participant or a trustee in bankruptcy of the
Participant. The Issuer will make certain warranties relating to the validity,
perfection and priority of the security interest created by each Manufactured
Home Loan in the underlying Manufactured Home in favor of the Manufactured Home
Loan's originator. A breach of any such warranty that materially and adversely
affects the Trust's interest in any Manufactured Home Loan would create an
obligation on the part of the Participant to repurchase or substitute for the
Manufactured Home Loan unless the breach is cured within 90 days after the
Issuer's discovery of or receipt of notice of the breach.
CONVEYANCE OF MANUFACTURED HOME LOANS. A case (OCTAGON GAS SYSTEMS,
INC. V. RIMMER, 995 F.2d 948 (10th Cir.), CERT. DENIED 114 S.Ct 554 (1993))
decided by the United States Court of Appeals for the Tenth Circuit contains
language to the effect that accounts sold by a debtor under Article 9 of the UCC
would remain property of the debtor's bankruptcy estate. Although the
Manufactured Home Loans constitute chattel paper under the UCC rather than
accounts, sales of chattel paper are similarly governed by Article 9 of the UCC.
If, following a bankruptcy of the Participant, a court were to apply the
reasoning of the Tenth Circuit to chattel paper, then delays or reductions in
payments of collections on or in respect of the Manufactured Home Loans could
occur. To the extent the security for any Series of Bonds offered hereunder
contains a material concentration of Manufactured Home Loans secured by
Manufactured Homes located within the Tenth Circuit's jurisdiction, the related
Prospectus Supplement will disclose this concentration and will further describe
the impact the decision could have upon such Series.
CONSUMER FINANCE LOANS
GENERAL. A Consumer Finance Loan typically is made based upon a
determination of the Borrower's ability to make Monthly Payments on the Consumer
Finance Loan and upon the purchase price of the related Facilities and the costs
of installing the Facilities in a single family residential property. The
ability of a Borrower to make Monthly Payments will be dependent on the
availability of jobs and general economic conditions. Where a Borrower defaults
on a Consumer Finance Loan, realization is generally accomplished through
repossession and resale of the related Facilities. Facilities generally decline
in value over time, and so the Losses incurred upon repossession and resale of
Facilities securing Consumer Finance Loans generally may be expected to be more
severe than the Losses that would be incurred upon Foreclosure on Mortgaged
Premises securing Mortgage Loans (in each case, measured as a percentage of the
Unpaid Principal Balance of the related Loan). In addition, experience with
delinquencies and repossessions under manufactured housing installment sale
contracts indicates that recovery experience decreases with downturns in
regional or economic conditions, and such downturns are likely to have the same
effect on installment sales contracts like the Consumer Finance Loans. Thus, if
economic conditions decline in areas where Facilities are located, the actual
rates of Delinquencies, repossessions and Foreclosures are likely to increase,
and Losses on the Consumer Finance Loans are likely to increase, perhaps
substantially.
SECURITY INTERESTS IN FACILITIES. Each Consumer Finance Loan is
secured by a security interest in Facilities. Perfection of security interests
in Facilities is subject to state laws, including the Uniform Commercial Code
(the "UCC") as adopted in such states. Because of the expense and administrative
inconvenience involved, neither the Issuer nor the Participant will file any
UCC-3 financing statements or other instruments evidencing the pledge to the
10
Trustee of the Issuer's security interest in any Facilities. In some states, in
the absence of the filing of an appropriate transfer instrument under the
applicable UCC, it is unclear whether the assignment to the Trustee of the
security interest created by a Consumer Finance Loan in the underlying
Facilities will be effective against creditors of the Participant or Issuer or a
trustee in bankruptcy of the Participant or the Issuer. Unless the related
Prospectus Supplement otherwise provides, the Issuer will make certain
warranties relating to the validity, perfection and priority of the security
interest created by each Consumer Finance Loan in the underlying Facilities in
favor of the Consumer Finance Loan's originator. A breach of any such warranty
that materially and adversely affects the Trust's interest in any Consumer
Finance Loan would create an obligation on the part of the Participant to
repurchase or substitute for the Consumer Finance Loan unless the breach is
cured within 90 days after the Issuer's discovery of or receipt of notice of the
breach.
CONVEYANCE OF CONSUMER FINANCE LOANS. A case (OCTAGON GAS SYSTEMS,
INC. V. RIMMER, 995 F.2d 948 (10th Cir.), CERT. DENIED 114 S.Ct 554 (1993))
decided by the United States Court of Appeals for the Tenth Circuit contains
language to the effect that accounts sold by a debtor under Article 9 of the UCC
would remain property of the debtor's bankruptcy estate. Although the Consumer
Finance Loans constitute chattel paper under the UCC rather than accounts, sales
of chattel paper are similarly governed by Article 9 of the UCC. If, following a
bankruptcy of the Participant, a court were to apply the reasoning of the Tenth
Circuit to chattel paper, then delays or reductions in payments of collections
on or in respect of the Consumer Finance Loans could occur. To the extent the
security for any Series of Bonds offered hereunder contains a material
concentration of Consumer Finance Loans secured by Facilities located within the
Tenth Circuit's jurisdiction, the related Prospectus Supplement will disclose
this concentration and will further describe the impact the decision could have
upon such Series.
ENFORCEMENT OF SECURITY INTERESTS. Facilities consist of "goods"
that on installation in a single family residential property may become
"fixtures." Goods become fixtures when they become so related to particular real
estate that an interest arises in them under the applicable real estate law. In
order to perfect a security interest in the goods, the Participant will make a
"fixture filing," unless applicable state law makes such a filing inadvisable,
and will also file a financing statement as though the goods were personal
property under the applicable UCC. Generally, a perfected security interest in
Facilities installed in an existing home will, with one exception, have priority
over the conflicting interest of an encumbrancer of the real estate, including a
first lien mortgagee. The exception is that a perfected security interest in
fixtures will not take priority over a construction mortgage recorded before
goods become fixtures if the goods become fixtures before completion of
construction.
If the goods constitute fixtures and the Trustee's security interest
in the goods has priority over all other encumbrancers of the affected real
estate, the Servicer may on default remove and repossess the goods (not
including related "ordinary building materials"), provided that the Servicer can
do so peacefully. In addition, the Servicer must reimburse any encumbrancer who
is not the debtor for the cost of repair of any physical damage resulting from
the removal of fixtures, and the person entitled to reimbursement may refuse
permission to remove any fixtures unless the Servicer gives adequate security
for the cost of repair obligation. If the Trustee's security interest in the
goods does not have priority over all other owners and encumbrancers of the
affected real estate, for example because a construction mortgage has priority,
the Servicer may not remove the goods under any circumstances in the case of a
defaulted Consumer Finance Loan.
The value of Facilities is likely to decrease over time. In
addition, each Consumer Finance Loan will be made in an amount equal to the cost
of installation as well as the purchase price of the goods. If the goods are
fixtures, then to the extent that the balance of the Consumer Finance Loan
reflects sums spent for installation or the purchase of ordinary building
materials, the Servicer may be unable to recover a sum adequate to pay off the
Consumer Finance Loan, even if it can resell the removed goods for their fair
value. Thus, the net proceeds of any resale upon default is likely to be
inadequate to pay off the Unpaid Principal Balance plus accrued and unpaid
interest on the related Consumer Finance Loan. Seeking a judgment against the
debtor for the deficiency is seldom economically feasible, and, for that reason,
the Servicer is unlikely to do so.
Moreover, given that the Consumer Finance Loans involve relatively
small amounts, the Servicer, even with a perfected, first priority security
interest, may determine in many cases that the cost of removal of goods,
particularly if an obligation to pay cost of repairs exists, exceeds the net
proceeds that could be expected from a sale and, as a result, may decline to
remove the goods. If the Servicer either declines or is not permitted to remove
the goods, the UCC provisions dealing with fixtures do not indicate how the
Servicer is to proceed. It is not clear under applicable state law whether the
Trustee would be permitted to share in the proceeds of a Foreclosure proceeding
11
brought by an encumbrancer of the real estate. If the Trustee's security
interest in the goods was not a first priority security interest, there would be
little likelihood in any event that any Foreclosure proceeds would remain after
payment of expenses and satisfaction of the senior encumbrances. The Servicer
might have the right to reduce the Trustee's claim to judgment and proceed
against the debtor's assets. For the same reasons that the Servicer would be
unlikely to seek a deficiency judgment in the event of a repossession and
resale, however, a legal proceeding against the debtor frequently would not be
economically feasible. Thus, in the event of default on a Consumer Finance Loan,
the likelihood that the Trustee Estate will suffer a Loss on the Consumer
Finance Loan will be high.
Losses on the Consumer Finance Loans may reduce the amounts
available for payment on the related Bonds.
LIMITED OBLIGATIONS
The Bonds of a Series are obligations of the Issuer only, and
Holders of Bonds of a Series may look only to the assets pledged to the Trustee
for that Series. The Bonds will not represent an interest in or any obligation
of Dynex, IHC or any Affiliate of Dynex or IHC, the Underwriter or any Affiliate
of the Underwriter, the Master Servicer or any Servicer. The Bonds will not be
guaranteed by any government agency or instrumentality, Dynex, IHC or any
Affiliate of Dynex or IHC, the Underwriter or any Affiliate of an Underwriter,
the Master Servicer or any Servicer.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Bonds of
any Series will develop or, if it does develop, that it will provide Bondholders
of such Series with liquidity of investment or will remain for the term of such
Series of Bonds. In addition, if such a market does develop and continue, the
market value of the Bonds of each Series may fluctuate with changes in
prevailing rates of interest and other factors. Consequently, the sale of Bonds
by a Bondholder in any secondary market that may develop may be at a discount
from their purchase price. Except as otherwise specified in the related
Prospectus Supplement, Bondholders will have no optional redemption rights.
BANKRUPTCY OR INSOLVENCY OF THE ISSUER
The bankruptcy or insolvency of the Issuer could adversely affect
payments on the Bonds. For this reason, the Issuer was formed as a
limited-purpose financing subsidiary of IHS. See "The Issuer." Notwithstanding
its limited purpose, in the event of a bankruptcy or insolvency of the Issuer,
the automatic stay imposed by Title 11 of the United States Code (the
"Bankruptcy Code") could prevent enforcement of the obligations of the Issuer,
including its obligations under the Bonds and the Indenture, or actions against
any of the Issuer's property, including the related Collateral, prior to
modification of the stay. In addition, the trustee in bankruptcy for the Issuer
may be able to accelerate payment of the Bonds and liquidate the Collateral. In
the event the principal of the Bonds is declared due and payable, the
Bondholders would lose the right to future payments of interest and might suffer
reinvestment loss in a lower interest rate environment and (i) in the case of
Premium Bonds, may fail to recover fully their initial investments, and (ii) in
the case of Discount Bonds, may be entitled, under applicable provisions of the
Bankruptcy Code, to receive no more than an amount equal to the unpaid principal
amount thereof less unamortized original issue discount ("Accreted Value").
There is no assurance as to how such Accreted Value would be determined if such
event occurred.
BANKRUPTCY OR INSOLVENCY OF IHC OR A PARTICIPANT
The Issuer believes that each transfer of Collateral from IHC to the
Issuer will constitute an absolute and unconditional sale. However, in the event
of the bankruptcy of IHC or the Participant, a trustee in bankruptcy could
attempt to recharacterize the sale of the Collateral as a borrowing secured by a
pledge of the Collateral. Such an attempt, even if unsuccessful, could result in
delays in distributions on the Bonds. If such an attempt were successful, the
trustee in bankruptcy could elect to accelerate payment of the Bonds and
liquidate the Collateral, with the holders of the Bonds entitled to no more than
the then outstanding principal amount of such Bonds together with interest at
the applicable Class Interest Rate to the date of payment. In the event the
principal of the Bonds is declared due and payable, the Bondholders of the Bonds
would lose the right to future payments of interest and might suffer
reinvestment loss in a lower interest rate environment and (i) in the case of
Premium Bonds, may fail to recover fully their initial investments, and (ii) in
the case of Discount Bonds, may be entitled, under applicable provisions of the
Bankruptcy Code, to receive no more than an amount equal to the Accreted Value.
There is no assurance as to how such Accreted Value would be determined if such
event occurred.
12
DEFICIENCY ON SALE OF COLLATERAL
In the event of an acceleration of the payment of the Bonds
following an Event of Default for a Series, if the assets securing the Bonds of
such Series were to be sold, there can be no assurance that the proceeds of any
such sale would be sufficient to pay in full the outstanding principal amount of
the related Bonds and interest payments due thereon. The market value of the
assets generally will fluctuate with changes in prevailing rates of interest.
Consequently, the Collateral and any Eligible Investments in which the funds
deposited in the Collateral Proceeds Account and any Reserve Funds for a Series
may be invested may be liquidated at a discount, in which case the proceeds of
liquidation might be less than the aggregate outstanding principal amount and
interest payable on the Bonds of that Series. Unless otherwise specified in the
related Prospectus Supplement, except under limited circumstances, the Holders
of Subordinated Bonds will have no independent ability to declare a default or
force the sale of the Collateral even if an Event of Default has occurred. See
"The Indenture -- Events of Default" herein.
MODIFICATION AND SUBSTITUTION OF COLLATERAL
If an item of Collateral is in material default or a payment default
is imminent, the related Servicer, with the consent of the Master Servicer, may
enter into a forbearance or modification agreement with the Borrower. The terms
of any such forbearance or modification agreement may affect the amount and
timing of principal and interest payments on the item of Collateral and,
consequently, may affect the amount and timing of payments on one or more
Classes of the related Series of Bonds. For example, a modification agreement
that results in a lower Loan Rate would lower the Class Interest Rate of any
related Class of Bonds that accrues interest at a rate based on the weighted
average Net Loan Rate of the related Collateral. See "Servicing of the
Collateral -- Defaulted Collateral."
In addition, under certain circumstances, the Issuer may substitute
new Collateral ("Substitute Collateral") for defaulted Collateral. See "Security
for the Bonds -- Substitution of Collateral." The terms of each item of
Substitute Collateral may differ from those of the item of Collateral for which
it is substituted. In particular, the Loan Rate of the item of Substitute
Collateral may be less than that of the item of Collateral for which it is
substituted and, indeed, may be less than the then current market interest rate
for loans or other applicable assets with similar characteristics. The
substitution of an item of Substitute Collateral with a Loan Rate less than that
of the item of Collateral for which it is substituted will reduce the Class
Interest Rate of any related Class of Bonds with a Class Interest Rate based on
the Loan Rates or Net Loan Rates of the related Collateral. Furthermore, any
Bondholder that would be entitled to receive payments based on the Collateral
Value of a defaulted item of Collateral, REO or Repo Property upon Liquidation
of the defaulted item of Collateral may prefer that the defaulted item of
Collateral be Liquidated rather than replaced with an item of Substitute
Collateral, particularly if the item of Substitute Collateral has a Loan Rate
less than the then current market interest rate for loans or other applicable
assets with similar characteristics. See "Security for the Bonds -- Substitution
of Collateral."
As a condition to any modification or forbearance related to any
item of Collateral or to the substitution of an item of Substitute Collateral,
the Master Servicer is required to determine, in its reasonable business
judgment, that such modification, forbearance or substitution will maximize the
recovery on such item of Collateral on a present value basis. However, the
interests of the Issuer and the Master Servicer, which is an Affiliate of the
Issuer, may conflict with those of the Bondholders in determining whether to
enter into a modification or forbearance agreement or to substitute an item of
Substitute Collateral (or in establishing the terms of any such modification or
forbearance agreement or the terms of such item of Substitute Collateral).
PLEDGE OF ADDITIONAL COLLATERAL
Subject to certain conditions set forth herein and in the Prospectus
Supplement for a Series, the Issuer may pledge additional mortgage loans,
mortgage-backed certificates, model home loans, manufactured housing installment
sales contracts or facilities installment sales contracts ("Additional
Collateral") to the Trustee and issue Additional Bonds of that Series within one
year of the date of initial issuance of the Bonds of such Series. Although the
pledge of any Additional Collateral will not result in any change in the Class
Interest Rate, Stated Maturity Date or Payment Dates of any outstanding Bonds of
such Series, the pledge of Additional Collateral may result in a variance of
plus or minus 0.05 years in the weighted average life of any outstanding Class
of Bonds of such Series at the prepayment rate assumed for the pricing of the
initial issuance of the Class, and the characteristics of the Collateral may
vary within the parameters specified in the Prospectus Supplement relating to
the initial issuance of the Bonds of such Series. Furthermore, no assurance can
be given that any pledge of Additional Collateral and issuance of Additional
13
Bonds would not affect the timing or amount of payments received by Holders of
the outstanding Bonds of that Series. Provided that the conditions described in
the Prospectus Supplement for the outstanding Bonds are satisfied, the pledge of
Additional Collateral and the issuance of Additional Bonds will not be subject
to the prior consent of the Holders of the outstanding Bonds of such Series. See
"Security for the Bonds -- Pledge of Additional Collateral and Issuance of
Additional Bonds" herein.
AVERAGE LIFE AND YIELD CONSIDERATIONS
The rate of payment of principal on the Collateral will affect the
average life of each Class of Bonds. The Collateral may have provisions that
provide for the payment of a premium in connection with a voluntary or
involuntary principal prepayment thereof. In addition, the rate of payment of
principal, including prepayments, on the Collateral may be influenced by a
variety of economic, geographic, social, tax, legal and other factors, including
the difference between the interest rates on the Collateral and prevailing
interest rates for similar loans. In general, if the Collateral is not subject
to prepayment penalties and if prevailing interest rates for similar loans fall
below the interest rates on the Collateral, the rate of principal prepayments
would be expected to increase, especially if the Collateral carries fixed rates
of interest. If prevailing interest rates for similar loans rise above the
interest rates on the Collateral, the rate of principal prepayments would be
expected to decrease. See "Yield Considerations" herein.
Yields realized by Bondholders of Discount Bonds or Premium Bonds
may be extremely sensitive to the rate of principal payments (including for this
purpose, modifications, substitutions, scheduled principal payments, payments
resulting from refinancings, Liquidations due to defaults, casualties,
condemnations and repurchase by the seller of the Collateral securing such
Series). In general, yields on Premium Bonds will be adversely affected by
higher than anticipated rates of principal payments on the Collateral and
enhanced by lower than anticipated rates. Yields on Discount Bonds are likely to
be enhanced by higher than expected rates of principal payments and adversely
affected by lower than expected rates. In certain circumstances, Holders of
certain Classes of Bonds could fail to fully recover their initial investment.
LIMITED NATURE OF RATINGS
Each Class of Bonds of a Series offered hereby and by means of the
related Prospectus Supplement will be, when issued, rated in one of the four
highest rating categories by one or more Rating Agencies identified in such
Prospectus Supplement. Any such rating is not a recommendation to buy, sell or
hold Bonds and is subject to revision or withdrawal at any time by the Rating
Agency issuing the rating. An investor may obtain further details with respect
to any rating on the Bonds from the Rating Agency issuing the rating. In
addition, any such rating will be based, among other things, on the credit
quality of the Collateral and will represent only an assessment of the
likelihood of receipt by Bondholders of payments with respect to underlying
Collateral. A rating will not represent any assessment of the likelihood that
prepayment experience may differ from prepayment assumptions and, accordingly,
will not represent any assessment of the possibility that Holders of Premium
Bonds may, under circumstances of high principal prepayments on the Collateral,
fail fully to recover their initial investment. Credit ratings assigned to
Classes of Bonds having a disproportionate entitlement to principal or interest
payments on the Collateral specifically do not address the effect on the yield
to the Bondholder should the rate of principal payments be substantially
different than that assumed by the Bondholder when the Class of Bonds was
purchased. In addition, the ratings assigned to Subordinated Classes of Bonds
may be more subject to change than the ratings assigned to other kinds of
securities. A rating also will not assess the ability of the Participant or
other party to perform its obligation, if any, to repurchase Converted Loans.
INSURANCE AND CREDIT SUPPORT LIMITATIONS
The Insurance Policies, if any, on the Collateral or the obligation
to deliver Additional Collateral, if any, with respect to a Series will not
cover all contingencies and will cover certain contingencies only to a limited
extent. See "Security for the Bonds -- Insurance on the Collateral" and "-- Pool
Insurance." The amount, type and nature of Insurance Policies, subordination,
letters of credit and other credit support, if any, required with respect to a
Series will be determined on the basis of actuarial criteria established by each
Rating Agency rating the Series. This actuarial analysis is the basis upon which
each Rating Agency determines required amounts and types of Pool Insurance,
Special Hazard Insurance, Reserve Funds, overcollateralization or other credit
support. There can be no assurance that the historical data supporting an
actuarial analysis will accurately reflect future experience or any assurance
that the data derived from a large pool of housing-related loans will accurately
predict the Delinquency, Foreclosure or Loss experience of any particular pool
of Collateral.
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LENDER REGULATIONS
Numerous federal and state consumer protection laws impose
requirements on lending under mortgage loans or retail installment sales
contracts such as those included in the Collateral, and the failure by the
lender or seller of goods to comply with such requirements could give rise to
liabilities on the part of the lender's assignees to the Borrowers for amounts
due under such mortgage loans or contracts or to a Borrower's right of set-off
against claims by such assignees as a result of the lender's or seller's
noncompliance. To the extent these laws affect the Collateral, these laws would
apply to the Trustee as assignee of the Collateral. The Issuer will warrant that
the origination of each item of Collateral complied with all requirements of law
and that there exists no right of rescission, set-off, counterclaim or defense
in favor of the Borrower under any item of Collateral and that each item of
Collateral is enforceable against the related Borrower in accordance with its
terms, subject to applicable bankruptcy and similar laws, laws affecting
creditors' rights generally and general principles of equity. A breach of any
such warranty that materially and adversely affects the Trustee's interest in
any Loan would create an obligation on the part of the Issuer to repurchase or
substitute for the item of Collateral unless the breach is cured within 90 days
after the Issuer's discovery of the breach or after notice of the breach is
provided to the Issuer. If the credit support provided by any Subordinated
Bonds, insurance or other credit enhancement is exhausted, application of these
consumer protection laws could limit the ability of the Bondholders to realize
upon Mortgaged Premises, Manufactured Homes, Real Property or Facilities
securing defaulted items of Collateral or could limit the amount collected on a
defaulted Loan to less than the amount due thereunder. See "Certain Legal
Aspects of the Collateral -- Manufactured Home Loans -- Enforcement of Security
Interests in Manufactured Homes" and "-- Consumer Protection Laws" herein and
"Certain Legal Aspects of the Collateral -- Mortgage Loans and Model Home Loans
- -- Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
LIMITATIONS ON SUBORDINATION
With respect to Bonds of a Series that includes a Subordinated
Class, while the subordination feature is intended to enhance the likelihood of
timely payment of principal and interest to Holders of Senior Bonds, the
available subordination may be limited, as specified in the related Prospectus
Supplement. In addition, with respect to Bonds of a Series supported by a
Reserve Fund, the Reserve Fund could be depleted under certain circumstances. In
either case, shortfalls could result for both the Senior Bonds and the
Subordinated Bonds of such Series. Prospective purchasers of a Class of Bonds
should carefully review the credit risks associated with the Class resulting
from its subordination or from the timing of the distributions intended to be
made on the Class.
ORIGINAL ISSUE DISCOUNT
Discount Bonds generally will be treated as issued with original
issue discount for federal income tax purposes. In addition, certain classes of
Premium Bonds may be treated by the Trustee as issued with original issue
discount. The Trustee will report original issue discount with respect to such
Discount and Premium Bonds on an accrual basis, which may be prior to the
receipt of cash associated with such income. See "Certain Federal Income Tax
Consequences" herein.
LEGAL INVESTMENT CONSIDERATIONS
No representation or warranty is made concerning whether the Bonds
of any Series are legal investments under any federal or state law, regulation,
rule or order of any court. Any Class of a Series of Bonds (a) that is (i)
secured by Second Lien Mortgage Loans or (ii) secured by Consumer Finance Loans
or (b) that is not rated in one of the two highest rating categories by at least
one nationally recognized statistical rating organization will not constitute
"mortgage related securities" within the meaning of SMMEA. Prospective investors
are advised to consult their counsel as to qualification of any Class of a
Series of Bonds as legal investments under any such laws, regulations, rules and
orders.
CONSOLIDATED TAX RETURN
If the Issuer were to fail to be treated for federal income tax
purposes as a "qualified REIT subsidiary" by reason of Dynex's failure to
continue to qualify as a real estate investment trust ("REIT") for federal
income tax purposes or for any other reason, the net income of the Issuer would
be subject to corporate income tax and the Issuer would not be permitted to be
included on a consolidated income tax return of another corporate entity. No
15
assurance can be given with regard to the future qualification of the Issuer as
a qualified REIT subsidiary or of Dynex as a REIT for federal income tax
purposes. See "Certain Federal Income Tax Consequences -- General."
DESCRIPTION OF THE BONDS
GENERAL
The Bonds will be issued in Series, pursuant to an Indenture between
the Issuer and a Trustee, as specified in the Prospectus Supplement. The Bonds
within a Series will be issued by Class or Classes, pursuant to the Indenture. A
Series of Bonds will consist of one or more Classes of Bonds. The Prospectus
Supplement and the Series Supplement for a Series of Bonds will specify with
respect to each Class the type of Bond, the specific designation of the Class,
the Stated Maturity Date, the aggregate principal amount, the Payment Dates, the
Class Interest Rate (or method of determining such rate), any redemption
features and other related terms.
The Bonds of each Series will be secured by the Collateral, the
Collateral Proceeds Account and, to the extent specified in the related
Prospectus Supplement, the Reserve Funds (and any other funds or accounts
pledged to secure the Series), the Insurance Policies, the Bond Insurance, the
Surplus (prior to its disbursement to the Issuer), other credit enhancement, the
Servicing Agreements and the Master Servicing Agreement for such Series. See
"The Indenture" and "Security for the Bonds." The following summaries describe
certain provisions of the Bonds. The summaries do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, the
provisions of the Indenture and the Series Supplement relating to the applicable
Series of Bonds. When particular provisions or terms used in the Indenture are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference. A copy of the form of Indenture (including all
supplements thereto to date) has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. A copy of the Indenture
supplement for a Series (the "Series Supplement") will be filed with the
Commission as an Exhibit to a Current Report on Form 8-K to be filed with the
Commission within 15 days after issuance of Bonds of the related Series.
The Indenture does not limit the amount of Bonds that can be issued
thereunder and provides that Bonds may be issued up to the aggregate principal
amount authorized from time to time by the Issuer. The Indenture provides that
Additional Bonds may be issued for any outstanding Class of Bonds or Series up
to the aggregate principal amount authorized from time to time by the Issuer,
subject to the provisions of the related Series Supplement or supplements
thereto.
The Bonds of each Series will be issued in fully-registered
certificated or book-entry form in the authorized denominations specified in the
related Prospectus Supplement. The Bonds of each Series that are issued in
certificated form may be transferred or exchanged at the corporate trust office
of the Trustee without the payment of any service charge, other than any tax or
other governmental charge payable in connection therewith. Unless otherwise
specified in the related Prospectus Supplement, the Trustee will make payments
of principal of and interest on the Bonds of a Series that are issued in
certificated form (i) by checks mailed to registered Bondholders at their
addresses appearing on the books and records of the Issuer or (ii) by wire
transfer of immediately available funds upon timely request to the Trustee in
writing by any Bondholder of Bonds having an initial principal amount of at
least $1,000,000 or such other amount as may be specified in the related
Prospectus Supplement except that the final payments in retirement of each Class
of Bonds of a Series issued in certificated form will be made only upon
presentation and surrender of such Bonds at the office or agency of the Issuer
maintained for that purpose. The Trustee will make such payments with respect to
Bonds in book-entry form as set forth below.
BOOK-ENTRY PROCEDURES
The Prospectus Supplement for a Series may specify that certain
Classes of the Bonds will initially be issued in book-entry form ("Book-Entry
Bonds") in the authorized denominations specified therein. Each such Class of
Bonds will be represented by one or more certificates registered in the name of
the nominee of the depository, which is expected to be The Depository Trust
Company ("DTC" and, together with any successor or other depository selected by
the Issuer, the "Depository"). The Depository or its nominee will be registered
as the record holder of the Bonds in the Bond Register. No person acquiring a
Book-Entry Bond (a "beneficial owner") will be entitled to receive a certificate
representing such Bond.
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The beneficial owner's ownership of a Book-Entry Bond will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains such
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Bond will be recorded on the records
of the Depository (either directly or through one or more Financial
Intermediaries). Therefore, the beneficial owner must rely on the foregoing
procedures to evidence its beneficial ownership of a Book-Entry Bond, and
beneficial ownership of a Book-Entry Bond may only be transferred by compliance
with the procedures of such Financial Intermediaries and Depository
participants.
DTC, which is a New York-chartered limited-purpose trust company,
performs services for its participants, some of whom (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
Bonds, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Bonds will be subject to the rules,
regulations and procedures governing the Depository and Depository participants
as in effect from time to time.
Payment of principal of and interest on the Book-Entry Bonds will be
made on each Payment Date to the Depository. The Depository will be responsible
for crediting the amount of such distributions to the accounts of the applicable
Depository participants in accordance with the Depository's normal procedures.
Each Depository participant will be responsible for disbursing such payments to
the beneficial owners of the Book-Entry Bonds 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 Bonds that it represents. As a result of the foregoing
procedures, beneficial owners of the Book-Entry Bonds may experience some delay
in their receipt of payments.
Because transactions in Book-Entry Bonds can be effected only
through the Depository, participating organizations, indirect participants and
certain banks, the ability of a beneficial owner of a Book-Entry Bond to pledge
such Bond to persons or entities that do not participate in the Depository, or
otherwise to take actions in respect of such Bond, may be limited due to the
lack of a physical certificate representing such Bond. Issuance of Book-Entry
Bonds may reduce the liquidity of such Bonds in the secondary trading market
because investors may be unwilling to purchase Book-Entry Bonds for which they
cannot obtain physical certificates.
The Book-Entry Bonds will be issued in fully-registered,
certificated form to beneficial owners of Book-Entry Bonds or their nominees,
rather than to the Depository or its nominee, only if (i) the Issuer advises the
Trustee in writing that the Depository is no longer willing or able to discharge
properly its responsibilities as depository with respect to the Book-Entry Bonds
and the Issuer is unable to locate a qualified successor within 30 days or (ii)
the Issuer, at its option, elects to terminate the book-entry system through the
Depository. Upon the occurrence of either event described in the preceding
sentence, the Trustee is required to notify the Depository, which in turn will
notify all beneficial owners of Book-Entry Bonds through Depository
participants, of the availability of certificated Bonds. Upon surrender by the
Depository of the certificates representing the Book-Entry Bonds and receipt of
instructions for re-registration, the Trustee will reissue the Book-Entry Bonds
as certificated Bonds to the beneficial owners of Book-Entry Bonds.
Neither the Issuer, the Master Servicer nor the Trustee will have
any liability for any aspect of the records relating to or payment made on
account of beneficial ownership interests of the Book-Entry Bonds held by the
Depository, or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
PAYMENTS OF PRINCIPAL AND INTEREST
To the extent specified in the related Prospectus Supplement,
payments on the Collateral securing a Series, including prepayments, together
with withdrawals from various debt service and Reserve Funds, will be available
to pay principal of and interest on the Bonds of a Series.
On each Payment Date for a Series, principal will be paid on the
Bonds in an amount equal to the Principal Distribution Amount or such other
amount as may be specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the Principal
Distribution Amount on any Payment Date will equal the amount by which (i) the
aggregate Collateral Value of the Collateral securing the Series as of the
preceding Payment Date (or, with respect to the first Payment Date, as of the
Cut-off Date for the Series) exceeds (ii) the aggregate Collateral Value of the
Collateral securing the Series as of the current Payment Date. Unless otherwise
specified in the related Prospectus Supplement, the Collateral Value of any
Collateral securing a Series will generally equal (i) the Scheduled Principal
17
Balance of the Collateral or (ii) as specified in the related Prospectus
Supplement, the Scheduled Principal Balance of the Collateral multiplied by a
fraction, the numerator of which is the Net Rate of the Collateral and the
denominator of which is the Collateral Value Discount Rate.
The Prospectus Supplement will specify (i) the order in which
payments of principal (including prepayments) on the Collateral will be applied
to pay principal of different Classes of Bonds of a Series and (ii) the
percentage interest in payments of principal (including prepayments) on the
Collateral or pools of Collateral for each Class of Bonds within a Series if
such payments are unequally allocated among the Classes of Bonds within a
Series. Unless otherwise specified in the related Prospectus Supplement, all
payments of principal of a particular Class of Bonds will be applied on a pro
rata basis.
The Stated Maturity Date for the Bonds of each Class will be the
date by which all Bonds of the Class are scheduled to be fully paid. The Stated
Maturity Date of a Class of Bonds may be determined by reference to the maturity
date of the Collateral pledged to the related Series with the latest stated
final Due Date or on the basis of the assumptions set forth in the related
Prospectus Supplement. All or a portion of the payments on the Collateral
securing a Series will be used to amortize Bonds of the Series, as described in
the related Prospectus Supplement. It is expected that each Class of Bonds will
be fully paid in advance of its Stated Maturity Date from payments, including
prepayments, on the Collateral. The rate of principal payments on the Collateral
securing a Series will depend on the characteristics of the Collateral, as well
as on the level of interest rates prevailing from time to time and other
economic factors. No assurance can be given as to the actual prepayment
experience of the Collateral. See "Maturity and Prepayment Considerations" and
"Yield Considerations" herein.
Each Class of Bonds will bear interest from the date and at the rate
per annum (the "Class Interest Rate") specified, or determined as specified, in
the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, interest will be computed on the basis of a 360-day year
consisting of 12 months of 30 days each. Interest on a Class of Bonds consisting
of Current Interest Bonds will be payable on the Payment Dates specified in the
related Prospectus Supplement. Each such payment of interest will include all
interest either accrued to the Accounting Date immediately preceding the Payment
Date on which it is made or to another date specified in such Prospectus
Supplement. Unless interest is accrued to the Payment Date, the effective yield
to the Bondholder will be reduced to a level below the yield that would apply if
interest were accrued to the Payment Date. If specified in the related
Prospectus Supplement, any Class of Bonds may bear interest at a variable rate.
For any variable rate Class of Bonds, the related Prospectus Supplement will set
forth the manner for determining the variable interest rate and the interest
rate change interval. The variable interest rate for a Class of Bonds will not
exceed a maximum rate specified in the related Prospectus Supplement, and the
payments due on the Collateral securing the related Series or Class of Bonds
will be in amounts (taking into account Reserve Funds and other funds and any
redemption rights and obligations) determined to be adequate to pay interest on
such Class of Bonds at the specified maximum interest rate.
If specified in the related Prospectus Supplement, (i) a Class of
Bonds may be a Principal Only Class comprised solely of Principal Only Bonds,
which will not bear interest, and (ii) a Class of Bonds may be a High Coupon
Class comprised solely of High Coupon Bonds, which will receive only relatively
small payments of principal. If specified in the related Prospectus Supplement,
a Class of Bonds may be an Accretion Class, which is comprised solely of
Accretion Bonds on which interest will accrue but will not be paid ("Deferred
Interest") until each Class of Bonds of the Series, if any, with an earlier
priority of payment has been paid in full or as otherwise specified in the
related Prospectus Supplement. Deferred Interest will be added to the principal
of each Class of Accretion Bonds on each Accounting Date until all Classes of
Bonds that have an earlier payment priority are paid in full, and, thereafter,
interest will be paid on the Compound Value of the Accretion Bonds. The Compound
Value of a Class of Accretion Bonds will equal the original principal amount of
such Class, plus Deferred Interest through the Accounting Date preceding the
determination date, less any principal payments made on such Class of Bonds.
Unless otherwise specified in the related Prospectus Supplement,
payments on the Collateral pledged to a particular Series and not used to pay
principal or interest on the Bonds will be treated as Surplus. To the extent
specified in the related Prospectus Supplement for a Series, all or a portion of
the Surplus on any Payment Date may be applied to cover Losses or interest
shortfalls associated with a Series or any Series sold pursuant to this
Prospectus, or the Surplus may be distributed to the Issuer. Any Surplus
distributed to the Issuer will not be available for payment of principal or
interest on the Bonds.
18
REDEMPTION
To the extent provided in the related Prospectus Supplement, the
Bonds of any Class may be subject to redemption at the option of the Issuer
prior to their Stated Maturity Date. Notice of such redemption must be given by
the Issuer or by the Trustee as provided in the related Prospectus Supplement.
The redemption price for any Bond (or portion thereof) so redeemed will be the
percentage of the unpaid principal amount of such Bond specified in the related
Prospectus Supplement, together with accrued interest thereon to the date
specified in the related Prospectus Supplement, or such other price as may be
specified in the related Prospectus Supplement.
MATURITY AND PREPAYMENT CONSIDERATIONS
The actual maturity date and average life of a Class of Bonds will
be determined by, among other things, (i) the prepayment experience on the
Collateral, (ii) the frequency and scope of any forbearance or modification
relating to defaulted Collateral and (iii) the optional redemption provisions of
a Series of Bonds.
The rate of principal payments on Collateral will be affected by the
amortization schedules of the Collateral and by the rate of principal
prepayments thereon (including for this purpose payments resulting from
refinancings, Liquidations due to defaults, casualties and condemnations). No
assurance can be given as to the rate of principal payments or prepayments on
the Collateral. In general, however, if prevailing interest rates fall
significantly below the interest rates on the Collateral and the Collateral may
be voluntarily prepaid in accordance with the applicable terms, the Collateral
would likely be subject to a higher rate of principal prepayments than if
prevailing rates remain at or above the rates borne by the Collateral.
The Servicer, with the approval of the Master Servicer in most
cases, is authorized pursuant to the Servicing Agreement to modify the payment
terms of a defaulted Loan. If the Master Servicer appoints a Special Servicer,
the Special Servicer would be authorized to make such modifications or
substitutions. Any such modification or substitution would likely provide for a
slower principal amortization schedule than was required under the original
terms of the Loan (including an extension of the final Due Date) and therefore
would have an effect on the average life of a Class of Bonds opposite to the
effect that a prepayment of a Loan would have. To the extent one or more Loans
is in default on its revised final Due Date and the respective Servicer is
unable to liquidate timely the defaulted Loan, the Issuer may fail to pay one or
more Classes of the Bonds in full by their Stated Maturity Date. See "Servicing
of the Collateral -- Master Servicing Agreement" and " -- Special Servicing
Agreement" herein.
The Prospectus Supplement for a Series of Bonds may contain a table
setting forth percentages of the original principal amount of each Class of
Bonds of such Series anticipated to be outstanding after each of the dates shown
in the table. It is unlikely that the prepayment experience of the Collateral
for any Series will conform to any of the percentages of the prepayment
assumption model described in any table set forth in the related Prospectus
Supplement.
YIELD CONSIDERATIONS
Payments of interest on the Bonds generally will include interest
accrued through the Accounting Date for the applicable Payment Date. Because
payments to the Bondholders generally will not be made until the Payment Date
following the Accounting Date, the effective yield to the Bondholders of the
Bonds will be lower than the yield otherwise produced by the applicable Class
Interest Rate and purchase price for the Bond.
The yield to maturity of any Bond will be affected by the rate and
timing of payments of principal of the Collateral and, to a lesser extent, the
frequency and scope of any modifications or substitutions of Loans. If the
purchaser of a Bond offered at a discount from its Parity Price calculates the
anticipated yield to maturity of the Bond based on an assumed rate of payment of
principal that is faster than that actually received on the Collateral, the
actual yield to maturity will be lower than the calculated yield. If the
purchaser of a Bond offered at a premium over its Parity Price calculates the
anticipated yield to maturity of the Bond based on an assumed rate of payment of
principal that is slower than that actually received on the Collateral, the
actual yield to maturity will be lower than the calculated yield.
The timing of changes in the rate of payment of principal on the
Collateral may significantly affect an investor's actual yield to maturity, even
if the average rate of principal payments experienced over time is consistent
with an investor's expectation. In general, the earlier a payment of principal
on an item of Collateral, the greater will be the effect on the investor's yield
19
to maturity. As a result, the effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during the period immediately following the issuance of the Bonds would
not be fully offset by a subsequent commensurate reduction (or increase) in the
rate of principal payments at a later date. Because the rate of principal
payments (including prepayments) on the Collateral may significantly affect the
weighted average life and other characteristics of any Class of Bonds,
prospective investors are urged to consider their own estimates as to the
anticipated rate of future payments of principal on the Collateral and the
suitability of the Class of Bonds to their investment objectives. For factors
affecting principal payments on Loans, including the impact of modifications and
substitutions of Collateral, see "Maturity and Prepayment Considerations" above.
Investors should consider the risk that rapid rates of prepayment on
the Collateral, and therefore of principal payments on the Bonds, may coincide
with periods of low prevailing interest rates. During such periods, the
effective interest rates on securities in which an investor may choose to
reinvest amounts received as principal payments on a Bond may be lower than the
applicable Class Interest Rate. Slow rates of prepayments on the Collateral, and
therefore of principal payments on the various Classes of Bonds, may coincide
with periods of high prevailing interest rates. During such periods, the amount
of principal payments available to an investor for reinvestment at such high
prevailing interest rates may be relatively low.
SECURITY FOR THE BONDS
GENERAL
Unless otherwise specified in the related Prospectus Supplement,
each Series will be secured by the pledge to the Trustee of a Trust Estate
consisting of (i) Collateral, together with the payments thereon, having an
aggregate initial Collateral Value at least equal to 100% of the original
principal amount of the Bonds of such Series and any REO Property or Repo
Property acquired in respect of such Collateral through Foreclosure or
repossession, (ii) the Collateral Proceeds Account for such Series, (iii) to the
extent applicable, Reserve Funds and other funds and accounts for such Series,
(iv) to the extent applicable, the Issuer's rights to Additional Collateral, (v)
all payments that may become due under Insurance Policies, if any, (vi) the
Issuer's rights under the Servicing Agreements and the Master Servicing
Agreement with respect to such Series and (vii) to the extent applicable, an
interest rate agreement with a third party. Scheduled payments of principal of
and interest on the Collateral securing a Series of Bonds (including payments
from the Reserve Fund, if applicable), net of applicable servicing fees, master
servicing fees, trustee fees, guarantee fees and insurance premiums, if any, for
the Series, are intended to be sufficient to make the required payments of
interest on the Bonds of the Series and to pay the entire principal amount of
each Class of Bonds of the Series not later than the Stated Maturity Date of the
Class of Bonds. Except as otherwise specified in the related Prospectus
Supplement, a Trust Estate (other than certain credit enhancement items) will
secure only one Series of Bonds.
THE COLLATERAL
The Prospectus Supplement for a Series will describe in general the
type of Collateral that will secure the Series. The Collateral will be composed
primarily of Mortgage Collateral and may also include, to the extent indicated
below, Model Home Loans, Manufactured Home Loans, Consumer Finance Loans or
certain other assets evidencing interests in or related to loans secured by
residential property.
THE MORTGAGE COLLATERAL
GENERAL
At least 70% of the aggregate Scheduled Principal Balance as of
the Cut-off Date of the Collateral securing a Series of Bonds will consist of
Mortgage Collateral.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Collateral securing a Series will consist of Mortgage Loans. Generally,
Mortgage Loans will be secured by first liens on single family (one-family or
two- to four-family) attached or detached residential property. If specified in
the related Prospectus Supplement, the Collateral securing a Series of Bonds may
include Mortgage Collateral consisting of Second Lien Mortgage Loans, REO
Properties and Mortgage Loans that are past due or non-performing. Because
Mortgage Loans secured by second liens are subordinate to the rights of the
senior lienholders, the position of the Trust Estate, and in turn the
20
Bondholders, could be more adversely affected by a reduction in value of the
Mortgaged Premises than would the position of a senior lienholder. In addition,
in the event of a default by the related Borrower, liquidation or other proceeds
may be insufficient to satisfy the Second Lien Mortgage Loan after satisfaction
of the senior lien and the payment of any liquidation expenses. In addition,
including REO Properties or non-performing Mortgage Loans in the Trust Estate
for a Series of Bonds may increase the rate of defaults and prepayments on the
Collateral and, in turn, adversely affect the yield on the Bonds of the related
Series. Regular monthly installments of principal of and interest on each
Mortgage Loan ("Monthly Payments") paid by the Borrower will be collected by the
Servicer or Master Servicer and ultimately remitted to the Trustee.
Except as provided in the related Prospectus Supplement, each
Mortgage Loan securing a Series will have been originated by a savings and loan
association, savings bank, commercial bank, credit union, insurance company or
similar institution that is supervised and examined by a federal or state
authority or by a mortgagee approved by HUD (each, an "Originator"). The
Mortgaged Premises securing Mortgage Loans may consist of (i) detached homes,
(ii) attached homes (units having a common wall), (iii) units located in
condominiums, (iv) manufactured homes and (v) other types of homes or units set
forth in the related Prospectus Supplement. The Mortgage Loans securing a Series
of Bonds may be secured by Mortgaged Premises that (i) are owner-occupied, (ii)
are owned by investors or (iii) serve as second residences or vacation homes.
The Mortgage Loans securing a Series may provide for the payment of
interest and full repayment of principal in level Monthly Payments with a fixed
rate of interest computed on the declining principal balance of the Mortgage
Loan ("Level Payment Mortgage Loans"); may provide for periodic adjustments to
the rate of interest on such Mortgage Loans ("Adjustable Rate Mortgage Loans")
to equal the sum (which may be rounded) of a Gross Margin and an Index, all as
described in the related Prospectus Supplement; may include Mortgage Loans on
which only interest is payable until maturity as well as Mortgage Loans that
provide for the amortization of principal over a certain period, although all
remaining principal is due at the end of a shorter period ("Balloon Payment
Mortgage Loans"); may include Adjustable Rate Mortgage Loans that provide for
negative amortization or accelerated amortization resulting from delays in or
limitations on the payment adjustments necessary to amortize fully the
outstanding principal balance of the Mortgage Loan at its then applicable Note
Rate over its remaining term; and may include such other types of mortgage loans
as are described in the related Prospectus Supplement. Balloon Payment Mortgage
Loans also may be Adjustable Rate Mortgage Loans.
As further described in the applicable Prospectus Supplement,
Balloon Payment Mortgage Loans include Mortgage Loans that provide for
amortization of the principal amount over a certain period (for example, 30
years), although all remaining principal is due at the end of a shorter period
(for example, 15 years). The final balloon payment on a Balloon Payment Mortgage
Loan will be treated as a prepayment of that Mortgage Loan. The ability of a
Borrower to make the final "balloon" payment may be dependent upon the
Borrower's ability to refinance the Balloon Payment Mortgage Loan or sell the
related Mortgaged Premises for an amount equal to or greater than the Unpaid
Principal Balance of the Mortgage Loan. Under certain circumstances (for
example, in a rising interest rate environment), a Borrower may be unable to
secure refinancing for such loan or to sell the related Mortgaged Premises.
Accordingly, Balloon Payment Mortgage Loans may be subject to a higher risk of
Delinquency, Foreclosure and Loss than certain other types of mortgage loans.
In addition, Adjustable Rate Mortgage Loans may be underwritten on
the basis of an assessment that the Borrower will have the ability to make
payments in higher amounts in later years and, in the case of certain Adjustable
Rate Mortgage Loans, after relatively short periods of time. Accordingly,
defaults on Adjustable Rate Mortgage Loans leading to Foreclosure and the
ultimate Liquidation of the related Mortgaged Premises may occur with greater
frequency in the early years of such Loans, although little data is available
with respect to the rate of default on such loans. Increases in the required
monthly payments on such loans may result in a default rate that is higher than
that for fixed rate Mortgage Loans.
As specified in the related Prospectus Supplement, a Security
Instrument securing a Mortgage Loan may contain a "due-on-sale" clause
permitting acceleration of the maturity of the related Mortgage Loan if the
Borrower transfers its interest in the Mortgaged Premises. Unless otherwise
specified in the related Prospectus Supplement, the Servicing Agreement will
require the Servicers to enforce "due-on-sale" clauses. See "Certain Legal
Aspects of the Collateral -- Mortgage Loans and Model Home Loans -- Due-on-Sale
Provisions" herein.
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The Prospectus Supplement applicable to a Series of Bonds will
include among other things information, as of the applicable Cut-off Date, as to
(i) the aggregate principal balance of the Mortgage Loans, (ii) the range of
remaining terms to stated maturity or weighted average remaining term to stated
maturity of the Mortgage Loans, (iii) the current Scheduled Principal Balance of
the largest Mortgage Loan and the average outstanding Scheduled Principal
Balance of the Mortgage Loans, (iv) the weighted average Note Rate or range of
Note Rates borne by the Mortgage Loans, (v) the range of original loan-to-value
ratios or the weighted average loan-to-value ratio of the Mortgage Loans and
(vi) the geographic distribution of the Mortgaged Premises.
SECOND LIENS
Certain of the Mortgage Loans securing a Series of Bonds may be
Second Lien Mortgage Loans, and the related first lien mortgage loans ("First
Liens") may not be included in the Collateral. The primary risk to holders of
Second Lien Mortgage Loans is the possibility that adequate funds will not be
received in connection with a Foreclosure of the related First Lien to satisfy
fully both the First Lien and the Second Lien Mortgage Loan. In the event that a
holder of the First Lien forecloses on a Mortgaged Premises, the proceeds of the
Foreclosure or similar sale will be applied first to the payment of court costs
and fees in connection with the Foreclosure, second to real estate taxes, third
in satisfaction of all principal, interest and prepayment or acceleration
penalties, if any, and fourth any other sums due and owing to the holder of the
First Lien. The claims of the holder of the First Lien will be satisfied in full
out of proceeds of the Liquidation of the Mortgage Loan, if such proceeds are
sufficient, before the Trust Estate as holder of the second lien receives any
payments in respect of the Mortgage Loan. If the Servicer were to foreclose on
any Second Lien Mortgage Loan, it would do so subject to any related First Lien.
In order for the debt related to the Mortgage Loan to be paid in full at such
sale, a bidder at the Foreclosure sale of such Mortgage Loan would have to bid
an amount sufficient to pay off all sums due under the Mortgage Loan and the
First Lien or purchase the Mortgaged Premises subject to the First Lien. In the
event that such proceeds from a Foreclosure or similar sale of the related
Mortgaged Premises are insufficient to satisfy both Mortgage Loans in the
aggregate, the Trust Estate, as the holder of the second lien, and, accordingly,
Holders of the Bonds bear (i) the risk of delay in distributions while a
deficiency judgment against the Borrower is obtained and (ii) the risk of Loss
if the deficiency judgment is not realized upon. Moreover, deficiency judgments
may not be available in certain jurisdictions. In addition, a mortgagee may not
foreclose on the property securing a Second Lien Mortgage Loan unless it
forecloses subject to the First Lien.
Even assuming that the Mortgaged Premises provide adequate security
for the Second Lien Mortgage Loans, substantial delays could be encountered in
connection with the Liquidation of defaulted Mortgage Loans, with corresponding
delays in the receipt of related proceeds by Bondholders. An action to foreclose
on a Mortgaged Premises securing a Mortgage Loan is regulated by state statutes
and rules, is subject to many of the delays and expenses of other lawsuits if
defenses or counterclaims are interposed and may require several years to
complete. Furthermore, in some states an action to obtain a deficiency judgment
is not permitted following a nonjudicial sale of a Mortgaged Premises. In the
event of a default by a Borrower, these restrictions, among other things, may
impede the ability of the Servicer to foreclose on or sell the Mortgaged
Premises or to obtain Liquidation Proceeds sufficient to repay all amounts due
on the related Mortgage Loan. In addition, the Servicer generally will be
entitled to deduct from related Liquidation Proceeds all expenses reasonably
incurred in attempting to recover amounts due on defaulted Mortgage 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 Second Lien Mortgage
Loans will not vary directly with the Unpaid Principal Balances of the Loans at
the time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon a defaulted Second Lien Mortgage Loan having a small remaining
Unpaid 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 Unpaid Principal Balance
of the defaulted Second Lien Mortgage Loan than it would be the case with the
defaulted mortgage loan having a large Unpaid Principal Balance. Because the
average outstanding principal balance of the Second Lien Mortgage Loans
generally is smaller relative to the size of the average outstanding principal
balance of the loans in a typical pool of conventional, first priority mortgage
loans, Liquidation Proceeds may also be smaller as a percentage of the Unpaid
Principal Balance of a Second Lien Mortgage Loan than would be the case for a
typical conventional, first lien mortgage loan.
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REPURCHASE OF CONVERTED MORTGAGE LOANS
If so specified in the Prospectus Supplement for a Series, the
related Series may be secured by Adjustable Rate Mortgage Loans the Note Rates
of which are convertible from an adjustable rate to a fixed rate at the option
of the Borrower upon the fulfillment of certain conditions. Except as otherwise
specified in the related Prospectus Supplement, the Participant may at its
option repurchase any such Adjustable Rate Mortgage Loan as to which the
conversion option has been exercised at a purchase price equal to the Unpaid
Principal Balance of the Adjustable Rate Mortgage Loan, plus 30 days of interest
thereon at the applicable Note Rate. The purchase price will be treated as a
prepayment of the Mortgage Loan. Until a Converted Mortgage Loan is purchased or
sold as described above, it will remain in the Trust Estate with a fixed Note
Rate.
OTHER MORTGAGE COLLATERAL
A Series of Bonds may also be secured by other Mortgage Collateral
consisting of conventional mortgage pass-through certificates or collateralized
mortgage obligations as more fully described in the related Prospectus
Supplement. Such other Mortgage Collateral must be in form and substance
satisfactory to each Rating Agency rating that Series of Bonds.
THE MODEL HOME LOANS
If so specified in the related Prospectus Supplement, up to 10% of
the aggregate Scheduled Principal Balance as of the Cut-off Date of the
Collateral securing a Series of Bonds may consist of Model Home Loans.
Each Model Home Loan securing a Series of Bonds will be secured by a
first lien on a single family (one- to four- family) attached or detached
residential property that is used as a model home. The Borrower, which may be an
Affiliate of the Participant, will use the proceeds of the Model Home Loan to
purchase the related Mortgaged Premises from a homebuilder and will then lease
the property back to the homebuilder, who will use it as a model home. The
homebuilder will agree pursuant to the lease agreement to pay all taxes,
insurance premiums, utility costs and maintenance costs, and to make lease
payments to the Borrower, during the term of the lease.
The Borrower is required to make interest payments during the life
of a Model Home Loan either at a fixed annual rate, an adjustable annual rate
based on a short-term Index or a combination of the two. Adjustable interest
rates may not be subject to a cap. The lease payments will be designed to enable
the Borrower to make Monthly Payments on the Model Home Loan during the period
of the lease. Typical lease terms for the leases will be shorter than the
maturity of the related Model Home Loans, which will usually have a shorter
maturity than conventional, first lien mortgage loans. Generally, the lessee
will be permitted to extend the lease on a month-to-month basis and may
terminate at any time upon notice to the Borrower and sale of the related
Mortgaged Premises on the Borrower's behalf.
If the Loan Rate applicable to the Model Home Loan and the lease
payments required by the lease agreement between the Borrower and the
homebuilder are adjustable and not subject to a cap, the rate of Delinquencies
on the lease agreement, and thus the default rate on the Model Home Loans, may
increase, particularly if the Loan Rates and required lease payments increase.
The Borrower may have no assets other than the Mortgaged Premises
and the lease payments received from lessees of the Mortgaged Premises. In that
event, its ability to make Monthly Payments on a Model Home Loan after the term
of the related lease expires, or in the event that the homebuilder defaults on
its lease, will depend on the ability of the Borrower to sell the related
Mortgaged Premises for an amount equal to or greater than the Unpaid Principal
Balance of the Model Home Loan.
The Prospectus Supplement applicable to a series of Bonds secured by
Model Home Loans will include for such Loans the information described herein
under "Security for the Bonds -- The Mortgage Collateral -- General."
THE MANUFACTURED HOME LOANS
GENERAL
If so specified in the related Prospectus Supplement, up to 10% of
the aggregate Scheduled Principal Balance as of the Cut-off Date of the
Collateral securing a Series of Bonds may consist of Consumer Finance Loans.
This Collateral may include any Manufactured Home or Real Property that
initially secured a Manufactured Home Loan and that is acquired by repossession,
Foreclosure or otherwise.
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Unless otherwise provided in the Prospectus Supplement for a Series,
the Issuer will acquire the underlying Manufactured Home Loans from a
Participant that will have originated the Manufactured Home Loans or purchased
them from other originators. Specific information respecting the Manufactured
Home Loans included as security for a particular Series of Bonds will be
provided in the related Prospectus Supplement and, to the extent such
information is not fully provided in the related Prospectus Supplement, in a
Current Report on Form 8-K to be filed with the Securities and Exchange
Commission within fifteen days after the initial issuance of such Bonds. A copy
of the Indenture with respect to each Series of Bonds will be attached to the
related Current Report on Form 8-K and will be available for inspection at the
corporate trust office of the Trustee (the location of which will be specified
in the related Prospectus Supplement).
For each Series of Bonds, the Issuer will cause the Manufactured
Home Loans included as security for the related Series to be assigned to the
Trustee named in the related Prospectus Supplement (the "Trustee").
The Manufactured Home Loans securing a Series of Bonds will consist
of conventional manufactured housing installment sales contracts. Each
Manufactured Home Loan will be secured by a Manufactured Home, and some
Manufactured Home Loans may also be secured by a lien on a parcel of real estate
("Real Property"). Each Manufactured Home Loan will be fully amortizing and,
unless otherwise specified in the Prospectus Supplement for a Series, will bear
interest at a fixed or adjustable Loan Rate. Unless otherwise provided in the
related Prospectus Supplement, the Manufactured Home Loans will have terms of
from 7 to 30 years. Each Manufactured Home Loan will be assumable, subject to
underwriting in accordance with standards customary in the industry.
The Issuer will represent that the Manufactured Homes securing the
Manufactured Home Loans consist of manufactured homes within the meaning of
Title 42 of the United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [Chapter 70 under Title 42 of the
United States Code]."
With respect to the Manufactured Home Loans expected to secure a
Series of Bonds, the related Prospectus Supplement will specify, to the extent
known (i) the aggregate principal balance of the Manufactured Home Loans, (ii)
the range of remaining terms to maturity or weighted average remaining term to
maturity of the Manufactured Home Loans, (iii) the current Scheduled Principal
Balance of the largest Manufactured Home Loan and the average Unpaid Principal
Balance of the Manufactured Home Loans, (iv) the weighted average Loan Rate or
the range of Loan Rates borne by the Manufactured Home Loans and (v) the
geographic distribution of the Manufactured Homes.
TYPES OF MANUFACTURED HOME LOANS
Manufactured Home Loans may be subject to various types of payment
provisions. In addition to other types of Manufactured Home Loans described in
the related Prospectus Supplement, the Manufactured Home Loans securing a Series
may consist of (1) "Level Payment Loans," which may provide for the payment of
interest and full repayment of principal in level Monthly Payments with a fixed
rate of interest computed on their declining principal balances; (2) "Life Floor
Adjustable Rate Loans," which may provide for fixed Loan Rates for a period of
years, followed by periodic adjustments that cause their Loan Rates to equal the
sum of a Gross Margin and an Index, subject to Periodic Rate Caps, a Maximum
Rate and a lifetime floor equal to the initial fixed Loan Rate; and (3)
"Convertible Loans," which are Life Floor Adjustable Rate Loans subject to
provisions pursuant to which, subject to certain limitations, the related
Borrowers may exercise an option to convert the adjustable Loan Rate to a fixed
Loan Rate.
REPURCHASE OF CONVERTED MANUFACTURED HOME LOANS
If so specified in the Prospectus Supplement for a Series, the
related Series may be secured by Manufactured Home Loans the Loan Rates of which
are convertible from an adjustable rate to a fixed rate at the option of the
Borrower upon the fulfillment of certain conditions. Except as otherwise
specified in the related Prospectus Supplement, the Participant may at its
option repurchase any adjustable rate Manufactured Home Loan as to which the
conversion option has been exercised at a purchase price equal to the Unpaid
Principal Balance of the Loan, plus 30 days of interest thereon at the
24
applicable Loan Rate. The purchase price will be treated as a prepayment of the
Manufactured Home Loan. Until a Converted Manufactured Home Loan is purchased as
described above, it will remain in the Trust Estate with a fixed Loan Rate.
THE CONSUMER FINANCE LOANS
If so specified in the related Prospectus Supplement, up to 100% of
the aggregate scheduled principal balance of the Collateral securing a Series of
Bonds may consist of Consumer Finance Loans. This Collateral also may include
any Facilities that initially secured a Consumer Finance Loan and that are
acquired by repossession, Foreclosure or otherwise.
The Issuer will acquire the underlying Consumer Finance Loans from
the Participant, which will have originated the Consumer Finance Loans or
acquired them from other originators. Specific information respecting the
Consumer Finance Loans included as security for a particular Series of Bonds
will be provided in the related Prospectus Supplement and, to the extent such
information is not fully provided in the related Prospectus Supplement, in a
Current Report on Form 8-K to be filed with the Securities and Exchange
Commission within fifteen days after the initial issuance of such Bonds. A copy
of the Indenture with respect to each Series of Bonds will be attached to the
related Current Report on Form 8-K and will be available for inspection at the
corporate trust office of the Trustee (the location of which will be specified
in the related Prospectus Supplement).
For each Series of Bonds to be secured by Consumer Finance Loans,
the Issuer will cause the Loans to be assigned to the Trustee.
The Consumer Finance Loans securing a Series of Bonds will consist
of conventional, installment sales contracts. Each Consumer Finance Loan will be
secured by the related Facilities, will be fully amortizing and will bear
interest at a fixed or adjustable Loan Rate. Unless otherwise provided in the
related Prospectus Supplement, the Consumer Finance Loans will have terms based
on the useful lives of the related Facilities, which will typically be 5 to 15
years, and will generally range in original principal amount from $2,500 to
$25,000. The originator of a Consumer Finance Loan will perfect the security
interest in the related Facilities by making a "fixture filing," unless such a
filing is inadvisable under applicable state law, and will file a financing
statement treating the Facilities as personal property, under the provisions of
the UCC of the state where the related single family residential property is
located. Each Consumer Finance Loan will be assumable, subject to underwriting
in accordance with underwriting standards that are customary in the industry.
With respect to the Consumer Finance Loans expected to secure a
Series of Bonds, the related Prospectus Supplement will specify, to the extent
known, (i) the aggregate principal balance of the Consumer Finance Loans, (ii)
the range of remaining terms to maturity or weighted average remaining term to
maturity of the Consumer Finance Loans, (iii) the current Scheduled Principal
Balance of the largest Consumer Finance Loan and the average Unpaid Principal
Balance of the Consumer Finance Loans, (iv) the weighted average Loan Rate or
the range of Loan Rates borne by the Consumer Finance Loans and (v) the
geographic distribution of the related Facilities.
SUBSTITUTION OF COLLATERAL
Unless otherwise provided in the Prospectus Supplement for a Series
and subject to the limitations set forth below, the Issuer at any time may
deliver to the Trustee other items of Collateral in substitution for any one or
more items of Collateral pledged as security for the Series. The Issuer will
have the option to pledge to the Trustee, in substitution for a defaulted item
of Collateral, a new item of Collateral ("Substitute Collateral"), to the extent
that the Master Servicer has determined, in its reasonable business judgment,
that the present value of any potential Loss on the defaulted item of Collateral
will be reduced through the substitution of Substitute Collateral for the
defaulted item of Collateral, and provided that the Substitute Collateral (i) is
secured by the collateral that secures the defaulted item of Collateral, (ii)
has either (A) an initial principal balance equal to or less than the Scheduled
Principal Balance of the defaulted item of Collateral for which it is
substituted or (B) a loan-to-value ratio, in the case of a Mortgage Loan, of not
more than 100%, based upon a current appraisal of the Mortgaged Premises, and
(iii) has a maturity date that is not later than the Stated Maturity Date of the
related Series of Bonds. The amount, if any, by which the Collateral Value of
the defaulted item of Collateral exceeds the Collateral Value of the Substitute
Collateral would constitute a Loss on the item of Collateral. Upon the pledge of
Substitute Collateral, the Trustee will release the defaulted item of Collateral
from the lien of the Indenture.
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In addition, unless otherwise provided in the Prospectus Supplement,
the Issuer may pledge to the Trustee items of Collateral in substitution for
items of Collateral initially pledged (each, an "Original Loan") as security for
a Series of Bonds in the event of a breach of a representation or warranty by
the seller of the Original Loan or in the case of defective or incomplete
documentation with respect to the Original Loan. Any substitute items of
Collateral will have an interest rate within one percentage point in excess of
the Loan Rate of the Original Loan for which it is substituted, a principal
balance or value at least equal to the principal balance or value of the
Original Loan for which it is substituted and a maturity within 180 days of the
maturity of the Original Loan for which it is substituted. As more particularly
set forth in the Indenture, a substitute Loan must have characteristics
substantially similar to those of the Original Loan for which it is substituted.
PLEDGE OF ADDITIONAL COLLATERAL AND ISSUANCE OF ADDITIONAL BONDS
To the extent specified in the Prospectus Supplement for a Series,
the Issuer may pledge additional mortgage loans, mortgage certificates, model
home loans or manufactured home or facility installment sales contracts
("Additional Collateral") to the Trustee and issue additional Bonds ("Additional
Bonds") of that Series within one year of the date of initial issuance of the
Bonds of such Series. Such Additional Bonds may represent additional Bonds of
one or more outstanding Classes of Bonds or may represent one or more new
Classes of Bonds of such Series. Any such Additional Bonds will be issued
pursuant to a Prospectus Supplement, which will describe the characteristics of
the Additional Collateral and the material terms of the Additional Bonds. Any
pledge of Additional Collateral and issuance of Additional Bonds will be subject
to satisfaction of the following conditions: (a) each Rating Agency rating any
outstanding Class of Bonds of the related Series will confirm that the pledge of
Additional Collateral and other additional Collateral, if any, and the
corresponding issuance of Additional Bonds will not result in the downgrading of
the credit rating of any outstanding Class of Bonds of such Series, (b) the
pledge of Additional Collateral will not affect the Class Interest Rate, Stated
Maturity Date or Payment Dates of any outstanding Bonds of such Series, (c) the
weighted average life of each outstanding Class of Bonds calculated at the
prepayment rate assumed for the pricing of the initial issuance of such Class of
Bonds will not vary by more than plus or minus 0.05 years from the weighted
average life disclosed in the Prospectus Supplement for the initial issuance of
the Bonds of such Series, (d) the Collateral mix based on the Scheduled
Principal Balances of the Collateral and the Additioinal Collateral as of the
Cut-off Date for the Additional Bonds will satisfy the requirements set forth on
the cover of this Prospectus, and (e) the characteristics of the Additional
Collateral and the Collateral as augmented by the Additional Collateral will
conform to the parameters for Additional Collateral disclosed in the Prospectus
Supplement for the initial issuance of Bonds of such Series. However, there can
be no assurance that any pledge of Additional Collateral and issuance of
Additional Bonds would not affect the timing or amount of payments received by
Holders of the outstanding Bonds of that Series. Provided that the conditions
described in the Prospectus Supplement for the outstanding Bonds are satisfied,
the pledge of Additional Collateral and the issuance of Additional Bonds will
not be subject to the prior consent of the Holders of the outstanding Bonds of
such Series.
MASTER SERVICER CUSTODIAL ACCOUNT
Unless otherwise specified in the Prospectus Supplement for a
Series, each Servicing Agreement will require an amount representing the
Servicer Remittance to be remitted by each Servicer on the Remittance Date to
the Master Servicer Custodial Account established by the Master Servicer at a
depository institution whose senior debt obligations are then rated in the
security rating category required to support the then applicable rating assigned
to that Series. See "Servicing of the Collateral -- Payments on Collateral"
herein.
COLLATERAL PROCEEDS ACCOUNT
The Collateral Proceeds Account will be an account established by
the Trustee for the benefit of Bondholders. The Collateral Proceeds Account will
be an account or accounts that are either (i) maintained with a depository
institution whose senior debt obligations are then rated in the security rating
category required to support the then applicable rating assigned to that Series,
or (ii) trust accounts.
On or before each Master Servicer Remittance Date, the Master
Servicer will transfer from the Master Servicer Custodial Account to the
Collateral Proceeds Account the proceeds of the Collateral that are
distributable to the Bondholders. The proceeds of the Collateral deposited into
the Collateral Proceeds Account generally will consist of the sum of (i) the
aggregate Servicer Remittance relating to the Collateral securing a Series, less
the master servicing fee, and (ii) any Advances to be made by the Master
Servicer or Special Servicer, if any. On each Payment Date, the Trustee will
26
withdraw from the Collateral Proceeds Account and pay to the Bondholders, to the
extent of the available funds on deposit therein, all amounts required to be
paid on the Bonds of such Series on that date. The interposition of the Master
Servicer between the Servicers and the Trustee provides for the accumulation of
collections from the various Servicers outside of a trust account, thereby
avoiding the likelihood that multiple Servicers will make demands on the Trustee
for the payment of servicing fees or the reimbursement of Advances from amounts
on deposit in the Collateral Proceeds Account. The master servicing fee is
payable to the Master Servicer in part due to its performance as an intermediary
between the various Servicers and the Trustee.
Funds in the Collateral Proceeds Account may be invested and, if
invested, shall be invested in the name of the Trustee (in its capacity as such)
in Eligible Investments that mature not later than the Business Day preceding
each Payment Date (except that, if such Eligible Investment is an obligation of
the Trustee, then such Eligible Investment may mature not later than such
Payment Date) and will not be sold or disposed of prior to its maturity. All
income realized from any such investments will accrue to the benefit of the
Master Servicer as additional compensation and may be withdrawn by the Master
Servicer from time to time. However, no withdrawals from the Collateral Proceeds
Account will be permitted if such withdrawals would cause a deficiency in
amounts payable to Bondholders.
RESERVE FUND OR ACCOUNTS
If stated in the Prospectus Supplement for a Series, the Issuer will
deposit cash, certificates of deposit or letters of credit in one or more
Reserve Funds or accounts, which may be used by the Trustee to make any required
payments of principal or interest on the Bonds of the Series to the extent that
funds are not otherwise available. The Series Supplement may limit the pledge of
any Reserve Fund to certain Classes of Bonds. The Issuer may have certain rights
on any Payment Date to cause the Trustee to make withdrawals from the Reserve
Fund for a Series and to pay such amounts in accordance with the instructions of
the Issuer as specified in the related Prospectus Supplement to the extent that
such funds are no longer required to be maintained for the Bondholders.
OTHER FUNDS OR ACCOUNTS
The Bonds of a Series may also be secured by certain other funds and
accounts for the purpose of, among other things, (i) making required payments of
principal or interest on the Bonds of the Series to the extent funds are not
otherwise available, (ii) paying certain administrative, insurance and similar
costs and (iii) accumulating funds that are credited to the Issuer's account
pending their distribution to the Issuer. To the extent such funds and accounts
are material, they will be described in the related Prospectus Supplement.
INVESTMENT OF FUNDS
Funds deposited in or remitted to the Collateral Proceeds Account,
any Reserve Fund and any other funds and accounts held under the Indenture for a
Series will be invested by the Trustee, and amounts in the Master Servicer
Custodial Account will be invested by the Master Servicer, in certain eligible
investments ("Eligible Investments") as specified in the Indenture or Indenture
Supplement for the related Series.
INSURANCE ON THE COLLATERAL
Each Mortgage Loan securing a Series of Bonds generally will be
covered by Title Insurance, a Standard Hazard Insurance Policy and, if so
specified in the related Prospectus Supplement, a Primary Mortgage Insurance
Policy (collectively, the "Mortgage Insurance Policies"). Each Model Home Loan
securing a Series generally will be covered by Title Insurance and a Standard
Hazard Insurance Policy. Each Manufactured Home Loan securing a Series of Bonds
generally will be covered by a Standard Hazard Insurance Policy. In addition,
the related Prospectus may specify that the Mortgage Loans, Model Home Loans or
Manufactured Home Loans securing a Series of Bonds will be covered by a Special
Hazard Insurance Policy. To the extent provided in the related Prospectus
Supplement, in lieu of certain Insurance Policies, Additional Collateral (or
instruments secured by Additional Collateral) may be pledged to the Trustee to
secure the timely payment of principal of and interest on the Collateral and/or
the Bonds.
The Issuer may obtain a Pool Insurance Policy to cover Losses
(subject to the limitations described below) incurred by reason of default by
the Borrowers on the Mortgage Loans or the Manufactured Home Loans securing a
Series that are not covered by any Primary Mortgage Insurance Policy or exceed
the coverage provided by any applicable Primary Mortgage Insurance Policy. The
terms of the Master Servicing Agreement with respect to a Series will require
the Master Servicer to maintain the Pool Insurance Policies, if any, for the
Series and to present or cause the Servicers to present claims thereunder to the
related insurer on behalf of the Issuer, the Trustee and the holders of Bonds of
such Series.
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The amount of the Pool Insurance Policy (or Policies) for a Series,
if any, will be specified in the related Prospectus Supplement. A Pool Insurance
Policy for a Series, however, will not be a blanket policy against loss, because
claims thereunder may only be made for particular defaulted Loans and only upon
satisfaction of certain conditions precedent as described below.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy for a Series will provide that as a condition precedent to
the payment of any claim the insured will be required (a) to advance hazard
insurance premiums on the Mortgaged Premises securing the defaulted Mortgage
Loan or the Manufactured Home securing the defaulted Manufactured Home Loan; (b)
to advance, as necessary and approved in advance by the related insurer, (1)
real estate property taxes, (2) all expenses required to preserve and repair the
Mortgaged Premises or Manufactured Home, or to protect the Mortgaged Premises or
Manufactured Home from waste, so that the Mortgaged Premises or Manufactured
Home is in at least as good a condition as existed on the date upon which
coverage under the Pool Insurance Policy with respect to such Mortgaged Premises
or Manufactured Home first became effective, ordinary wear and tear excepted,
(3) property sales expenses, (4) any outstanding liens on the Mortgaged Premises
or Manufactured Home, and (5) foreclosure costs including court costs and
reasonable attorneys' fees; and (c) if there has been physical loss or damage to
the Mortgaged Premises or Manufactured Home, to restore the Mortgaged Premises
or Manufactured Home to its condition (ordinary wear and tear excepted) as of
the issue date of the Pool Insurance Policy. It also will be a condition
precedent to the payment of any claim relating to a Mortgage Loan under the Pool
Insurance Policy that the insured maintain a Primary Mortgage Insurance Policy
that is acceptable to the Pool Insurer on all Mortgage Loans covered by the Pool
Insurance Policy that have loan-to-value ratios at the time of origination in
excess of 80%. Assuming satisfaction of these conditions, the Pool Insurer will
pay to the insured the amount of the loss, which will generally be: (a) the
amount of the unpaid principal balance of the Mortgage Loan or Manufactured Home
Loan immediately prior to the Approved Sale of the related Mortgaged Premises or
Manufactured Home; (b) the amount of the accumulated unpaid interest on such
Mortgage Loan or Manufactured Home Loan to the date of claim settlement at the
contractual rate of interest; and (c) reimbursable amounts advanced by the
insured as described above, less certain payments (including the proceeds of any
prior Approved Sale and any Primary Mortgage Insurance Policies). The Pool
Insurance Policy may not reimburse the insured for attorneys' fees on a
foreclosed Mortgage Loan in excess of 3% of the unpaid balance of principal and
interest of that Mortgage Loan. As a result, legal expenses in excess of such
reimbursement limitation may be charged as a loss on the related Bonds. An
Approved Sale is (1) a sale of the Mortgaged Premises or Manufactured Home
acquired by the insured because of a default by the Borrower to which sale the
Pool Insurer has given prior approval, (2) a pre-foreclosure, Foreclosure or
trustee's sale of the Mortgaged Premises or Manufactured Home at a price
exceeding the minimum amount specified by the Pool Insurer, (3) the acquisition
of the Mortgaged Premises under the Primary Mortgage Insurance Policy by the
related Mortgage Insurer, or (4) the acquisition of the Mortgaged Premises or
Manufactured Home by the Pool Insurer. If the Pool Insurer elects to take title
to the Mortgaged Premises or Manufactured Home, the insured must, as a condition
precedent to the payment of any such Loss, provide the Pool Insurer with good
and merchantable title to the related Mortgaged Premises or Manufactured Home.
If any property securing a defaulted Mortgage Loan or Manufactured Home is
damaged and the proceeds, if any, from the related Standard 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 Servicer or the Master Servicer of the related
Mortgage Loan or Manufactured Home Loan will not be required to expend its own
funds to restore the damaged Mortgaged Premises or Manufactured Home unless it
determines and the Master Servicer agrees (A) that such restoration will
increase the proceeds to the Trust Estate on Liquidation of the Mortgage Loan or
Manufactured Home Loan after reimbursement of the Servicer or the Master
Servicer for its expenses and (B) that such expenses will be recoverable by it
through Liquidation Proceeds or Insurance Proceeds.
The Pool Insurance Policies will generally not insure (and many
Primary Mortgage Insurance Policies may 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 Mortgage Loan or Manufactured Home Loan,
including misrepresentation by the Borrower or the Originator, (ii) failure to
construct Mortgaged Premises or a Manufactured Home in accordance with plans and
specifications, and (iii) a claim in respect of a defaulted Mortgage Loan
occurring when the Servicer of the Mortgage Loan, at the time of default or
thereafter, was not approved by the Mortgage Insurer. A failure of coverage
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attributable to one of the foregoing events might result in a breach of the
Participant's representations and warranties described under "Origination of the
Collateral -- Representations and Warranties" herein and, in such event, subject
to the limitations described therein, might give rise to an obligation on the
part of the Participant to purchase the defaulted Mortgage Loan or Manufactured
Home Loan if the breach cannot be cured. See "Origination of the Collateral --
Representations and Warranties" herein. In addition, if a terminated Servicer
has failed to comply with its obligation under the Servicing Agreement to
purchase a Mortgage Loan or Manufactured Home Loan upon which coverage under a
Pool Insurance Policy has been denied on the grounds of fraud, dishonesty or
misrepresentation (or if the Servicer has no such obligation), the Participant
may be obligated to purchase the Mortgage Loan or Manufactured Home Loan. See
"Servicing of the Collateral -- Maintenance of Insurance Policies; Claims
Thereunder and Other Realization Upon Defaulted Collateral" herein.
The original amount of coverage under any Pool Insurance Policy
securing a Series will be reduced over the life of the Bonds of such Series by
the aggregate dollar amount of claims paid less the aggregate of the net amount
realized by the Pool Insurer upon disposition of all foreclosed Mortgaged
Premises or Manufactured Homes covered thereby. The amount of claims paid
includes certain expenses incurred by the Servicer or the Master Servicer of the
defaulted Mortgage Loan or Manufactured Home Loan, as well as accrued interest
on delinquent Mortgage Loans or Manufactured Home Loans to the date of payment
of the claim. See "Certain Legal Aspects of the Collateral -- Mortgage Loans and
Model Home Loans -- Foreclosure" herein. The net amounts realized by the Pool
Insurer will depend primarily on the market value of the Mortgaged Premises or
Manufactured Home securing the defaulted Mortgage Loan or Manufactured Home
Loan. The market value of the Mortgaged Premises or Manufactured Home will be
determined by a variety of economic, geographic, social, environmental and other
factors and may be affected by matters that were unknown and could not
reasonably be anticipated at the time the original Loan was made.
If aggregate net claims paid under a Pool Insurance Policy reach the
original policy limit, coverage under the Pool Insurance Policy will lapse and
any further Losses may affect adversely distributions to Holders of Bonds of
such Series. In addition, unless the Servicer or Master Servicer could determine
that an Advance in respect of a delinquent Mortgage Loan or Manufactured Home
Loan would be recoverable by it from the proceeds of the Liquidation of such
Mortgage Loan or Manufactured Home Loan or otherwise, neither the Servicer nor
the Master Servicer would be obligated to make an Advance respecting any such
Delinquency since the Advance would not be ultimately recoverable by it from
either the Pool Insurance Policy or any other related source. See "Servicing of
the Collateral -- Advances." The original amount of coverage under the Pool
Insurance Policy securing a Series may also be reduced or canceled to the extent
each Rating Agency rating the Series confirms that such reduction will not
result in the lowering of the rating of the Bonds of such Series.
Unless otherwise specified in the related Prospectus Supplement, a
Pool Insurance Policy may insure against Losses on the Mortgage Loans or
Manufactured Homes securing other Series of Securities or that secure other
mortgage-backed securities or collateralized mortgage or manufactured housing
contract obligations issued by the Issuer or one of its Affiliates, provided,
however, that, at the time of the extension, such extension of coverage (and
corresponding assignment of the Pool Insurance Policy) to any other Series or
such other Bonds does not result in the lowering by any Rating Agency rating a
Series offered hereby of the rating of any Bonds of such Series.
CREDIT ENHANCEMENT
Credit enhancements acceptable to each Rating Agency may be used to
provide for coverage of certain risks of default or losses on the Collateral.
Any such credit enhancement will be described in detail in the related
Prospectus Supplement. Such credit enhancements may be limited to one or more
Classes of Bonds and may include, but will not necessarily be limited to, any of
the following:
(i) Subordination in right of payment of one or more Classes
to the right of other Classes to receive payments,
subject to such conditions and limitations as may be
described in the related Prospectus Supplement;
(ii) Pledge of additional collateral and any cash flow
thereon by any institution acceptable to each Rating
Agency, which the Trustee may sell or draw upon in the
event amounts received as payments on the Collateral are
insufficient to make required payments on one or more
Classes of Bonds. Such pledge of additional collateral
may be limited in amount and subject to conditions, as
described in the related Prospectus Supplement;
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(iii) Limited guarantees against losses arising from defaults
on the Collateral, or against failure to make payments
of principal of and interest on the Bonds. Such
guarantees may be limited to a specified maximum dollar
amount or may be subject to limitations having similar
effect;
(iv) Letters of credit issued by banks acceptable to each
Rating Agency, under which the Trustee may draw funds in
the event amounts received as payments on the Collateral
are insufficient to make required payments on a Class or
Classes of Bonds. Such letters of credit may be limited
in amount and subject to conditions, as described in the
related Prospectus Supplement;
(v) Reserve Funds created by the deposit of assets at the
time of the issuance of the Bonds or by the accumulation
of funds generated by the Collateral, upon which the
Trustee may draw in the event amounts received as
payments on the Collateral are insufficient to make
required payments on a Class or Classes of Bonds or by a
combination of the foregoing. The amounts held in such
Reserve Funds will be invested in Eligible Investments;
(vi) Insurance policies issued by insurers acceptable to each
Rating Agency that provide for payment to the Trustee or
the Servicer upon the occurrence of certain casualty
events at the Mortgaged Premises or Manufactured Homes.
Such insurance policies may be limited in amount and
subject to conditions, as described above; and
(vii) Combinations of the foregoing.
Except as otherwise provided in the related Prospectus Supplement, each Series
of Bonds will be secured by the Collateral for that Series and related property.
The related Prospectus Supplement may specify that payments received on such
Collateral be paid (i) so as to prioritize, with respect to right of payment,
certain Classes of Bonds within a Series or (ii) disproportionately among the
Classes of Bonds.
Unless otherwise specified in the related Prospectus Supplement, in
the event of Delinquencies in payments of principal or interest on the
Collateral, the applicable Servicer and the Master Servicer (or the Special
Servicer, if any) will advance cash in the amounts described herein. Neither any
Servicer, the Master Servicer nor any Special Servicer will be obligated to make
an Advance that it (or, in the case of the Servicer, the Master Servicer)
reasonably believes to be a Non-Recoverable Advance. See "Servicing of the
Collateral -- Advances" herein.
There can be no assurance that real estate values will remain at
present levels in the areas in which the Mortgaged Premises, Manufactured Homes,
Real Property or Facilities will be located. If the real estate market relating
to Loans in a particular pool should experience an overall decline in property
values, the actual rates of Delinquencies, Foreclosures and Losses could be
significantly higher than those now generally experienced in the housing lending
industry. To the extent that Losses are not covered by applicable credit
enhancements described in the related Prospectus Supplement, they will be borne
by Bondholders of the Series secured by such pool as specified in the related
Prospectus Supplement.
With respect to any Series that includes Adjustable Rate Loans,
there may be a higher likelihood of defaults and Losses on such Loans during
periods of higher prevailing interest rates. With respect to any Series that
includes one or more Subordinated Classes of Bonds, Losses generally will be
borne first by the Issuer, to the extent of any Surplus, and then, to the extent
of the subordination in right of payment of the Subordinated Classes, by the
Bondholders of the Subordinated Classes, as specified in the related Prospectus
Supplement.
BOND INSURANCE AND SURETY BONDS
If so provided in the Prospectus Supplement for a Series of Bonds,
deficiencies in amounts otherwise payable on the Bonds or certain Classes
thereof will be covered by Bond Insurance and/or surety bonds provided by one or
more insurance companies or sureties. Such instruments may cover, with respect
to one or more Classes of Bonds, timely payments of interest and full payments
of principal on the basis of a schedule of principal payments set forth in or
determined in the manner specified in the related Prospectus Supplement. A copy
of any such instrument for a Series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed with the Commission within
15 days of issuance of the Bonds of the related Series.
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ORIGINATION OF THE COLLATERAL
MORTGAGE LOANS AND MANUFACTURED HOME LOANS
Each Mortgage Loan securing a Series of Bonds will be originated by
a savings and loan association, savings bank, commercial bank, credit union, or
similar institution that is supervised and examined by a federal or state
authority, or by a mortgagee approved by HUD. Each Manufactured Home Loan will
be originated by the Participant or acquired by the Participant from the
originator. In originating a Mortgage Loan or a Manufactured Home Loan, the loan
originator (the "Originator") will follow either (a) its own credit approval
process, to the extent that such process conforms to underwriting standards
generally acceptable to FNMA or FHLMC, or (b) the Participant's various credit,
appraisal and underwriting standards and guidelines. The Prospectus Supplement
for a Series of Bonds will disclose the percentage of Mortgage Loans or
Manufactured Home Loans included in the Collateral that are originated using the
Participant's underwriting guidelines and those originated using the
Originator's stricter underwriting guidelines. As discussed further in the
related Prospectus Supplement, the Participant's underwriting guidelines for
Mortgage Loans are less stringent than those applied by FNMA or FHLMC, primarily
in that the Participant's guidelines generally permit the Borrower to have a
higher debt-to-income ratio and a larger number of derogatory credit items than
do the guidelines of FNMA or FHLMC. The Participant will also apply the same
underwriting standards for Manufactured Home Loans, with one exception: in
underwriting a Mortgage Loan, the Participant has an appraisal, described below,
performed on the Mortgaged Premises, while in evaluating a Manufactured Home
Loan, it performs an investment analysis based principally on the invoice cost,
in the case of a new manufactured home, and a national appraisal guide used to
determine retail values, in the case of a used manufactured home.
Both the FNMA and FHLMC underwriting standards and the Participant's
underwriting standards are applied in a manner intended to comply with
applicable federal and state laws and regulations. The purpose of applying these
standards is to evaluate each prospective Borrower's credit standing and
repayment ability and the value and adequacy of the related Mortgaged Premises
as collateral.
The mortgage loans and manufactured housing installment sales
contracts originated under the Participant's underwriting standards generally
are based on loan application packages submitted by mortgage brokerage
companies, manufactured home dealers or consumers for underwriting review,
approval and funding by the Participant or an Affiliate of the Participant.
Originators who apply their own, stricter underwriting standards review a
similar loan application package in their decision whether to approve and fund
the loans or contracts. In general, a prospective Borrower is required to
complete a detailed application designed to provide pertinent credit
information. The prospective Borrower generally is required to provide a
statement of income as well as an authorization for a credit report that
summarizes the Borrower's credit history with merchants and lenders as well as
any suits, judgments or bankruptcies that are of public record. 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 collateral for a Mortgage Loan,
an appraisal is made of each Mortgaged Premises considered for financing by a
qualified independent appraiser approved by FNMA, FHLMC, the Participant or an
Affiliate of the Participant. The appraiser is required to inspect the property
and verify that it is in good repair and that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes and,
if considered applicable by the appraiser, the estimated rental income of the
property and a replacement cost analysis based on the current cost of
constructing a similar home. All appraisals are required to conform to FNMA or
FHLMC appraisal standards then in effect.
In assessing a possible Manufactured Home Loan, the Participant
determines the amount that it is willing to lend based not on an appraisal but
on an investment analysis based on the invoice price of the Manufactured Home
plus accessories, freight, taxes, insurance and other costs. The use of an
investment analysis in the underwriting of manufactured housing installment
sales contracts is customary in the financing of manufacturing housing. If the
Manufactured Home Loan is also to be secured by Real Property, the Participant
may have the Real Property appraised in the same manner as Mortgaged Premises
are appraised.
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 or contract (generally
determined on the basis of the monthly payments due in the year of origination)
and other expenses related to the Mortgaged Premises or Manufactured Home (such
31
as property tax and hazard insurance) and (ii) to meet monthly housing expenses
and other financial obligations and monthly living expenses. The underwriting
standards applied, particularly with respect to the level of income and debt
disclosure on the application and verification, may be varied in appropriate
cases where factors such as low loan-to-value ratios or other favorable
compensating factors exist.
A prospective Borrower applying for a loan pursuant to the full
documentation program is required to provide, in addition to the above, a
statement of income, expenses and liabilities (existing or prior). An employment
verification is obtained from an independent source (typically the prospective
Borrower's employer), which verification generally reports the length of
employment with that organization, the prospective Borrower's current salary and
whether it is expected that the prospective 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. For other than
self-employed Borrowers, income verification may be accomplished by W-2 forms or
pay stubs that indicate year to date earnings.
Under the limited documentation program, emphasis is placed both on
the value and adequacy of the Mortgaged Premises or Manufactured Home as
collateral and on credit underwriting, although certain credit underwriting
documentation concerning income and employment verification is waived. The
maximum permitted loan-to-value ratios for loans originated under such program
are generally lower than those permitted for similar loans originated pursuant
to the full documentation program.
MODEL HOME LOANS
Each Model Home Loan will be originated by a mortgagee approved by
HUD. In originating such Loans, the Originator will follow its own credit
approval process. That process utilizes standards for Loan diversification by
home builder and by geographic area in which the model home is located. The
Originator will review the operating practices and financial condition of each
home builder that applies for participation. The Originator will also have the
related model home appraised in conformance with FNMA or FHLMC appraisal
standards then in effect.
CONSUMER FINANCE LOANS
Each Consumer Finance Loan securing a Series of Bonds will be
originated by the Participant or acquired by the Participant from the
Originator. The Originator will require that an authorized contractor install
the Facilities in the related single family residential property. The Originator
will require a completed loan application from each potential borrower and will
examine the application and base credit decisions primarily on Fair Isaac
("FICO") credit scores. A FICO score represents a numerical weighing of a
borrower's credit characteristics that permits lenders to determine the credit
risk that a borrower presents and the likelihood that a Loan will be repaid.
FICO scores are empirically derived from historical credit data.
These scores estimate, on a relative basis, which loans are most likely to
default in the future. A FICO score is generated through the statistical
analysis of a number of credit-related characteristics or variables. Common
characteristics include number of credit lines (trade lines), payment history,
past delinquencies, severity of delinquencies, current levels of indebtedness,
types of credit and length of credit history. Attributes are the specific values
of each characteristic. A scoreboard (the model) is created with weights or
points assigned to each attribute. Weights are developed by optimizing the
combination of weight values for each characteristic that were most predictive
for a specific data set. An individual applicant's credit score is derived by
adding together the attribute weights for that applicant.
REPRESENTATIONS AND WARRANTIES
The Issuer generally will acquire Loans from the Participant. The
Participant may act as a Servicer of Loans securing a Series or an unrelated
entity may act as Servicer. The Participant will make certain representations
and warranties with respect to Loans in the agreement by which the Participant
transfers its interest in the Loans to the Issuer. Except as otherwise noted in
the Prospectus Supplement for a Series, the Participant will represent and
warrant, among other things, as follows: (i) that each Loan has been originated
in compliance with all applicable laws, rules and regulations; (ii) that each
Insurance Policy is the valid and binding obligation of the Insurer; and (iii)
that, in the case of each Mortgaged Premises and Manufactured Home, each
Security Instrument constitutes a good and valid first or, if applicable, second
lien on the collateral securing the Loan; and (iv) that the Borrower holds good
and marketable title to the collateral securing the Loan. Except as otherwise
noted in the Prospectus Supplement for a Series, the Participant is required to
submit to the Trustee with each Mortgage Loan a mortgagee title insurance
policy, title insurance binder, preliminary title report, or satisfactory
32
evidence of title insurance. If a preliminary title report is delivered
initially, the Participant is required to deliver a final title insurance policy
or satisfactory evidence of the existence of such a policy.
In the event the Participant breaches a representation or warranty
with respect to a Loan or if any principal document executed by the Borrower
relating to a Loan is found to be defective in any material respect and the
breaching party cannot cure such breach of defect within the number of days
specified in the applicable agreement, the Trustee may require the breaching
party to purchase the Loan upon deposit with the Trustee of funds equal to the
then Unpaid Principal Balance of the Loan plus accrued interest thereon at the
Loan Rate through the end of the month in which the purchase occurs. In the
event of a breach by the Participant of a representation or warranty with
respect to a Loan or the delivery by the Participant to the Trustee of a
materially defective document with respect to a Loan, the Participant may under
certain circumstances, in lieu of repurchasing the Loan, substitute a Loan
having characteristics substantially similar to those of the defective Loan. See
"Security for the Bonds -- Substitution of Collateral" herein. The Participant's
obligation to purchase a Loan will not be guaranteed by the Issuer or any other
party, unless otherwise specified in the related Prospectus Supplement.
SERVICING OF THE COLLATERAL
GENERAL
For the Collateral securing each Series, various Servicers, which
may include Dynex or an Affiliate, will provide certain customary servicing
functions pursuant to servicing agreements ("Servicing Agreements"), which will
be pledged to the Trustee to secure the related Bonds. The Servicers will be
entitled to withhold their servicing fees and certain other fees and charges
from payments on the Collateral they service. If so specified in the related
Prospectus Supplement, a Special Servicer may be appointed. The related
Prospectus Supplement will describe the duties and obligations of the Special
Servicer, if any. A Special Servicer will be entitled to a special servicing
fee.
Each Servicer of one- to four-family Mortgage Loans and Model Home
Loans generally will be approved or will utilize a Sub-Servicer that is approved
by the Master Servicer. In determining whether to approve a Servicer, the Master
Servicer will review the credit of the Servicer and, if necessary for the
approval of the Servicer, the Sub-Servicer, including capitalization ratios,
liquidity, profitability and other similar items that indicate financial ability
to perform its obligations. In addition, the Master Servicer's mortgage
servicing personnel will review the Servicer's and any Sub-Servicer's servicing
records and evaluate the ability of the Servicer and Sub-Servicer to comply with
required servicing procedures. The Master Servicer will continue to monitor on a
regular basis the financial position and servicing performance of the Servicer
and, to the extent the Servicer does not meet the foregoing requirements, any
Sub-Servicer.
Each Servicer or Sub-Servicer (subject to the general supervision of
the Servicer) of Collateral other than Mortgage Loans and Model Home Loans must
be approved by the Master Servicer and will perform all services and duties
specified in the related Servicing Agreement consistently with the servicing
standards and practices of prudent lending institutions with respect to
installment sales contracts of the same types as the Manufactured Home Loans and
Consumer Finance Loans in those jurisdictions where the Manufactured Homes and
Facilities are located or as otherwise specified in the related Servicing
Agreement.
The duties to be performed by the Servicers with respect to
Collateral securing a Series will include calculation, collection and remittance
of principal and interest payments, administration of mortgage escrow accounts,
as applicable, collection of insurance claims, Foreclosure procedures and, if
necessary, the advance of funds to the extent certain payments are not made by
the Borrowers and are recoverable from late payments by the Borrower,
Liquidations Proceeds or Insurance Proceeds. Each Servicer also will provide
such accounting and reporting services as are necessary to enable the Master
Servicer to provide required information to the Issuer and the Trustee with
respect to the Collateral securing such Series. Each Servicer is entitled to (i)
a periodic servicing fee equal to a specified percentage of the outstanding
principal balance of each Loan serviced by the Servicer and (ii) certain other
fees, including but not limited to, late payments, conversion or modification
fees and assumption fees, as applicable. With the consent of the Master
Servicer, certain servicing obligations of a Servicer may be delegated to a
Sub-Servicer approved by the Master Servicer, provided, however, that the
Servicer remains fully responsible and liable for all of its obligations under
the Servicing Agreement.
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Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will (i) administer and supervise the performance of the
Servicers of the Collateral for each Series of their duties and responsibilities
under the Servicing Agreements; (ii) maintain any insurance policies (other than
property specific Insurance Policies) providing coverage for Losses on the
Collateral for the Series; (iii) calculate amounts payable to Bondholders on
each Payment Date; (iv) prepare periodic reports to the Trustee or the
Bondholders with respect to the foregoing matters; (v) prepare federal and state
tax and information returns; and (vi) prepare reports, if any, required under
the Securities Exchange Act of 1934, as amended. In addition, the Master
Servicer will receive, review and evaluate all reports, information and other
data provided by each Servicer for the purpose of enforcing the provisions of
the Servicing Agreements, monitoring each Servicer's servicing activities,
reconciling the results of such monitoring with information provided by the
Servicer and making corrective adjustments to records of the Servicer and Master
Servicer, as appropriate.
The Master Servicer will be entitled to receive a portion of the
interest payments remitted on the Collateral securing the Series to cover its
fees as Master Servicer. The Master Servicer or the Trustee may terminate a
Servicer who has failed to comply with its covenants or breached a
representation contained in the Servicing Agreement. Upon termination of a
Servicer by the Master Servicer, the Master Servicer will assume certain
servicing obligations of the terminated Servicer or, at its option, appoint a
substitute Servicer acceptable to the Trustee to assume the servicing
obligations of the terminated Servicer.
Forms of Servicing Agreements have been filed as exhibits to, or
incorporated by reference in, the Registration Statement of which this
Prospectus forms a part. The Issuer's rights under each Servicing Agreement with
respect to a Series will be assigned to the Trustee as security for such Series.
The descriptions contained herein do not purport to be complete and are
qualified in their entirety by reference to the form of Servicing Agreement.
PAYMENTS ON COLLATERAL
Pursuant to the Servicing Agreements with respect to a Series, each
Servicer will be required to establish and maintain one or more separate,
insured (to the available limits) custodial accounts (collectively, the
"Custodial P&I Account") into which the Servicer will be required to deposit on
a daily basis payments of principal and interest received with respect to the
Collateral. To the extent deposits in each Custodial P&I Account are required to
be insured by the FDIC, if at any time the sums in any Custodial P&I Account
exceed the limits of insurance on such account, the Servicer will be required
within one Business Day to withdraw such excess funds from such account and
remit such amounts (i) to a "Servicer Custodial Account," which shall be a
custodial account maintained at a separate institution designated by the Master
Servicer or (ii) to the Master Servicer for deposit in either the Collateral
Proceeds Account for such Series or the Master Servicer Custodial Account. The
amounts deposited pursuant to (i) and (ii) above will be invested in Eligible
Investments.
The Servicing Agreements will require each Servicer, not later than
the Remittance Date, to remit to the Master Servicer Custodial Account amounts
representing Monthly Payments on the Collateral securing a Series received or
advanced by the Servicer that were due during the related Due Period, principal
prepayments, Insurance Proceeds and Liquidation Proceeds received during the
applicable Prepayment Period (as specified in the Indenture for such Series),
with interest to the last day of the calendar month occurring in such Prepayment
Period (subject to certain limitations), and proceeds from the repurchase of
Converted Mortgage Loans, if any, less applicable servicing fees and amounts
representing reimbursement of Advances made by the Servicer. On or before the
related Master Servicer Remittance Date, the Master Servicer will withdraw its
master servicing fees from the Master Servicer Custodial Account and remit to
the Collateral Proceeds Account those amounts allocable to the Bonds for such
Payment Date. In addition, there will be deposited in the Collateral Proceeds
Account for a Series of Bonds any P&I Advances made by the Master Servicer or
the Trustee pursuant to the terms of the Master Servicing Agreement or Indenture
to the extent such amounts were not deposited in the Master Servicer Custodial
Account or received and applied by the Servicer.
Prior to each Payment Date for a Series, the Master Servicer will
furnish to the Trustee and to the Issuer a statement setting forth certain
information with respect to the Collateral securing such Series.
ADVANCES
Unless otherwise provided in the related Prospectus Supplement, the
Servicing Agreements with respect to a Series will require each Servicer to
advance funds to cover, to the extent that such amounts are deemed to be
recoverable from any subsequent payments on the Collateral securing such Series,
(i) delinquent payments of principal of and interest on the Collateral and (ii)
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delinquent payments of taxes, insurance premiums and other escrowed items. If a
Servicer defaults, the Master Servicer or the Trustee may, if so provided in the
Master Servicing Agreement or Indenture, respectively, be required to make
Advances to the extent necessary to make required payments on certain Bonds,
provided that the party deems the amounts to be recoverable.
As specified in the related Prospectus Supplement, the Advance
obligation of the Trustee, the Servicers and the Master Servicer may be further
limited to an amount specified (i) in the Indenture, the Servicing Agreement or
the Master Servicing Agreement or (ii) by a Rating Agency rating the Bonds. Any
required Advances by the Servicers, the Master Servicer or the Trustee, as the
case may be, must be deposited into the applicable Custodial P&I Account or
Master Servicer Custodial Account or into the Collateral Proceeds Account and
will be due not later than the Payment Date to which such delinquent payment
relates. Amounts to be advanced by the Servicers, the Master Servicer or the
Trustee, as the case may be, will be reimbursable out of future payments on the
Collateral, Insurance Proceeds or Liquidation Proceeds of the Collateral for
which such amounts were advanced. If an Advance made by a Servicer, the Master
Servicer or the Trustee later proves to be unrecoverable, the Servicer, the
Master Servicer or the Trustee, as the case may be, will be entitled to
reimbursement from funds in the Collateral Proceeds Account prior to the
distribution of payments to the Bondholders.
Any Advances made by the Servicers, the Master Servicer or the
Trustee with respect to Collateral securing any Series will be intended to
enable the Issuer to make timely payments of principal and interest on the Bonds
of the Series and will be due not later than the Payment Date on which such
payments are scheduled to be made. However, none of the Trustee, the Master
Servicer or any Servicer will insure or guarantee any Series or any Collateral
securing any Series, and their obligations to advance for delinquent payments
will be limited to the extent that such Advances, in the judgment of the Master
Servicer or the Trustee, will be recoverable out of future payments on the
Collateral, or Insurance Proceeds or Liquidation Proceeds of the Collateral, for
which the amounts were advanced.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicing Agreements with respect to a Series will require each
Servicer to make reasonable efforts to collect all payments called for with
respect to the Collateral securing the Series and under the applicable Insurance
Policies with respect to each such Loan and, consistent with the Servicing
Agreement, to follow with respect to Mortgage Loans such collection procedures
as it normally would follow with respect to mortgage loans serviced for FNMA.
The servicing of Manufactured Home Loans and Consumer Finance Loans
is generally similar to the servicing of Mortgage Loans, except that, in
general, servicers of the Manufactured Home Loans and Consumer Finance Loans
will place greater emphasis on making prompt telephone contact with delinquent
Borrowers than is generally customary in the case of the servicing of Mortgage
Loans.
The Security Instrument used in originating a Mortgage Loan may, at
the lender's option, contain a "due-on-sale" clause. See "Certain Legal Aspects
of the Collateral -- Mortgage Loans and Model Home Loans -- Due-On-Sale
Provisions" herein. The Servicing Agreements will require the Servicers of
Mortgage Loans to use reasonable efforts to enforce a "due-on-sale" clause with
respect to any Security Instrument containing such a clause provided that the
coverage of any applicable Insurance Policy will not be adversely affected
thereby. In any case in which a Mortgaged Premises has been or is about to be
conveyed by the Borrower and the "due-on-sale" clause has not been enforced or
the Note related to any Loan is by its terms assumable, the Servicer will be
authorized to take or enter into an assumption agreement with the person to whom
such property has been or is about to be conveyed, if such person meets certain
loan underwriting criteria, including the criteria necessary to maintain the
coverage provided by the applicable Insurance Policies or if otherwise required
by law. In the event that the Servicer enters into an assumption agreement in
connection with the conveyance of collateral securing a Loan, the Servicer will
release the original Borrower from liability upon the Loan and substitute the
new Borrower as obligor thereon. In no event can the assumption agreement permit
a decrease in the applicable interest rate or an increase in the term of the
Loan. Fees collected for entering into an assumption agreement will be retained
by the Servicer of the related Loan.
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DEFAULTED COLLATERAL
With respect to any item of Collateral on which a material default
has occurred or a payment default is imminent, the Servicer may, with the
approval of the Master Servicer in most cases, negotiate a forbearance or
modification agreement with the Borrower. A "forbearance" consists of a
temporary reduction in the Monthly Payment that a Borrower is required to make
with respect to a Loan, provided that the payment of principal and interest is
only deferred and not forgiven. A "modification" consists of a permanent
reduction in the Monthly Payment that a Borrower is required to make with
respect to a Loan, and may result in a Realized Loss on the Loan. A Loan
modification may involve a reduction in the Loan Rate of the Loan, its Unpaid
Principal Balance or both. A forbearance or modification of a Loan only will be
permitted if the Servicer and, if required, the Master Servicer have determined
that in their good faith business judgment granting the forbearance or
modification will maximize the recovery on the Loan to the Trust Estate on a
present value basis. In determining whether to grant a forbearance or a
modification, the Servicer and, if required, the Master Servicer will take into
account the willingness of the Borrower to perform on the Loan, the general
condition of the collateral for the Loan and the likely proceeds from the
Foreclosure and Liquidation of a Mortgaged Premises or the repossession and
Liquidation of a Manufactured Home or Facilities.
Except as otherwise specified in the Prospectus Supplement, the
Issuer will be entitled to purchase any Loan that has a payment that is 90 days
past due upon payment to the Trustee of the Unpaid Principal Balance of the Loan
plus accrued and unpaid interest thereon through the Payment Date following the
date of purchase.
The Servicers will not exercise any discretion with respect to
changes in any of the terms of any Loan (including but not limited to the Loan
Rate, whether the term of the Loan is extended for a further period and the
specific provisions applicable to such an extension) or the disposition of REO
Property or Repo Property without the consent of the Master Servicer.
MAINTENANCE OF INSURANCE POLICIES; CLAIMS THEREUNDER AND
OTHER REALIZATION UPON DEFAULTED COLLATERAL
The Servicing Agreements require each Servicer to maintain in full
force and effect, as long as coverage is required under the Servicing Agreement,
Standard Hazard Insurance, Flood Insurance, in certain areas, and, with respect
to Mortgage Loans, any Primary Mortgage Insurance Policy relating to a Loan that
it services.
If any collateral securing a defaulted Loan is damaged and the
proceeds, if any, from the related Standard Hazard Insurance Policy and any
Flood Insurance Policy are insufficient to restore the damaged property to the
condition that will permit recovery under the related Insurance Policy, the
Servicer will not be required to expend its own funds to restore the damaged
collateral unless it determines that it can recover the expenses from
Liquidation Proceeds or Insurance Proceeds. Each Servicing Agreement and the
Master Servicing Agreement with respect to a Series will require the Servicer or
the Master Servicer, as the case may be, to present claims to the insurer under
any Insurance Policy applicable to the Collateral securing the Series and to
take the reasonable steps necessary to permit recovery under the Insurance
Policy with respect to defaulted Loans or losses on the collateral securing such
Loans.
If recovery under the applicable Insurance Policy is not available,
the Servicer or the Master Servicer nevertheless will be obligated to follow
standard practice and procedures to realize upon defaulted Collateral. See
"Certain Legal Aspects of the Collateral -- Environmental Considerations"
herein. In this regard, the Servicer or Master Servicer will sell the Loan
collateral pursuant to Foreclosure or trustee's sale or, in the event a
deficiency judgment is available against the Borrower or other Person, proceed
to seek recovery of the deficiency against the appropriate person. To the extent
that the proceeds of any Liquidation proceeding are less than the Collateral
Value of the defaulted Collateral, there will be a reduction in the value of the
Collateral for the related Series, and the holders of Bonds of the Series may
not receive full principal of and interest on their Bonds.
The Master Servicer with respect to a Series may be required to
maintain any Special Hazard Insurance Policy and any Pool Insurance Policy for
the Series in full force and effect throughout the term of the Master Servicing
Agreement, subject to payment of the applicable premiums by the Trustee. The
Master Servicer will be required to notify the Trustee to pay the premiums for
any Special Hazard Insurance Policy and any Pool Insurance Policy for a Series
on a timely basis. Any premiums may be payable on a monthly basis in advance or
pursuant to any other payment schedule acceptable to the applicable insurer. In
the event that a Special Hazard Insurance Policy or Pool Insurance Policy for a
Series is canceled or terminated for any reason (other than the exhaustion of
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total policy coverage), the Master Servicer will be obligated to obtain from
another insurer a comparable replacement policy with a total coverage that is
equal to the then existing coverage (or the lesser amount if the Master Servicer
confirms in writing with the Rating Agencies rating the Bonds that the lesser
amount will not impair the rating on the Bonds) of the Special Hazard Insurance
Policy or Pool Insurance Policy or other form of substitute credit enhancement
as the Rating Agencies rating the Bonds confirm in writing will not impair the
ratings on the Bonds. However, if the cost of any replacement policy or bond is
greater than the cost of the policy or bond that has been terminated, the amount
of the coverage either will be reduced to a level such that the applicable
premium will not exceed the cost of the premium for the policy or bond that was
terminated or the Master Servicer may secure such replacement policy or other
credit enhancement at increased cost, so long as the increase in cost will not
adversely affect amounts available to make payments of principal or interest on
the Bonds.
EVIDENCE AS TO SERVICING COMPLIANCE
Within 120 days of the end of each of its fiscal years each Servicer
must provide the Master Servicer with a copy of its audited financial statements
for the year. In addition, the Servicer will be required to deliver an officer's
certificate to the effect that it has fulfilled its obligations under the
applicable Servicing Agreement during the preceding fiscal year or identifying
any ways in which it has failed to fulfill its obligations during the fiscal
year and the steps that have been taken to correct such failure. The Master
Servicer will be required promptly to make available to the Trustee any
compliance reporting that it receives from a Servicer.
Each year the Master Servicer will review each Servicer's
performance under its Servicing Agreement and the status of any fidelity bond
and errors and omissions policy required to be maintained by the Servicer under
the Servicing Agreement.
EVENTS OF DEFAULT AND REMEDIES
Events of default under a Servicing Agreement in respect of a Series
of Bonds will consist of (i) any failure by the Servicer to remit to the Master
Servicer Custodial Account any payment required to be made by a Servicer under
the terms of the Servicing Agreement that is not remedied within at least one
Business Day; (ii) any failure on the part of a Servicer to observe or perform
in any material respect any other of its covenants or agreements contained in
the Servicing Agreement that continues unremedied for a specified period after
the giving of written notice to the Servicer by the Master Servicer; (iii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings regarding a Servicer; or (iv) certain actions
by or on behalf of the Servicer indicating its insolvency or inability to pay
its obligations.
The Master Servicer will have the right pursuant to the Servicing
Agreement to terminate a Servicer upon the occurrence of an event of default by
the Servicer involving any of its obligations under the Servicing Agreement. In
the event of such termination, the Master Servicer will appoint a substitute
Servicer (which may be the Master Servicer) acceptable to the Master Servicer.
Any successor servicer, including the Master Servicer or the Trustee, will be
entitled to compensation arrangements similar to those provided to the Servicer.
MASTER SERVICING AGREEMENT
Except as otherwise specified in the related Prospectus Supplement,
Dynex will act as the master servicer (in such capacity, the "Master Servicer")
of the Collateral pursuant to the terms of the Master Servicing Agreement
between Dynex and the Issuer. Pursuant to the Master Servicing Agreement, the
Master Servicer (i) will supervise the servicing of the Collateral by the
Servicers, (ii) will instruct, among other things, each Servicer as to the
proper actions to be taken with respect to defaulted Collateral, (iii) will be
responsible for providing general administrative services with respect to the
Bonds, and (iv) will make Advances to the limited extent described herein. The
Master Servicer may engage various independent contractors to perform certain of
its responsibilities, provided, however, that the Master Servicer will remain
fully responsible and liable for all of its obligations under the Master
Servicing Agreement (other than those specifically undertaken by a Special
Servicer). The Master Servicer will be entitled to a monthly master servicing
fee applicable to each Loan expressed as a fixed percentage of the remaining
Scheduled Principal Balance of the Loan as of the first day of the immediately
preceding Due Period. It is anticipated that the master servicing fee will range
between 0.020% and 0.050% per annum of the Scheduled Principal Balance of the
Collateral, depending upon the structure of the related transaction. The related
Prospectus Supplement will specify the actual amount of the master servicing
fee. The Issuer will assign its rights to enforce the obligations of the Master
Servicer under that agreement to the Trustee as security for the Bonds.
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The form of Master Servicing Agreement pursuant to which the Master
Servicer will master service the Collateral will be filed or incorporated by
reference as an exhibit to the Registration Statement of which this Prospectus
is a part. The summaries of the obligations of the Master Servicer contained
herein do not purport to be complete and are subject to, and qualified in their
entirety by reference to, the Master Servicing Agreement.
SPECIAL SERVICING AGREEMENT
The Master Servicer may appoint a Special Servicer to undertake
certain responsibilities of the Servicer with respect to certain defaulted
Collateral securing a Series. The Special Servicer may engage various
independent contractors to perform certain of its responsibilities, provided,
however, that the Special Servicer remains fully responsible and liable for all
of its obligations under the special servicing agreement (the "Special Servicing
Agreement"). As may be further specified in the related Prospectus Supplement, a
Special Servicer may be entitled to various fees, including, but not limited to,
(i) a monthly engagement fee applicable to each Loan, expressed as a fixed
percentage of the Scheduled Principal Balance of the Loan as of the first day of
the immediately preceding Due Period, (ii) a special servicing fee expressed as
a fixed percentage of the remaining Scheduled Principal Balance of each
specially serviced Loan, or (iii) a performance fee applicable to each
liquidated Loan based upon the Liquidation Proceeds.
THE INDENTURE
The following summaries describe certain provisions of the
Indenture. When particular provisions or terms used in the Indenture are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference as part of such summaries.
GENERAL
The Indenture does not limit the amount of Bonds that can be issued
thereunder and provides that Bonds of any Series may be issued thereunder up to
the aggregate principal amount that may be authorized from time to time by the
Issuer. The Indenture provides that additional Bonds may be issued for any
outstanding Class or Series up to the aggregate principal amount authorized from
time to time by the Issuer, subject to the provisions of the related Series
Supplement or supplements thereto.
The Bonds of each Series will be issued in fully-registered
certificated or book-entry form in the authorized denominations for each Class
of Bonds specified in the related Prospectus Supplement. The Bonds of each
Series in certificated form may be transferred or exchanged at the corporate
trust office of the Trustee without the payment of any service charge, other
than any tax or other governmental charge payable in connection therewith.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will make payments of principal of and interest on the Bonds of a Series in
certificated form by checks mailed to registered Bondholders of the Bonds at
their addresses appearing on the books and records of the Issuer, except that
the final payments in retirement of each Class of Bonds of a Series in
certificated form will be made only upon presentation and surrender of such
Bonds at the office or agency of the Issuer maintained for that purpose. If
provided in the related Prospectus Supplement, upon receipt of written
instructions and the payment of any required charge or fee, payments on certain
Bonds of a Series may be made to certain Bondholders of such Bonds by the
Trustee by wire transfer of immediately available funds. Payment and transfer
procedures for Bonds in book-entry form will be as specified herein in
"Description of the Bonds -- Book-Entry Procedures" herein and in the related
Prospectus Supplement.
MODIFICATION OF INDENTURE
With the consent of the Holders of not less than a majority in
principal balance of the outstanding Bonds of each Series to be affected or, if
fewer than all Classes of a Series would be affected, of each Class to be
affected, the Trustee and the Issuer may execute a supplemental indenture to add
provisions to, or change in any manner or eliminate provisions of, the Indenture
relating to such Series, or to such Class or Classes, or modify in any manner
the rights of the Holders of the Bonds of such Series, or of such Class or
Classes. If any such supplemental indenture would adversely affect the Holders
of any Senior Bonds or of any Subordinated Bonds, then approval of Holders of a
majority in principal balance of such outstanding Senior Bonds or of such
outstanding Subordinated Bonds, as the case may be, would also be required.
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Without the consent of the Bondholders of each outstanding Bond
affected, however, no supplemental indenture may (i) change the Stated Maturity
Date of the principal of, or timing of any installment of principal or interest
on, any Bond, reduce the principal amount thereof or the interest thereon or the
redemption price thereof or the time for redemption with respect thereto, change
the provisions relating to the application of proceeds of the Trust Estate to
the payment of principal on the Bonds, change any place where, or the currency
in which, any Bond or interest thereon is payable, or impair the right to
institute suit for payment on or after the maturity thereof or, in the case of
redemption, on or after the redemption date, (ii) reduce the percentage in
principal amount of Bonds of the affected Series whose Holders must consent to
any supplemental indenture or to any waiver of compliance with certain
provisions of the Indenture or certain defaults thereunder or their
consequences, (iii) impair or adversely affect the Collateral securing a Series,
(iv) permit the creation of any lien ranking prior to or on a par with the lien
of the Indenture with respect to any part of the Trust Estate or terminate the
lien of the Indenture on any part of the Trust Estate or on any property at any
time subject to the Indenture or deprive the Holder of the security afforded by
the lien of the Indenture, (v) change the definition of default under the
Indenture, or reduce the percentage of Bondholders of Bonds of any Series whose
consent is required to direct the Trustee to liquidate the Collateral for such
Series, (vi) change any condition precedent for the redemption of any Series of
Bonds or (vii) modify any of the provisions of the Indenture with respect to
supplemental indentures except to increase the percentage of outstanding Bonds
whose consent is required for any such action or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent of
the Bondholders of each outstanding Bond of a Class affected thereby. The
issuance of additional Bonds in accordance with the provisions and limitations
contained in a Series Supplement relating to outstanding Bonds will be deemed
not to have changed the timing of any installment of principal of or interest on
any outstanding Class of Bonds issued under such Series Supplement for purposes
of requiring Bondholder consent pursuant to clause (i) above.
The Issuer and the Trustee, upon advice of counsel, also may enter
into supplemental indentures, without obtaining the consent of Bondholders, for
the purpose of, among other things, (i) setting forth the terms of and security
for any previously unissued Series, (ii) adding to the covenants of the Issuer
or the Trustee for the benefit of the Bondholders, and (iii) curing ambiguities,
or correcting or supplementing any defective, ineffective or inconsistent
provision or amending any other provision with respect to matters or questions
relating to the Indenture, provided the interests of the Bondholders would not
be materially adversely affected. For purposes of clause (iii) above, among
other things, a supplemental indenture will be conclusively deemed not to
adversely affect a particular Series if (i) the Trustee receives a letter or
other writing from each Rating Agency rating the Class or Series to the effect
that execution of the supplemental indenture will not result in any change in
the current rating assigned by that Rating Agency to the Class or Series and
(ii) the supplemental indenture effects no change in principal priority
schedules, interest rates, redemption prices, substitution of Collateral,
Payment Dates, record dates, Accounting Dates, terms of optional or mandatory
redemption, application of Surplus to the payment of a Series or other payment
terms established by the Series Supplement for the Series.
EVENTS OF DEFAULT
An event of default ("Event of Default") with respect to a Series or
Class of Bonds will be described in the related Prospectus Supplement.
Generally, an Event of Default with respect to the Senior Bonds of a Series
(and, so long as 91 days have passed during which no Senior Bond has been
outstanding, a Class of the Subordinated Bonds of a Series) is (i) failure to
pay required interest and principal when any related available credit
enhancement amount has been reduced to zero, (ii) failure to pay principal in
full prior to the Stated Maturity Date for such Bonds and (iii) default in the
performance of certain covenants in the Indenture and the continuation of such
default for 60 days after notice to the Issuer by the Trustee or to the Trustee
and the Issuer by the Bondholders of at least 25% in principal amount of such
Bonds. Certain events of bankruptcy, insolvency, reorganization or receivership
of the Issuer constitute an Event of Default for all Bonds of a Series.
Unless otherwise specified in the related Prospectus Supplement, (i)
a breach of a representation, warranty or covenant in the Servicing Agreement or
Master Servicing Agreement will not constitute an Event of Default under the
Indenture and (ii) an Event of Default with respect to one Series will not
constitute an Event of Default with respect to any other Series.
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Within 90 days after the occurrence of any default that is, or with
notice or the lapse of time or both would become, an Event of Default with
respect to the Bonds, the Trustee is required under the Indenture to transmit
notice of such default, if known to the Trustee, to all Bondholders, unless such
default shall have been cured or waived, or the Trustee determines in good faith
that the withholding of such notice is in the interest of the Bondholders.
If an Event of Default with respect to the Senior Bonds of a Series
occurs and is continuing, the Bondholders of not less than 25% in principal
balance of the outstanding Senior Bonds of such Series may declare the principal
of all of the Bonds of such Series to be immediately due and payable, by a
notice in writing to the Issuer and to the Trustee. If an Event of Default with
respect to the Subordinated Bonds of a Series occurs and is continuing, the
Bondholders of not less than 25% in principal balance of the outstanding
Subordinated Bonds (and of the outstanding Senior Bonds, if any) of such Series
may declare the principal of all of the Bonds of such Series to be immediately
due and payable, by a notice in writing to the Issuer and to the Trustee. Any
such declaration may be rescinded by the Bondholders of not less than a majority
in principal balance of the outstanding Bonds that were entitled to vote on the
declaration. Following any such declaration that is not rescinded, the Trustee
shall sell the Collateral as described in the Indenture. If an Event of Default
has occurred and is continuing and no Bonds of the Series have been declared due
and payable, or any such declaration and its consequences has been rescinded,
the Trustee may, and on the direction of a majority in principal balance of the
outstanding Senior Bonds (or, if no Senior Bonds are outstanding, Subordinated
Bonds) shall give notice to the Issuer of its election to preserve the Trust
Estate, collect the proceeds thereof and make and apply all payments in respect
of the Bonds in accordance with the Indenture.
Proceeds from the liquidation of the Collateral for a Series of
Bonds will be applied, after all required payments and reimbursements to the
Trustee, Servicer, Master Servicer and Special Servicer, in the order set forth
in the Series Supplement and related Prospectus Supplement for such Series of
Bonds. Declaration of acceleration and liquidation of the Collateral pursuant to
the foregoing procedures shall be the sole remedy for the Bondholders upon an
Event of Default. In the event that a Series of Bonds is declared due and
payable, as described above, and the Collateral securing the Bonds is sold, the
net proceeds from such sale may be insufficient to pay the full unpaid amount of
principal of and interest due on each outstanding Class of Bonds of such Series.
Furthermore, in the event that the principal of the Bonds of a Series is
declared due and payable, as described above, and the Collateral securing such
Series is sold, the Bondholders of any Discount Bonds may be entitled to receive
no more than an amount equal to the unpaid principal amount thereof less the
unamortized original issue discount. No assurance can be given about how the
amount of the original issue discount that has not been amortized will be
determined.
Subject to the provisions of the Indenture relating to the duties of
the Trustee in case an Event of Default will occur and be continuing, the
Trustee will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any Bondholders of the Bonds
of a Series, unless such Bondholders will have offered to the Trustee reasonable
security or indemnity. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, Holders of a majority in
principal amount of the outstanding Senior Bonds (or the most senior of any
Subordinated Bonds if no Senior Bonds are outstanding) of a Series will 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 Bonds of such Series; and the Bondholders of the
majority in principal amount of the outstanding Senior Bonds (or the
Subordinated Bonds if no Senior Bonds are outstanding) of a Series may, in
certain cases, waive any default with respect to such Series.
No Bondholder of any of the Bonds of a Series will have the right to
institute any proceeding with respect to the Indenture, unless (i) such
Bondholder previously has given to the Trustee written notice of an Event of
Default, (ii) the Bondholders of not less than 25% in principal amount of the
outstanding Senior Bonds (or the Subordinate Bonds if no Senior Bonds are
outstanding) of the same Series have made written request upon the Trustee to
institute such proceedings in its own name as Trustee and have offered the
Trustee reasonable indemnity, (iii) the Trustee has for 60 days failed to
institute any such proceeding, and (iv) no direction inconsistent with such
written request has been given to the Trustee during such 60-day period by the
Holders of a majority in principal amount of the outstanding Senior Bonds (or
the Subordinated Bonds if no Senior Bonds are outstanding) of a Series.
Except as otherwise provided in the related Prospectus Supplement,
at such time as an Event of Default for a Series is declared and so long as
Senior Bonds of such Series remain outstanding, the Trustee will cease to act on
behalf of the Holders of Subordinated Bonds and will thereafter act only on
behalf of the Holders of the Senior Classes of Bonds. The Issuer is required in
such circumstances to appoint a separate trustee for the Holders of the
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Subordinated Bonds. Such trustee may seek to act in a manner adverse to the
Holders of the Senior Bonds, and such action may result in a delay in
disposition of the Trust Estate or the exercise of other remedies and,
consequently, a delay in payment to the Holders of the Senior Bonds. Should the
Issuer fail to appoint a separate trustee within 60 days after such Event of
Default, the Trustee will petition a court of competent jurisdiction to appoint
a separate trustee.
AUTHENTICATION AND DELIVERY OF BONDS
The Issuer may from time to time deliver Bonds executed by it to the
Trustee and request that the Trustee authenticate such Bonds. Upon the receipt
of such Bonds and such request, and subject to the Issuer's compliance with
certain conditions specified in the Indenture, the Trustee will authenticate and
deliver such Bonds as the Issuer may direct.
LIST OF BONDHOLDERS
Three or more Bondholders of the Bonds of a Series, each of whom has
owned a Bond of such Series for at least six months, may, by written request to
the Trustee, obtain access to the list of all Bondholders of Bonds of the same
Series or of all Bonds, as specified in the request, maintained by the Trustee
for the purpose of communicating with other Bondholders with respect to their
rights under the Indenture. The Trustee may elect not to afford the requesting
Bondholders access to the list of Bondholders if it agrees to mail the desired
communication or proxy, on behalf of the requesting Bondholders, to all such
Bondholders.
ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Trustee a
written statement as to fulfillment of its obligations under the Indenture.
REPORTS TO BONDHOLDERS
On or before each Payment Date for a Series, the Trustee will
transmit by mail to each Bondholder of such Series a report with respect to the
principal balance of the Bonds of such Series held by such Bondholder as of the
immediately preceding Payment Date and the amount of principal, interest and
premium, if any, paid with respect to the Bonds of such Series held by such
Bondholder since the immediately preceding Payment Date. Such report also will
include information regarding the levels of Delinquencies and Losses on the
Collateral, losses with respect to each related Class of Bonds, and the amount
of servicing and master servicing fees paid with respect to the Collateral in
the related Collateral Pool for the applicable Payment Date.
TRUSTEE'S ANNUAL REPORT
The Trustee under present law is required to mail each year to all
registered Bondholders of Bonds of a Series a brief report with respect to any
of the following events that may have occurred within the previous year (but if
no such event has occurred, no report is required): any change in its
eligibility and qualifications to continue as the Trustee under the Indenture,
any amounts advanced by it under the Indenture, the amount, interest rate and
maturity date of certain indebtedness owing by the Issuer to it in the Trustee's
individual capacity, any change in the property and funds relating to such
Series physically held by the Trustee as such, any additional issue of Bonds of
such Series not previously reported, any change in the release or release and
substitution of any property relating to such Series subject to the lien of the
Indenture, and any action taken by it that materially affects the Bonds or the
Trust Estate for such Series and that has not been previously reported. In any
event, the Trustee will make such information available to all Bondholders on an
annual basis.
TRUSTEE
The Trustee for each Series of Bonds will be specified in the
respective Prospectus Supplement. The commercial bank or trust company serving
as Trustee may have normal banking relationships with the Issuer or any of its
Affiliates.
The Trustee may resign at any time, in which event the Issuer will
be obligated to appoint a successor Trustee. The Issuer may remove the Trustee
and appoint a successor Trustee if the Trustee ceases to be eligible to act as
Trustee under the Indenture or if the Trustee becomes insolvent or otherwise
incapable of acting with respect to any Series of Bonds. The Issuer may also
remove the Trustee and appoint a successor Trustee for any Series of Bonds at
any time provided that the Issuer receives confirmation that the appointment of
the successor Trustee will not result in the lowering of the rating of that
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Series of Bonds. The Trustee with respect to a Series of Bonds may also be
removed at any time by the holders of a majority in principal amount of the
Bonds of such Series then outstanding.
Any resignation and removal of the Trustee, and the appointment of a
successor Trustee, will not become effective until acceptance of such
appointment by the successor Trustee. The Trustee, and any successor Trustee,
each will have a combined capital and surplus of at least $50,000,000, or will
be a member of a bank holding system, the aggregate combined capital and surplus
of which is at least $50,000,000, provided that the Trustee's and any such
successor Trustee's separate capital and surplus shall at all times be at least
the amount specified in Section 310(a)(2) of the Trust Indenture Act of 1939 and
that the Trustee and such successor Trustee will be subject to supervision or
examination by federal or state authorities and will have an office in the
United States.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will be discharged as to a Series upon the
cancellation of all of the Bonds of such Series or, with certain limitations,
upon deposit with the Trustee of funds sufficient for the payment or redemption
thereof.
CERTAIN LEGAL ASPECTS OF THE COLLATERAL
The following discussion contains summaries of certain legal aspects
of mortgage loans, such as the Mortgage Loans and the Model Home Loans, and
installment sales contracts, such as the Manufactured Home Loans and the
Consumer Finance Loans, that are general in nature. Because such legal aspects
are governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete, to reflect the laws of any particular
state or to encompass the laws of all states in which the collateral for the
Loans is situated. The summaries are qualified in their entirety by reference to
the applicable federal and state laws governing the Collateral.
MORTGAGE LOANS AND MODEL HOME LOANS
GENERAL
Mortgage Loans and Model Home Loans as described herein are distinct
from Land Secured Loans (which are discussed below under "-- Manufactured Home
Loans -- Foreclosure under Real Property Laws"). A Mortgage Loan or Model Home
Loan is secured by Mortgage Premises on which a single family, (one- to
four-family) attached or detached residential structure is located, whereas a
Land Secured Loan is secured primarily by a Manufactured Home and is secured
only secondarily by Real Property.
The Mortgage Loans and Model Home Loans will be secured by Security
Instruments consisting of either mortgages, deeds of trust, deeds to secure debt
or security deeds, depending upon the prevailing practice in the state in which
the underlying Mortgaged Premises are located. The filing of a mortgage, deed of
trust, deed to secure debt or security deed creates a lien or title interest
upon the real property covered by such instrument and represents the security
for the repayment of an obligation that is customarily evidenced by a promissory
note. It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers. Priority with respect to such
instruments depends on their terms, on the knowledge of the parties to the
instrument and generally on the order of recording with the applicable state,
county or municipal office. There are two parties to a mortgage: the mortgagor,
who is the borrower/owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/owner is the
beneficiary. At origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties, the trustor, who is the borrower/owner, the
beneficiary, who is the lender, and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases in deed of trust transactions, the directions of the
beneficiary.
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FORECLOSURE
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property upon any default by the borrower
under the terms of the note or deed of trust. In some states, the trustee must
record a notice of default and send a copy to the borrower-trustor and to any
person who has recorded a request for a copy of a notice of default and notice
of sale. In addition, the trustee in some states must provide notice to any
other individual having an interest in the real property, including any second
lienholders. The trustor, borrower or any person having a junior encumbrance on
the real estate may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, that may be recovered by a lender. If the
deed of trust is not reinstated, a notice of sale must be posted in a public
place and, in most states, published for a 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, recorded and sent to all parties having an
interest in the real property.
An action to foreclose a mortgage generally is accomplished by
judicial action to recover the mortgage debt by enforcing the mortgagee's rights
under the mortgage. It is regulated by statutes and rules and subject throughout
to the court's equitable powers. Generally, a mortgagor is bound by the terms of
the mortgage note and the mortgage as made and cannot be relieved from his
default if the mortgagee has exercised his rights in a commercially reasonable
manner. However, because a foreclosure action historically was equitable in
nature, the court may exercise equitable powers to relieve a mortgagor of a
default and deny the mortgage foreclosure on proof that either the mortgagor's
default was neither willful nor in bad faith or the mortgagee's action
established a waiver, fraud, bad faith, or oppressive or unconscionable conduct
such as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under certain circumstances a court of equity may relieve the
mortgagor from an entirely technical default where such default was not willful.
A foreclosure action is subject to most of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring up to several years to complete. Moreover, a noncollusive, regularly
conducted foreclosure sale may be challenged as a fraudulent conveyance,
regardless of the parties' intent, if a court determines that the sale was for
less than fair consideration and such sale occurred while the mortgagor was
insolvent and within one year (or within the state statute of limitations if the
trustee in bankruptcy elects to proceed under state fraudulent conveyance law)
of the filing of bankruptcy. Similarly a suit against the debtor on the mortgage
note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty potential third party purchasers
at the sale have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the principal
amount of the mortgage or deed of trust plus accrued and unpaid interest and the
expenses of foreclosure, in which event the mortgagor's debt will be
extinguished or the lender may purchase for a lesser amount in order to preserve
its right against a borrower to seek a deficiency judgment in states where such
a judgment is available. Thereafter, the lender will assume the burdens of
ownership, including obtaining casualty insurance, paying taxes and making such
repairs at its own expense as are necessary to render the property suitable for
sale. The lender will commonly obtain the services of a real estate broker and
pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Any loss may be
reduced by the receipt of any insurance proceeds.
SECOND MORTGAGES
Some of the Mortgage Loans may be secured by second mortgages or
deeds of trust, which are junior to first mortgages or deeds of trust held by
other lenders. The rights of the holders of a junior mortgage or a junior deed
of trust are subordinate in lien and in payment to those of the holder of the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive and apply hazard insurance and condemnation
proceeds and, upon default of the mortgagor, to cause a foreclosure on the
property. Upon completion of the foreclosure proceedings by the holder of the
senior mortgage or the sale pursuant to the deed of trust, the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the second
lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings.
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Furthermore, the terms of the second mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust. In the event of
a conflict between the terms of the first mortgage or deed of trust and the
second mortgage or deed of trust, the terms of the first mortgage or deed of
trust will govern. Upon a failure of the mortgagor or trustor to perform any of
its obligations, the senior mortgagee or beneficiary, subject to the terms of
the senior mortgage or deed of trust, may have the right to perform the
obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the second mortgage.
EQUITY RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property that is subordinate to the foreclosing mortgagee, from
their "equity of redemption."
The doctrine of equity of redemption provides that, until the
property covered by a mortgage has been sold in accordance with a properly
conducted foreclosure and foreclosure sale, those having an interest that is
subordinate to that of the foreclosing mortgagee have an equity of redemption
and may redeem the property by paying the entire debt with interest. In
addition, in some states, when a foreclosure action has been commenced, the
redeeming party must pay certain costs of such action. Those having an equity of
redemption must be made parties and duly summoned to the foreclosure action in
order for their equity of redemption to be barred.
STATUTORY RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or
foreclosure of a mortgage, the trustor or mortgagor and foreclosed second lienor
are given a statutory period in which to redeem the property from the
foreclosure sale. The right of redemption should be distinguished from the
equity of redemption, which is a nonstatutory right that must be exercised prior
to the foreclosure sale. In some states, redemption may occur only upon payment
of the entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The 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 a right of redemption is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run. In some states, there is no right to redeem property
after a trustee's sale under a deed of trust.
DUE-ON-SALE PROVISIONS
The Mortgage Loans may contain due-on-sale clauses, which permit the
lender to accelerate the maturity of the Mortgage Loan if the Borrower sells,
transfers or conveys the related Mortgaged Premises in violation of the
restrictions with respect thereto set forth in the applicable Security
Instrument. The enforceability of these clauses has been the subject of
legislation or litigation in many states. Some jurisdictions automatically
enforce such clauses, while others require a showing of reasonableness and hold,
on a case-by-case basis, that a "due-on-sale" clause may be invoked only where a
sale threatens the legitimate security interest of the lender.
The Garn-St. Germain Depository Institutions Act of 1982 purports to
preempt state laws that prohibit the enforcement of "due-on-sale" provisions in
certain loans made after October 15, 1982. The Servicer may thus be able to
accelerate the Mortgage Loans that contain a "due-on-sale" provision, upon
transfer of an interest in the related Mortgaged Premises, regardless of its
ability to demonstrate that a sale threatens its legitimate security interest.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more
second liens, the senior lender is subjected to additional risk. First, the
mortgagor may have difficulty servicing and repaying multiple loans. In
addition, if the junior loan permits recourse to the mortgagor (as junior loans
often do) and the senior loan does not, a mortgagor may be more likely to repay
sums due on the junior loan than those on the senior loan. Second, acts of the
senior lender that prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
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example, if the mortgagor and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the senior
lender may lose its priority to the extent an existing junior lender is harmed
or the mortgagor is additionally burdened. Third, if the mortgagor defaults on
the senior loan and/or any junior loan or loans, the existence of junior loans
and actions taken by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of action by the senior
lender. Moreover, the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
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 for 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 experiencing temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the amounts due to
the lender and the greater of the net amount realized upon the foreclosure sale
and the market value of the Mortgaged Premises.
Statutory provisions may 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 Mortgaged Premises at the time of such
sale. The purpose of these statutes is to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of receiving low or no bids at the foreclosure sale.
Some state statutes may 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 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 in 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.
In some states, exceptions to the anti-deficiency statutes are
provided for in certain instances where the value of the lender's security has
been impaired by acts or omissions of the Borrower, for example, in the event of
waste of the Mortgaged Premises.
In addition to anti-deficiency and related legislation, numerous
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), and state laws affording relief to debtors, may interfere with or
affect the ability of a secured mortgage lender to realize upon its security.
For example, in certain proceedings under the Federal Bankruptcy Code, when a
court determines that the value of a home is less than the principal balance of
the loan, the court may prevent a lender from foreclosing on the home and, as
part of the rehabilitation plan, reduce the amount of the secured indebtedness
to the value of the home as its exists at the time of the proceeding, leaving
the lender as a general unsecured creditor for the difference between that value
45
and the amount of outstanding indebtedness. A bankruptcy court may grant the
debtor a reasonable time to cure a payment default and, in the case of a
mortgage loan not secured by the debtor's principal residence, also may reduce
the periodic payments due under such mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. Certain court decisions have
applied such relief to claims secured by the debtor's principal residence. If a
court relieves a Borrower's obligation to repay amounts otherwise due on a
Mortgage Loan, the Servicer will not be required to advance such amounts, and
any loss in respect thereof may reduce the amounts available to be paid to the
holders of the Bonds.
The Internal Revenue Code of 1986, as amended, provides priority to
certain tax liens over the lien of the mortgage or deed of trust. Other federal
and state laws provide priority to certain tax and other liens over the lien of
the mortgage or deed of trust. Numerous federal and some state consumer
protection laws impose substantive requirements upon mortgage lenders in
connection with the origination, servicing and the enforcement of mortgage
loans. 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 laws and state laws impose specific statutory liabilities upon lenders
who originate or service mortgage loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
mortgage loans.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Relief Act, an obligor who enters military
service after the origination of such obligor's Mortgage Loan (including an
obligor who is a member of the National Guard or who is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest above a specified annual rate during the period of
such obligor's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such action could have an effect,
for an indeterminate period of time, on the ability of the Servicer to collect
full amounts of interest on certain of the Mortgage Loans. Any shortfall in
interest collections resulting from the application of the Relief Act, to the
extent not covered by the subordination of a Class of Subordinated Bonds, could
result in losses of Bondholders. In addition, the Relief Act imposes limitations
that would impair the ability of the Servicer to foreclose on an affected
Mortgage Loan during the obligor's period of active duty status. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned by the inability to liquidate the related Mortgaged Premises
in a timely fashion.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("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 statute authorized any
state to reimpose limitations on interest rates and finance charges by adopting
a law or constitutional provision that expressly rejects application of the
federal law before April 1, 1983. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where the 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.
MANUFACTURED HOME LOANS
GENERAL
As a result of the pledge of the Manufactured Home Loans underlying
a Series to the related Trustee, the Trustee will succeed to all of the rights
(including the right to receive payments on the Manufactured Home Loans) of the
obligees under the Manufactured Home Loans. Each Manufactured Home Loan
evidences both (1) the obligation of the Borrower to repay the Loan evidenced
thereby and (2) the grant of a security interest in the related Manufactured
Home to secure repayment of the Loan. Certain aspects of both features of the
Manufactured Home Loans are described more fully below.
The Manufactured Home Loans generally are "chattel paper" as defined
in the Uniform Commercial Code (the "UCC") in effect in the states in which the
Manufactured Homes initially were located. Under the Servicing Agreement, the
Servicer will retain possession of the Manufactured Home Loans as custodian for
the Trustee. Because the Servicer is not relinquishing possession of the
Manufactured Home Loans, the Participant or the Issuer will file a UCC-1
financing statement in the appropriate recording offices as necessary to perfect
the Trustee's interest in the Manufactured Home Loans. Notwithstanding such
filings, if, through negligence, fraud or otherwise, a subsequent purchaser from
46
the Participant or from a predecessor owner of a Manufactured Home Loan were
able to take physical possession of the Manufactured Home Loan without notice of
the pledge of the Manufactured Home Loans to the Trustee, the Trustee's interest
in the Manufactured Home Loans could be subordinated to the interest of such
purchaser. To provide a measure of protection against this possibility, within
ten days after the Closing Date, unless otherwise specified in the related
Prospectus Supplement, the Manufactured Home Loans will be stamped or marked
otherwise to reflect their pledge by the Issuer to the Trustee.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Manufactured Home Loans may be
located in any or all of the 50 states and the District of Columbia. The manner
in which liens on Manufactured Homes are "perfected" is governed by applicable
state law. In many states ("Title States"), a lien on a manufactured home may be
"perfected" under applicable motor vehicle titling statutes by notation of the
secured party's lien on the related certificate of title or by delivery of
certain required documents and payment of a fee to the state motor vehicle
authority to re-register the home, depending upon applicable state law. In some
states ("UCC States"), perfection of a lien on a manufactured home is
accomplished pursuant to the provisions of the applicable UCC by filing UCC-3
financing statements or other appropriate transfer instruments with all
appropriate UCC filing offices. Some states are both Title States and UCC
States. Unless otherwise specified in the related Prospectus Supplement, because
of the expense and administrative inconvenience involved, the Participant will
not amend any certificate of title to change the lienholder specified therein,
deliver any documents or pay fees to re-register any Manufactured Home, or file
any UCC transfer instruments, and the Participant will not deliver any
certificate of title or note thereon the Issuer's interest. In some states,
simple assignment of the security interest created by a Manufactured Home Loan
in the related Manufactured Home constitutes an effective conveyance of such
security interest without amendment of any lien noted on the related certificate
of title, re-registration of the underlying home or filing of any statement
under the applicable UCC, and the assignee succeeds to the seller's rights as
the secured party as to such Manufactured Home. In other states, however, the
law is unclear whether a security interest in a Manufactured Home is effectively
assigned in the absence of an amendment to a certificate of title,
re-registration of the underlying home, or the filing of an appropriate UCC
transfer instrument, as appropriate under the applicable state law. In such
event, the assignment of the security interest created by a Manufactured Home
Loan in the related Manufactured Home may not be effective against creditors of
the Participant in bankruptcy of the Participant.
In recent years, manufactured homes have become increasingly large
and often are attached to their sites, without appearing to be readily mobile.
Perhaps in response to these trends, courts in many states have held that
manufactured homes, under certain circumstances, are subject to real estate
title and recording laws. As a result, a security interest created by an
installment sales contract in a manufactured home located in such a state could
be rendered subordinate to the interests of other parties claiming an interest
in the home under applicable state real estate law. In order to perfect a
security interest in a manufactured home under real estate laws, the holder of
the security interest must file either a real estate mortgage, deed of trust,
deed to secure debt or security deed, as appropriate under the real estate laws
of the state in which the related home is located (any of the foregoing, a
"Mortgage") or a "fixture filing" under the provisions of the applicable UCC.
These filings must be made in the real estate records office of the jurisdiction
in which the home is located. The Participant will not be required to make
fixture filings or to file Mortgages with respect to any of the Manufactured
Homes (except in the case of Land Secured Loans, as described below).
Consequently, if a Manufactured Home is deemed subject to real estate title or
recording laws because the owner attaches it to its site or otherwise, the
Issuer's interest therein may be subordinated to the interests of others that
may claim an interest therein under applicable real estate laws.
The Issuer's security interest in a Manufactured Home would be
subordinate to, among others, subsequent purchasers for value of the
Manufactured Home and holders of perfected security interests therein, in either
case without notice of the Issuer's adverse interest in such Manufactured Home.
In the absence of fraud, forgery or affixation of the Manufactured Home to its
site by the Manufactured Home owner, or administrative error by state recording
officials, the notation of the lien on the related certificate of title or
delivery of the required documents and fees necessary to register the home or
the public filing of appropriate transfer instruments reflecting the lien of the
Participant, in each case as required under applicable state law, will be
sufficient to protect the Bondholders against the rights of subsequent
purchasers of a Manufactured Home or subsequent lenders who take a security
interest in the Manufactured Home.
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Certain of the Manufactured Home Loans ("Land Secured Loans") will
be secured by real estate as well as a Manufactured Home. The Issuer will cause
the liens created by the Land Secured Loans on the related real estate to be
assigned to the Trustee. The Manufactured Home Loan file for each Land Secured
Loan will be required to include an original or a certified copy of the recorded
Mortgage relating to the Land Secured Loan, together with originals or certified
copies of a chain of recorded assignments of the Mortgage sufficient to reflect
the Participant as the record holder of the Mortgage and the lien it evidences
on the related real estate. Assignments in recordable form for such Mortgages
naming the Trustee as assignee will not be prepared by the Servicer or the
Issuer. However, the Issuer will deliver to the Trustee a power of attorney
entitling the Trustee to prepare, execute and record such assignments of
Mortgages, in the event that recordation thereof becomes necessary to enable the
Servicer to foreclose on the related real property.
Under the laws of most states, in the event that a manufactured home
is moved to a state other than the state in which it initially is registered,
any perfected security interest in the manufactured home would continue
automatically for four months after relocation, during which time the security
interest must be re-perfected in the new state in order to remain perfected
after the four-month period. Generally, a security interest in such a
manufactured home may be re-perfected after the expiration of the four-month
period, but, for the period between the end of the four-month period and the
date of re-perfection, the security interest would be unperfected.
If a Manufactured Home is moved to a UCC State, an appropriate UCC
financing statement generally would have to be filed in such state within the
four-month period after the move in order for the Participant's security
interest in the Manufactured Home to remain perfected continuously. If a
Manufactured Home is moved to a Title State, re-perfection of a security
interest in such home generally would be accomplished by registering the
Manufactured Home with the Title State's motor vehicle authority. In the
ordinary course of servicing its portfolio of manufactured housing installment
sales contracts, the Servicer takes steps to re-perfect its security interests
in the related manufactured homes upon its receipt of notice of registration of
a home in a new state (which it should receive by virtue of the notation of its
lien on the original certificate of title, if the home is moved from a Title
State to a Title State) or of information from a related borrower as to
relocation of such home. In some Title States, the certificate of title to a
Manufactured Home (which is required to be in the Servicer's possession) must be
surrendered before the home can be re-registered; in such states a Borrower
could not re-register a Manufactured Home to a transferee without the Servicer's
assistance. In other Title States, when a Borrower under a Manufactured Home
Loan sells the related Manufactured Home (if it is located in a Title State both
before and after the sale), the Participant should at least receive notice of
any attempted re-registration thereof because its lien is noted on the related
certificate of the title and accordingly it should have the opportunity to
require satisfaction of the related Manufactured Home Loan before releasing its
lien on the home. If the motor vehicle authority of a Title State to which a
Manufactured Home is relocated or in which a Manufactured Home is located when
it is transferred registers the Manufactured Home in the name of the owner
thereof or the owner's transferee without noting the Participant's lien on the
related certificate of title, whether because (1) such state did not require the
owner to surrender the certificate of tile issued prior to the transfer or
issued by the Title State from which the home was moved or failed to notify the
Participant of re-registration and failed to note the Participant's lien on the
new certificate of title issued upon re-registration or (2) the Manufactured
Home was moved from a state that is not a Title State, re-registration could
defeat the perfection of the Participant's lien in the Manufactured Home. In
addition, re-registration of a Manufactured Home (whether due to a transfer or
relocation thereof) in a state, such as a UCC State, that does not require a
certificate of title for registration of a Manufactured Home, could defeat
perfection of the Participant's lien thereon.
If the Participant and the Servicer are not the same entity, the
Participant will be required to report to the Servicer any notice it receives of
any re-registration of a Manufactured Home. Under the related Servicing
Agreement, the Servicer is obligated to take all necessary steps, at its own
expense, to maintain perfection of the Trustee's security interests in the
Manufactured Homes, to the extent it received notice of relocation, sale or
re-registration thereof. However, the Servicer has no independent obligation to
monitor the status of the Participant's lien on any Manufactured Home.
Under the laws of most states, liens for repairs performed on a
manufactured home and for property taxes on a manufactured home take priority
even over a prior perfected security interest. Such liens could arise at any
time during the term of a Manufactured Home Loan. No notice will be given to the
Trustee or Bondholders in the event such a lien arises.
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ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Servicer, on behalf of the Trustee, to the extent required by
the related Servicing Agreement, may take action to enforce the security
interest with respect to Manufactured Home Loans in default by repossession and
resale of the Manufactured Homes securing the defaulted Manufactured Home Loans.
So long as the manufactured home has not become subject to the real estate laws
of a state, a creditor is entitled, in most states, to repossess a manufactured
home through the voluntary surrender thereof, by "self-help" repossession that
is "peaceful" (I.E., not including any breach of the peace) or, if the creditor
is unable to repossess through either of the foregoing means, by judicial
process. The holder of a Manufactured Home Loan must give the debtor a number of
days' notice, which varies depending on the state (usually ranging from 10 to 30
days depending on applicable state law), prior to commencement of any
repossession action. The UCC and consumer protection laws in most states place
restrictions on repossession sales; among other things, such laws require 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 prior to any
resale of a repossessed home so that the debtor may redeem the home at or before
such resale. In the event of repossession and resale of a Manufactured Home, the
Trustee would be entitled to receive the net proceeds of the resale up to the
amount of the Unpaid Principal Balance of the related Manufactured Home Loan
plus all accrued and unpaid interest thereon at the related Loan Rate.
Under applicable laws of most states, a creditor is entitled to
obtain a judgment against a debtor for any deficiency remaining after
repossession and resale of the manufactured home securing such debtor's loan.
However, obtaining and collecting deficiency judgments is seldom economically
feasible and, for that reason, the Participant generally has not attempted to
obtain deficiency judgments. In addition, some states impose prohibitions or
limitations on deficiency judgments, and certain other statutory provisions,
including federal and state bankruptcy and insolvency laws and general equitable
principles, the Relief Act and state laws affording relief to debtors, may
interfere with or affect the ability of a secured lender to repossess and resell
collateral or to enforce a deficiency judgment. For example, in certain
proceedings under the Federal Bankruptcy Code, when a court determines that the
value of a home is less than the principal balance of the loan it secures, the
court may prevent a lender from repossessing or foreclosing on the home, and, as
part of the debtor's rehabilitation plan, reduce the amount of the secured
indebtedness to the value of the home as it exists at the time of the
proceeding, leaving the lender as a general unsecured creditor for the
difference between that value and the amount of outstanding indebtedness. A
bankruptcy court may grant the debtor a reasonable time to cure a payment
default, and in the case of a manufactured housing installment sale contract not
secured by the debtor's principal residence, also may reduce the monthly
payments due under such contract, change the rate of interest and alter the
repayment schedule. Certain court decisions have applied such relief to claims
secured by the debtor's principal residence. If a court relieves a Borrower's
obligation to repay all or any portion of the amounts otherwise due on a
Manufactured Home Loan, the Servicer will not be required to advance such
amounts, and any loss in respect thereof may reduce amounts available for
payment on the related Bonds.
Under the terms of the federal Relief Act, a Borrower who enters
military service after the origination of such Borrower's Manufactured Home Loan
(including a Borrower who is a member of the National Guard or who is in reserve
status at the time of the origination of the Manufactured Home Loan and is later
called to active duty) may not be charged interest above a specified annual rate
during the period of the Borrower's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such action could
have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Manufactured Home
Loans. Any shortfall in interest collections resulting from the application of
the Relief Act, to the extent not covered by the subordination of a Class of
Subordinated Bonds, could result in losses to Bondholders. In addition, the
Relief Act imposes limitations that would impair the ability of the Servicer to
repossess or foreclose on the Manufactured Home securing an affected
Manufactured Home Loan during the Borrower's period of active duty status. Thus,
in the event that such a Manufactured Home Loan goes into default, there may be
delays and losses occasioned by the inability to liquidate the related
Manufactured Home in a timely fashion.
FORECLOSURE UNDER REAL PROPERTY LAWS
If a Manufactured Home has become attached to real estate to a
degree such that the home would be treated as real property under the laws of
the state in which it is located, it may not be legally permissible for the
Servicer to repossess the home under the provisions of the UCC or other
applicable personal property laws. If so, the Servicer could obtain possession
of the home only pursuant to real estate mortgage foreclosure laws. See "A
Mortgage Loans and Model Home Loans A Foreclosure" above. In addition, in order
to realize upon the Real Property securing any Land Secured Loan, the Servicer
49
must proceed under applicable state real estate mortgage foreclosure laws. The
requirements that the Servicer must meet in order to foreclose on the Real
Property securing a Land Secured Loan, and the restrictions on such foreclosure,
are identical to the requirements and restrictions that would apply to
foreclosure of any Mortgage Loan. For a description of such foreclosure, see "A
Mortgage Loans and Model Home Loans" above. Mortgage foreclosure generally is
accomplished through judicial action, rather than by private action as permitted
under personal property laws, and real estate laws generally impose stricter
notice requirements and require public sale of the collateral. In addition, real
estate mortgage foreclosure is usually far more time-consuming and expensive
than repossession under personal property laws, and applicable real estate law
generally affords debtors many more protections than are provided under personal
property laws. Rights of redemption under real estate laws generally are more
favorable to debtors than they are under personal property laws, and in many
states antideficiency judgment legislation will be applicable in the real estate
foreclosure context even if it would not apply to repossessions under personal
property laws. If real estate laws apply to a Manufactured Home, to the extent
the Participant has not perfected its security interest in a Manufactured Home
under applicable real estate laws, the Participant's security interest in the
Manufactured Home would be subordinate to a lien on the home recorded pursuant
to applicable real estate laws.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides, subject to certain
conditions described in the next sentence, that state usury limitations shall
not apply to any loan that is secured by a first lien on certain kinds of
manufactured housing. The Manufactured Home Loans would be covered under Title V
if they satisfy certain conditions governing, among other things, the terms of
any prepayments, late charges and deferral fees and requiring 30 days' prior
notice before the institution of any action leading to repossession of or
foreclosure with respect to the related manufactured home.
Title V authorized any state to reimpose limitations on interest
rates and finance charges by adopting a law or constitutional provision that
expressly rejects application of the federal law before April 1, 1983. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition, even
where the 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.
CONSUMER FINANCE LOANS
GENERAL
As a result of the pledge of the Consumer Finance Loans underlying a
Series to the related Trustee, the Trustee will succeed to all of the rights
(including the right to receive payments on the Consumer Finance Loans) of the
obligees under the Consumer Finance Loans. Each Consumer Finance Loan evidences
both (1) the obligation of the Borrower to repay the Loan evidenced thereby, and
(2) the grant of a security interest in the related Facilities to secure
repayment of the Consumer Finance Loan. Certain aspects of both features of the
Consumer Finance Loans are described more fully below.
The Consumer Finance Loans generally are "chattel paper" as defined
in the Uniform Commercial Code (the "UCC") in effect in the states in which the
Facilities are located. Under the Servicing Agreement, the Servicer will retain
possession of the chattel paper evidencing the Consumer Finance Loans as
custodian for the Trustee. Because the Servicer is not relinquishing possession
of the Consumer Finance Loans, the Servicer will file a UCC-1 financing
statement in the appropriate recording offices as necessary to perfect the
Trustee's interest in the Consumer Finance Loans. Notwithstanding such filings,
if, through negligence, fraud or otherwise, a subsequent purchaser from the
Participant or from a predecessor owner of the chattel paper evidencing the
Consumer Finance Loans were able to take physical possession of the Consumer
Finance Loans without notice of the pledge of the Consumer Finance Loans to the
Trustee, the Trustee's interest in the Consumer Finance Loans could be
subordinated to the interest of such purchaser. To provide a measure of
protection against this possibility, within ten days after the Closing Date,
unless otherwise specified in the related Prospectus Supplement, the documents
evidencing the Consumer Finance Loans will be stamped or marked otherwise to
reflect their pledge by the Issuer to the Trustee.
SECURITY INTERESTS IN THE FACILITIES
The Facilities securing the Consumer Finance Loans may be located in
single family residential properties in any or all of the 50 states and the
District of Columbia. The manner in which security interests in Facilities are
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"perfected" is governed by applicable state law. Generally, a security interest
in Facilities may be perfected by filing UCC financing statements or other
required transfer documents with appropriate offices. In connection with a
Series of Bonds secured by Consumer Finance Loans, the Participant will cause
the security interests created by the Consumer Finance Loans to be assigned to
the Issuer and, in turn, assigned to the Trustee. Unless otherwise specified in
the related Prospectus Supplement, however, because of the expense and
administrative inconvenience involved, neither the Participant nor the Issuer
will file any UCC transfer documents reflecting the assignment to the Trustee.
Generally, under the UCC, simple assignment of the security instrument created
by the Consumer Finance Loan constitutes an effective conveyance of the security
instrument without the filing of any statement under the UCC. In some states,
however, the law is unclear as to whether a security interest is effectively
assigned in the absence of filing an appropriate UCC transfer instrument. In
such a state, the assignment of the security interest created by a Consumer
Finance Loan in the related Facilities may not be effective against creditors of
the Participant or the Issuer or a trustee in bankruptcy of the Participant or
Issuer.
The Trustee's security interest in Facilities would be subordinate
to, among others, subsequent purchasers for value of the Facilities and holders
of perfected security interests therein, in either case without notice of the
Trustee's adverse interest in the Facilities. In the absence of fraud or
forgery, or administrative error by state recording officials, the public filing
of appropriate transfer instruments reflecting the lien of the Participant, in
each case as required under applicable state law, will be sufficient to protect
the Bondholders against the rights of subsequent purchasers of Facilities or
subsequent lenders who take a security interest in the Facilities from anyone
other than the Participant because they will be on notice of the interest in the
Facilities held by the Participant.
The Facilities consist of equipment, facilities and materials
(referred to as "goods" in this discussion) that will be installed in existing,
single family residential properties, and the goods may become "fixtures."
Generally, goods become fixtures under the UCC when they become so related to
particular real estate that an interest arises in them under the real estate law
of the applicable state. In order to perfect a security interest in goods (the
UCC provides that no security interest may exist in "ordinary building
materials" incorporated into an improvement to real estate), the Participant
will make a "fixture filing" under the applicable UCC, unless such a filing is
inadvisable under applicable state law. The Participant will also perfect a
security interest in the goods as personal property in the customary manner
required by the applicable UCC. With respect to a Series of Bonds secured by
Consumer Finance Loans, the Participant will assign its security interest in the
related goods to the Issuer, which will pledge them to the Trustee.
In most states, with respect to the installation of goods that
become fixtures in an existing single family residential property, a perfected
security interest in the goods will, with one exception, have priority over the
conflicting interest of an encumbrancer of the real estate, including the
mortgagee under a first lien mortgage secured by the related real estate, if (i)
the security interest was created in connection with the purchase of the goods,
(ii) the interest of the encumbrancer arises before the goods become fixtures,
(iii) the security interest is perfected by the fixture filing before the goods
become fixtures or within a specified time thereafter and (iv) the debtor has an
interest of record in or possession of the real estate. The exception is that a
perfected security interest in fixtures will not take priority over a
construction mortgage recorded before the goods become fixtures if the goods
become fixtures before completion of construction. In a very small minority of
states, a perfected security interest in goods that are or are to become
fixtures will not have priority over the conflicting interest of an encumbrancer
whose security interest in the related single family residential property was
perfected before the perfection of the security interest in the fixtures.
Under the laws of most states, liens for repairs performed on a home
and for property taxes on a home take priority even over a prior perfected
security interest. Such liens could arise at any time during the term of a
Consumer Finance Loan. No notice will be given to the Trustee or Bondholders in
the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS
The Servicer, on behalf of the Trustee, to the extent required by
the related Servicing Agreement, may take action to enforce the Trustee's
security interest with respect to Consumer Finance Loans in default.
If the goods securing a defaulted Consumer Finance Loan have not
become fixtures under applicable state law, the Servicer may remove and
repossess the goods subject to the requirements with respect to "peaceful
repossession," notice to the debtor of repossession and resale and rights of
redemption in the debtor discussed herein under "Certain Legal Aspects of the
Collateral -- Manufactured Home Loans -- Enforcement of Security Interests."
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If the goods constitute fixtures and the Trustee's security interest
in the related goods has priority over all other encumbrancers of the affected
single family residential property, on default the Servicer may remove and
repossess the goods (not including the related "ordinary building materials"),
subject to the requirements described in the preceding paragraph. In addition,
the Servicer must reimburse any encumbrancer who is not the debtor for the cost
of repair of any physical damage to the dwelling resulting from the removal of
fixtures, and the person entitled to reimbursement may refuse permission to
remove any fixtures unless the Servicer gives adequate security for the cost of
repair obligation.
If the Trustee's security interest in the goods does not have
priority over all other owners and encumbrancers of the affected real estate,
for example because a construction mortgage has priority, the Servicer may not
remove the goods under any circumstances in the case of a defaulted Consumer
Finance Loan.
Each Consumer Finance Loan will be made in an amount equal to the
cost of the purchase and installation of the goods, which amount will include
the cost of labor and may include "ordinary building materials" that cannot be
repossessed. In addition, the value of Facilities, to a greater extent than
Mortgaged Premises, is likely to decrease over time. Either or both of these
factors could cause the net proceeds of any resale on default to be inadequate
to pay off the Unpaid Principal Balance plus accrued and unpaid interest on the
related Consumer Finance Loan. Under applicable laws of most states, the
Servicer might be able to seek a judgment against the debtor for the deficiency,
but obtaining such judgments is seldom economically feasible, and, for that
reason, the Servicer is unlikely to pursue this course of action. In addition,
certain legal prohibitions or restrictions on deficiency judgments and other
laws affording protections to debtors, discussed above under "-- Manufactured
Home Loans -- Enforcement of Security Interests," may apply in the case of
Consumer Finance Loans.
Given that the Consumer Finance Loans involve relatively small
amounts, even with a perfected, first priority security interest, the Servicer
is likely to determine in many cases that the cost of removal of goods,
particularly if an obligation to pay cost of repairs exists, exceeds the net
proceeds that could be expected from a sale and, as a result, decline to remove
the goods. If the Servicer either declines or is not permitted to remove the
goods, the UCC provisions dealing with fixtures do not indicate how the Servicer
is to proceed. It is not clear whether under applicable state law the Trustee
would be able to share in the proceeds of a Foreclosure proceeding brought by an
encumbrancer of the real estate. If the Trustee's security interest in the goods
is not a first priority security interest, there may be little likelihood that
any Foreclosure proceeds would remain after payment of expenses and satisfaction
of the senior encumbrances. The Servicer may have the right to reduce the
Trustee's claim to judgment and proceed against the debtor's assets. For the
same reasons that the Servicer would be unlikely to seek a deficiency judgment
in the event of a repossession and resale, however, a legal proceeding against
the debtor frequently will not be economically feasible.
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to prevent a seller of goods pursuant to a consumer
credit contract (and certain related lenders and assignees) from transferring
the contract free of claims by the debtor thereunder against the seller. The
effect of this rule is to subject the assignee of a consumer credit contract to
all claims and defenses that the debtor could have asserted against the seller
under the contract. Assignee liability under this rule (which would be
applicable to the Trust, as pledgee of the Manufactured Home Loans or Consumer
Finance Loan) is limited to amounts paid by the debtor under the pledged Loan;
however, a borrower also may assert the rule to set off remaining amounts due
under such a Loan as a defense against a claim brought by the assignee of the
Loan against the borrower. Numerous other federal and state consumer protection
laws impose requirements applicable to the origination and lending in connection
with one or more types of the Collateral, including the Truth in Lending Act,
the Federal Trade Commission Act, the Magnuson-Moss Warranty A Federal Trade
Commission Improvement Act, the Fair Credit Reporting Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Uniform Consumer
Credit Code. The failure of the originator of Collateral to have complied with
the provisions of some of these laws may result in liability of the related
Trust to the Borrower thereunder or in a reduction of the amount payable under
the Collateral. However, the Participant (a) will be required to represent and
warrant that each item of Collateral it sells to the Issuer complied, at the
time of its origination, with all requirements of law and (b) will be required
to make certain representations and warranties as to each item of Collateral
concerning the validity, existence, perfection and priority of its security
interest in each underlying item of Collateral as of the related Cut-off Date. A
breach of any such representation or warranty that materially and adversely
affects a Trustee's interest in any item of Collateral would create an
obligation on the part of the Participant to use its best efforts to cure the
breach to the satisfaction of the Trustee or to repurchase the item of
Collateral. Nevertheless, this requirement may not eliminate the Trustee's
liability to a Borrower.
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ENVIRONMENTAL CONSIDERATIONS
Under the federal Comprehensive Environmental Response Compensation
and Liability Act, as amended, a secured party that takes a deed in lieu of
foreclosure, purchases Mortgaged Premises or Real Property at a foreclosure sale
or operates Mortgaged Premises or Real Property may become liable in certain
circumstances for the costs of remedial action ("Cleanup Costs") if hazardous
wastes or hazardous substances have been released or disposed of on the
Mortgaged Premises or Real Property. Such Cleanup Costs may be substantial. It
is possible that such Cleanup Costs could subject the Collateral to a lien and
reduce the amounts otherwise available to pay to the holders of the Bonds if
Mortgaged Premises or Real Property securing a Mortgage Loan were acquired by
the Trustee through foreclosure or deed in lieu of foreclosure and if such
Cleanup Costs were incurred. Moreover, some states impose a lien for any Cleanup
Costs incurred by that State on the Mortgaged Premises that are subject of such
Cleanup Costs (a "Superlien"). All subsequent liens on such Mortgaged Premises
(but not prior recorded liens) are subordinated to such Superlien. The security
interest of the Trustee in Mortgaged Premises subject to such a Superlien could
be adversely affected.
No representations or warranties are made by the Participant or
Issuer as to the absence or effect of hazardous wastes or hazardous substances
on any of the Mortgaged Premises. In addition, the Servicers have not made any
representations or warranties or assumed any liability with respect to the
absence or effect of hazardous wastes or hazardous substances on any Mortgaged
Premises or any casualty resulting from the presence or effect of hazardous
wastes or hazardous substances and any loss or liability resulting from the
presence or effect of such hazardous wastes or hazardous substances will reduce
the amounts otherwise available to pay to the holders of the Bonds.
The Servicers are not permitted to foreclose on any Mortgaged
Premises without the approval of the Master Servicer. The Master Servicer is not
permitted to approve foreclosure on any property that it knows or has reason to
know is contaminated with or affected by hazardous wastes or hazardous
substances. The Master Servicer is required to inquire of any Servicer
requesting approval of Foreclosure whether the property proposed to be
foreclosed upon is so contaminated. If a Servicer does not foreclose on Mortgage
Premises, the amounts otherwise available to pay to the holders of the Bonds may
be reduced. A Servicer will not be liable to the holders of the Bonds if it
fails to foreclose on Mortgaged Premises that it reasonably believes may be so
contaminated or affected, even if such Mortgaged Premises are, in fact, not so
contaminated or affected. Similarly, a Servicer will not be liable to the
Bondholders if, based on its reasonable belief that no such contamination or
effect exists, the Servicer forecloses on Mortgaged Premises and takes title to
such Mortgaged Premises, and thereafter such Mortgaged Premises are determined
to be so contaminated or affected.
ENFORCEABILITY OF CERTAIN PROVISIONS
The standard forms of mortgage, deed of trust, Manufactured Home
Loan, Consumer Finance Loan or Note used by the originators of Loans 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 late charges that 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. Under each Series Supplement, late charges and prepayment fees on the
related Collateral (to the extent permitted by law and not waived by the
Servicer) will be retained by the Servicer as additional servicing compensation.
THE ISSUER
The Issuer was incorporated in Virginia on August 19, 1994. It is a
wholly-owned, limited-purpose financing subsidiary of IHC and an indirect
subsidiary of Dynex Capital, Inc., formerly named Resource Mortgage Capital,
Inc. The Issuer's principal office is located at 10900 Nuckols Road, Glen Allen,
Virginia 23060, telephone (804) 217-5800. The Issuer exists solely for the
purpose of facilitating the financing and sale of loans involving residential
housing, such as the Mortgage Loans, Model Home Loans, Manufactured Home Loans
and Consumer Finance Loans. It does not intend to engage in any business or
investment activities other than issuing and selling securities secured
53
primarily by loans involving residential housing, and taking certain action with
respect thereto. Dynex and IHC have agreed not to file a petition in bankruptcy
with respect to the Issuer. The Issuer's Articles of Incorporation, which have
been filed as an Exhibit to the Registration Statement of which this Prospectus
forms a part, limit the Issuer's business to the foregoing and place certain
other restrictions on the Issuer's activities.
Under the Indenture, the Issuer is responsible for certain
administrative and accounting matters relating to the outstanding Bonds. It is
intended that Dynex will perform these services on behalf of the Issuer and will
be paid a fee for its services relating to the administration of a Series.
IHC is a wholly-owned subsidiary of Dynex. IHC exists solely
for the purpose of holding the stock of one or more entities that issue
securities.
Dynex is a self-managed real estate investment trust that purchases
and securitizes loans associated primarily with residential (including
multifamily) properties and invests in securities backed by such loans. Dynex
was incorporated in Virginia in December 1987. Dynex's principal office is
located at 10900 Nuckols Road, Glen Allen, Virginia 23060, telephone (804)
217-5800.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of the Bonds is based on
advice provided to the Issuer by Hunton & Williams. With respect to each Series
of Bonds, counsel to the Issuer will be identified in the related Prospectus
Supplement. See "Certain Federal Income Tax Consequences" in the related
Prospectus Supplement. The summary is based upon the provisions of the Code, the
regulations promulgated thereunder, and the judicial and administrative rulings
and decisions now in effect or (with respect to regulations) proposed, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this summary 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, nor with certain categories of investors subject to
special treatment under the federal income tax laws. This summary focuses
primarily upon investors who will hold Bonds as "capital assets," (generally,
property held for investment) within the meaning of Section 1221 of the Code,
but much of the discussion is applicable to other investors as well. The summary
does not purport to address the anticipated state income tax consequences to
investors of owning and disposing of the Bonds. Consequently, potential
purchasers of Bonds are advised to consult their own tax advisors concerning the
federal, state or local tax consequences to them of the purchase, holding, and
disposition of the Bonds.
No election will be made to treat any Series of Bonds as a real
estate mortgage investment conduit ("REMIC") or a financial asset securitization
investment trust ("FASIT"). There are no regulations, published rulings or
judicial decisions involving the characterization for federal income tax
purposes of securities with terms substantially the same as the Bonds. However,
with respect to each Series of Bonds, counsel to the Issuer will advise the
Issuer that, based upon the facts as they exist at the time the opinion is
issued (which may precede the issuance of certain Classes of Bonds for federal
income tax purposes), in the firm's opinion the Bonds will be treated for
federal income tax purposes as indebtedness of the Issuer, and not as an
ownership interest in the Collateral, or an equity interest in the Issuer or in
a separate association taxable as a corporation. That opinion will be based on
existing law, but there can be no assurance that the law will not change or that
contrary positions will not be taken by the Internal Revenue Service (the
"Service").
Taxable mortgage pool ("TMP") rules treat certain arrangements that
securitize real estate mortgages as taxable corporations. An entity will be
characterized as a TMP if (i) substantially all of its assets are debt
obligations and more than 50 percent of such debt obligations consist of real
estate mortgages or interests therein, (ii) the entity is the obligor under debt
obligations with two or more maturities, and (iii) payments on the debt
obligations referred to in (ii) bear a relationship to payments on the debt
obligations referred to in (i). Furthermore, a group of assets held by an entity
can be treated as a separate TMP if the assets are expected to produce
significant cash flow that will support one or more of the entity's issues of
debt obligation.
54
It is likely that the Issuer or the portion of the Issuer relating
to the ownership of the Mortgage Collateral and the issuance of the Bonds will
satisfy the foregoing requirements and will be treated as a TMP. Such
characterization would require that the Issuer be treated as a "separate"
corporation and not includible with any other corporation, therefore subjecting
the Issuer to corporate income tax. However, because the Issuer is also a
"qualified REIT subsidiary" (as defined in Section 856(i)(2) of the Code) of
Dynex, which itself is a REIT, characterization of the Issuer as a TMP will
result only in the shareholders of Dynex being required to include in income, as
"excess inclusion" income, some or all of their allocable share of the Issuer's
net income that would be excess inclusion income, if any, if the Issuer were
treated as a REMIC. Such characterization will not result in entity-level,
corporate income taxation with respect to the Issuer. If the Issuer were to fail
to continue to be treated as a qualified REIT subsidiary by reason of Dynex's
failure to continue to qualify as a REIT for federal income tax purposes or for
any other reason, the net income of the Issuer would be subject to corporate
income tax and the Issuer would not be permitted to be included on a
consolidated income tax return of another corporate entity. No assurance can be
given with regard to the prospective qualification of the Issuer as a qualified
REIT subsidiary or of Dynex as a REIT for federal income tax purposes.
In addition, if the Service were to make and prevail upon the
contention that a Class of Bonds did not constitute indebtedness for federal
income tax purposes, such Bonds could be treated as equity interests in an
association taxable as a corporation, which would result in the imposition of a
federal income tax at the entity level. The imposition of such a tax could
result in a delay or shortfall in payments on the Bonds. The Issuer may redeem a
Class or Classes of Bonds at any time upon a determination by the Issuer, based
upon an opinion of counsel, that a substantial risk exists that the Bonds of the
Class to be redeemed will not be treated for federal income tax purposes as
evidences of indebtedness. Such redemption could occur when a Bondholder could
not reinvest the proceeds at an interest rate at least equal to the applicable
Class Interest Rate.
Because, in Counsel's opinion, the Bonds will be treated as
evidences of indebtedness for federal income tax purposes and not as ownership
interests in the Collateral, Bondholders should be aware that (i) Bonds held by
a mutual savings bank or domestic building and loan association will not
represent interests in "qualifying real property loans" within the meaning of
Code Section 593(d)(1); (ii) Bonds held by a domestic building and loan
association will not constitute "loans secured by an interest in real property,"
within the meaning of Code Section 7701(a)(19)(C)(v); (iii) Bonds held by a REIT
will not constitute "real estate assets" or "government securities" within the
meaning of Code Section 856(c)(5)(A); and (iv) income derived from the Bonds
will not be considered "interest on obligations secured by mortgages on real
property or on interests in real property" within the meaning of Code Section
856(c)(3)(B). Bonds held by a regulated investment company (a "RIC") will not
constitute "government securities" within the meaning of section 851
(b)(4)(A)(i) of the Code.
Payments received by Bondholders on the Bonds generally should be
accorded the same tax treatment under the Code as payments received on other
taxable corporate bonds. Except as described below for Bonds issued with
original issue discount, market discount, or premium, interest paid or accrued
on a Bond will be treated as ordinary income to the Bondholder and a principal
payment on a Bond will be treated as a return of capital to the extent that the
Bondholder's basis in the Bond is allocable to that payment. In general,
interest paid to Bondholders who report their income on the cash receipts and
disbursements method should be taxable to them when received. Interest earned by
Bondholders who report their income on the accrual method will be taxable when
accrued, regardless of when it is actually received. The Trustee will report
annually to the Internal Revenue Service and to Bondholders of record with
respect to interest paid or accrued, market discount, and original issue
discount, if any, accrued on the Bonds.
One or more Classes of Bonds may be subordinated to one or more
other Classes of Bonds of the same Series. In general, such subordination should
not affect the federal income tax treatment of either the Subordinated or the
Senior Bonds. Employee benefit plans subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), should consult their tax advisors
before purchasing any Subordinated Bond. See "ERISA Considerations" herein and
in the Prospectus Supplement.
ORIGINAL ISSUE DISCOUNT
GENERAL
Discount Bonds, Accretion Bonds, and certain other Classes of Bonds
will be issued with "original issue discount" within the meaning of Section
1273(a) of the Code. In general such original issue discount will equal the
difference between the "stated redemption price at maturity" of the Bond
(generally, its principal amount) and its issue price. Original issue discount
55
is treated as ordinary interest income, and Holders of Bonds with original issue
discount generally must include the amount of original issue discount in income
in advance of the receipt of the cash to which it relates.
The amount of original issue discount required to be included in a
Bondholder's income in any taxable year will be computed in accordance with
Section 1272(a)(6) of the Code, which provides rules for the accrual of original
issue discount under a constant yield method for certain debt instruments, such
as the Bonds, that are subject to prepayment by reason of prepayments of
underlying obligations. Under Section 1272(a)(6), the amount and rate of accrual
of original issue discount on a Bond generally is to be calculated based on (i)
a single constant yield to maturity and (ii) the Mortgage Collateral prepayment
rate and the reinvestment rate on amounts held pending distribution that were
assumed in pricing the Bond (the "Pricing Prepayment Assumptions"). No
regulatory guidance currently exists under Code Section 1272(a)(6). Accordingly,
until the Treasury issues guidance to the contrary, the Master Servicer or other
person responsible for computing the amount of original issue discount to be
reported to a Bondholder each taxable year (the "Tax Administrator"), except as
otherwise provided herein, expects to base its computations on Code Section
1272(a)(6) and final regulations governing the accrual of original issue
discount on debt instruments that do not address directly the treatment of
instruments that are subject to Code Section 1272(a)(6) (the "OID Regulations").
However, there can be no assurance that such methodology, which is described
below, represents the correct manner of calculating original issue discount on
the Bonds. The Tax Administrator intends to account for income on certain Bonds
that provide for one or more contingent payments as described in " -- Interest
Weighted Bonds and Non-VRDI Bonds" herein.
The amount of original issue discount on a Bond equals the excess,
if any, of the Bond's "stated redemption price at maturity" over its "issue
price." Under the OID Regulations, a debt instrument's stated redemption price
at maturity is the sum of all payments provided by the instrument other than
"qualified stated interest" ( "Deemed Principal Payments"). Qualified stated
interest, in general, is stated interest that is unconditionally payable in cash
or property (other than debt instruments of the issuer) at least annually at (i)
a single fixed rate or (ii) a variable rate that meets certain requirements set
out in the OID Regulations. See " -- Variable Rate Bonds." Thus, in the case of
any Bond providing for such stated interest other than an Accretion Bond, the
stated redemption price at maturity generally will equal the total amount of all
Deemed Principal Payments due on that Bond. Because an Accretion Bond generally
does not require unconditional payments of interest at least annually, the
stated redemption price at maturity of such a Bond will equal the aggregate of
all payments due, whether designed as principal, accrued interest, or current
interest. The issue price of a Bond generally will equal the initial price at
which a substantial amount of such Bonds is sold to the public.
Under a DE MINIMIS rule, a Bond will be considered to have no
original issue discount if the amount of original issue discount is less than
0.25% of the Bond `s stated redemption price at maturity multiplied by the
weighted average maturity ("WAM") of the Bond. For that purpose, the WAM of a
Bond is the sum of the amounts obtained by multiplying the amount of each Deemed
Principal Payment by a fraction, the numerator of which is the number of
complete years from the Bond `s issue date until the payment is made, and the
denominator of which is the Bond's stated redemption price at maturity. Although
no Treasury regulations have been issued under the relevant provisions of the
1986 Act, it is expected that the WAM of a Bond will be computed using the
Pricing Prepayment Assumptions. A Bondholder will include de minimis original
issue discount in income on a pro rata basis as stated principal payments on the
Bond are received or, if earlier, upon disposition of the Bond, unless the
Bondholder makes an "All OID Election" (as defined below).
Bonds of certain Series may bear interest under terms that provide
for a teaser rate period, interest holiday, or other period during which the
rate of interest payable on the Bonds is lower than the rate payable during the
remainder of the life of the Bonds ("Teaser Bonds"). The OID Regulations provide
a more expansive test under which a Teaser Bond may be considered to have a de
minimis amount of original issue discount even though the amount of the original
issue discount on the Bond would be more than de minimis as determined under the
regular test. The expanded test applies to a Teaser Bond only if the stated
interest on such Bond would be qualified stated interest but for the fact that
during one or more accrual periods its interest rate is below the rate
applicable for the remainder of its term. Under the expanded test, the amount of
original issue discount on a Teaser Bond that is measured against the de minimis
amount of original issue discount allowable on the Bond is the greater of (i)
the excess of the stated principal amount of the Bond over its issue price
("True Discount") and (ii) the amount of interest that would be necessary to be
payable on the Bond in order for all stated interest to be qualified stated
interest (the "Additional Interest Amount").
56
The holder of a Bond generally must include in gross income the sum,
for all days during his taxable year on which he holds the Bond, of the "daily
portions" of the original issue discount on such Bond. In the case of an
original holder of a Bond, the daily portions of original issue discount with
respect to such Bond generally will be determined by allocating to each day in
any accrual period the Bond's ratable portion of the excess, if any, of (i) the
sum of (a) the present value of all payments under the Bond yet to be received
as of the close of such period and (b) the amount of any Deemed Principal
Payments received on the Bond during such period over (ii) the Bond's "adjusted
issue price" at the beginning of such period. The present value of payments yet
to be received on a Bond is computed by using the Pricing Prepayment Assumptions
and the Bond's original yield to maturity (adjusted to take into account the
length of the particular accrual period), and taking into account Deemed
Principal Payments actually received on the Bond prior to the close of the
accrual period. The adjusted issue price of a Bond at the beginning of the first
accrual period is its issue price. The adjusted issue price at the beginning of
each subsequent period is the adjusted issue price of the Bond at the beginning
of the preceding period increased by the amount of original issue discount
allocable to that period and decreased by the amount of any Deemed Principal
Payments received during that period. Thus, an increased (or decreased) rate of
prepayments received with respect to a Bond will be accompanied by a
correspondingly increased (or decreased) rate of recognition of original issue
discount by the holder of such Bond.
The yield to maturity of a Bond is calculated based on (i) the
Pricing Prepayment Assumptions and (ii) any contingencies not already taken into
account under the Pricing Prepayment Assumptions that, considering all the facts
and circumstances as of the issue date, are more likely than not to occur.
Contingencies, such as the exercise of "mandatory redemptions," that are taken
into account by the parties in pricing the Bond typically will be subsumed in
the Pricing Prepayment Assumptions and thus will be reflected in the Bond's
yield to maturity. The Tax Administrator's determination of whether a
contingency relating to a Class of Bonds is more likely than not to occur is
binding on each holder of a Bond of such Class unless the holder explicitly
discloses on its federal income tax return that its determination of the yield
and maturity of the Bond is different from that of the Tax Administrator.
In many cases, Bonds will be subject to optional redemption before
their stated maturity dates. Under the OID Regulations, the Issuer will be
presumed to exercise its option to redeem for purposes of computing the accrual
of original issue discount if, and only if, by using the optional redemption
date as the maturity date and the optional redemption price as the stated
redemption price at maturity, the yield to maturity of the Bonds is lower than
it would be if the Bonds were not redeemed early. If the Issuer is presumed to
exercise its option to redeem the Bonds, original issue discount on such Bonds
will be calculated as if the redemption date were the maturity date and the
optional redemption price were the stated redemption price at maturity. In cases
in which all of the Bonds of a particular Series are issued at par or at a
discount, the Issuer will not be presumed to exercise its option to redeem the
Bonds because a redemption by the Issuer would not lower the yield to maturity
of the Bonds. If, however, some Bonds of a particular Series are issued at a
premium, the Issuer may be able to lower the yield to maturity of the Bonds by
exercising its redemption option. In determining whether the Issuer will be
presumed to exercise its option to redeem Bonds when one or more Classes of the
Bonds is issued at a premium, the Tax Administrator will take into account all
Classes of Bonds that are subject to the optional redemption to the extent that
they are expected to remain outstanding as of the optional redemption date,
based on the Pricing Prepayment Assumptions. If, determined on a combined
weighted average basis, the Bonds of such Classes were issued at a premium, the
Tax Administrator will presume that the Issuer will exercise its option.
However, the OID Regulations are unclear as to how the redemption presumption
rules should apply to instruments such as the Bonds, and there can be no
assurance that the Service will agree with the Tax Administrator's position.
The OID Regulations provide that a Bondholder generally may make an
election (an "All OID Election") to include in gross income all stated interest,
original issue discount, de minimis original issue discount, market discount (as
described below under " -- Market Discount"), and de minimis market discount
that accrues on the Bond (as reduced by any amortizable premium, as described
below under "Amortizable Premium," or acquisition premium, as described below)
under the constant yield method used to account for original issue discount. To
make an All OID Election, the holder of the Bond must attach a statement to its
timely filed federal income tax return for the taxable year in which the holder
acquired the Bond. The statement must identify the instruments to which the
election applies. An All OID Election is irrevocable unless the holder obtains
the consent of the Service. If an All OID Election is made for a debt instrument
with market discount, the holder is deemed to have made an election to include
in income currently the market discount on all of the holder's other debt
instruments with market discount, as described in " -- Market Discount" below.
In addition, if an All OID Election is made for a debt instrument with
amortizable premium, the holder is deemed to have made an election to amortize
57
the premium on all of the holder's other debt instruments with amortizable
premium under the constant yield method. See " -- Amortizable Premium."
Bondholders should be aware that the law is unclear as to whether an All OID
Election is effective for a Bond that is subject to the contingent payment
rules. See " -- Interest Weighted Bonds and Non-VRDI Bonds."
A Bond having original issue discount may be acquired in a
transaction subsequent to its issuance for more than its adjusted issue price.
If the subsequent holder's adjusted basis in such a Bond, immediately after its
acquisition, exceeds the sum of all Deemed Principal Payments to be received on
the Bond after the acquisition date, the Bond will no longer have original issue
discount, and the holder may be entitled to reduce the amount of interest income
recognized on the Bond by the amount of amortizable premium. See "Amortizable
Premium." If the subsequent holder's adjusted basis in the Bond immediately
after the acquisition exceeds the adjusted issue price of the Bond, but is less
than or equal to the sum of the Deemed Principal Payments to be received under
the Bond after the acquisition date, the amount of original issue discount on
the Bond will be reduced by a fraction, the numerator of which is the excess of
the Bond's adjusted basis immediately after its acquisition over the adjusted
issue price of the Bond and the denominator of which is the excess of the sum of
all Deemed Principal Payments to be received on the Bond after the acquisition
date over the adjusted issue price of the Bond. For that purpose, the adjusted
basis of a Bond generally is reduced by the amount of any qualified stated
interest that is accrued but unpaid as of the acquisition date. Alternately, the
subsequent purchaser of a Bond having original issue discount may make an All
OID Election with respect to the Bond.
If the interval between the issue date of a Current Interest Bond
and the first Distribution Date (the "First Distribution Period") contains more
days than the number of days of stated interest that are payable on the first
Distribution Date, the effective interest rate received by the Bondholder during
the first Distribution Period will be less than the Bond's stated interest rate
making such Bond a Teaser Bond. If the amount of original issue discount on the
Bond measured under the expanded de minimis test exceeds the de minimis amount
of original issue discount allowable on the Bond, the amount by which the stated
interest on the Bond exceeds the interest that would be payable on the Bond at
the effective rate of interest for the First Distribution Period (the
"Nonqualified Interest Amount") would be treated as part of the Bond's stated
redemption price at maturity. Accordingly, the holder of a Teaser Bond may be
required to recognize ordinary income arising from original issue discount
attributable to the First Distribution Period in addition to any qualified
stated interest that accrues in that period.
Similarly, if the First Distribution Period is shorter than the
interval between subsequent Distribution Dates, the effective rate of interest
payable on a Bond during the First Distribution Period will be higher than the
stated rate of interest if a Bondholder receives interest on the first
Distribution Date based on a full accrual period. Unless the "Pre-Issuance
Accrued Interest Rule" described below applies, such Bond (a "Rate Bubble Bond")
would be issued with original issue discount unless the amount of original issue
discount is de minimis. The amount of original issue discount on a Rate Bubble
Bond attributable to the First Distribution Period would be the amount by which
the interest payment due on the first Distribution Date exceeds the amount that
would have been payable had the effective rate for that Period been equal to the
stated interest rate. However, under the Pre-Issuance Accrued Interest Rule, if
(i) a portion of the initial purchase price of a Rate Bubble Bond is allocable
to interest that has accrued under the terms of the Bond prior to its issue date
("Pre-Issuance Accrued Interest") and (ii) the Bond provides for a payment of
stated interest on the first payment date within one year of the issue date that
equals or exceeds the amount of the Pre-Issuance Accrued Interest, the Bond's
issue price may be computed by subtracting from the issue price the amount of
Pre-Issuance Accrued Interest. If the Bondholder opts to apply the Pre-Issuance
Accrued Interest Rule, the portion of the interest received on the first
Distribution Date equal to the Pre-Issuance Accrued Interest would be treated as
a return of such interest and would not be treated as a payment on the Bond.
Thus, where the Pre-Issuance Accrued Interest Rule applies, a Rate Bubble Bond
will not have original issue discount attributable to the First Distribution
Period, provided that the increased effective interest rate for that Period is
attributable solely to Pre-Issuance Accrued Interest, as typically will be the
case. The Tax Administrator intends to apply the Pre-Issuance Accrued Interest
Rule to each Rate Bubble Bond for which it is available if the Bond `s stated
interest otherwise would be qualified stated interest. If, however, the First
Distribution Period of a Rate Bubble Bond is longer than subsequent Distribution
Periods, the application of the Pre-Issuance Accrued Interest Rule typically
will not prevent disqualification of the Bond's stated interest because its
effective interest rate during the First Distribution Period typically will be
less than its stated interest rate. Thus, a Bond with a long First Distribution
Period typically will be a Teaser Bond, as discussed above. The Pre-Issuance
Accrued Interest Rule will not apply to any amount paid at issuance for such a
Teaser Bond that is normally allocable to interest accrued under the terms of
58
such Bond before its issue date. All amounts paid for such a Teaser Bond at
issuance, regardless of how designated, will be included in the issue price of
such Bond for federal income tax accounting purposes.
It is not entirely clear how income should be accrued with respect
to Bonds, the payments on which consist entirely or primarily of a specified
nonvarying portion of the interest payable on one or more Mortgage Loans
("Interest Weighted Bonds"). Unless and until the Service provides contrary
administrative guidance on the income tax treatment of an Interest Weighted
Bond, the Tax Administrator will take the position that an Interest Weighted
Bond does not bear qualified stated interest, and will account for the income
thereon as described in " -- Interest Weighted Bonds and Non-VRDI Bonds" herein.
Some Interest Weighted Bonds may provide for a relatively small amount of
principal and for interest that can be expressed as qualified stated interest at
a very high fixed rate with respect to that principal ("Superpremium Bonds").
Superpremium Bonds technically are issued with amortizable premium. However,
because of their close similarity to other Interest Weighted Bonds it appears
more appropriate to account for Superpremium Bonds in the same manner as for
other Interest Weighted Bonds. Consequently, in the absence of further
administrative guidance, the Tax Administrator intends to account for
Superpremium Bonds in the same manner as other Interest Weighted Bonds. However,
there can be no assurance that the Service will not assert a position contrary
to that taken by the Tax Administrator, and, therefore, holders of Superpremium
Bonds should consider making a protective election to amortize premium on such
Bonds.
In view of the complexities and current uncertainties as to the
manner of inclusion in income of original issue discount on the Bonds, each
investor should consult his own tax advisor to determine the appropriate amount
and method of inclusion in income of original issue discount on the Bonds for
federal income tax purposes.
VARIABLE RATE BONDS
A Bond may pay interest at a variable rate (a "Variable Rate Bond").
A Variable Rate Bond that qualifies as a "variable rate debt instrument" as that
term is defined in the OID Regulations (a "VRDI") will be governed by the rules
applicable to VRDIs in the OID Regulations, which are described below. A
Variable Rate Bond qualifies as a VRDI under the OID Regulations if (i) the Bond
is not issued at a premium to its noncontingent principal amount in excess of
the lesser of (a) .015 multiplied by the product of such noncontingent principal
amount and the WAM (as that term is defined above in the discussion of the de
minimis rule) of the Bond or (b) 15 percent of such noncontingent principal
amount (an "Excess Premium"); (ii) stated interest on the Bond compounds or is
payable unconditionally at least annually at (a) one or more qualified floating
rates, (b) a single fixed rate and one or more qualified floating rates, (c) a
single "objective rate," or (d) a single fixed rate and a single objective rate
that is a "qualified inverse floating rate," and (iii) the qualified floating
rate or the objective rate in effect during an accrual period is set at a
current value of that rate (i.e. , the value of the rate on any day occurring
during the interval that begins three months prior to the first day on which
that value is in effect under the Bond and ends one year following that day).
However, if the Variable Rate Bond provides for any contingent payments (which
do not include qualified stated interest), the Tax Administrator intends to
account for the income thereon as described in " -- Interest Weighted Bonds and
Non-VRDI Bonds" herein.
Under the OID Regulations, a rate is a qualified floating rate if
variations in the rate reasonably can be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the debt
instrument is denominated. A qualified floating rate may measure contemporaneous
variations in borrowing costs for the issuer of the debt instrument or for
issuers in general. A multiple of a qualified floating rate is considered a
qualified floating rate only if the rate is equal to either (a) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (b) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate. If a Bond provides for two or more qualified floating
rates that reasonably can be expected to have approximately the same values
throughout the term of the Bond, the qualified floating rates together will
constitute a single qualified floating rate. Two or more qualified floating
rates conclusively will be presumed to have approximately the same values
throughout the term of a Bond, if the values of all such rates on the issue date
of the Bond are within 25 basis points of each other.
A variable rate will be considered a qualified floating rate if it
is subject to a restriction or restrictions on the maximum stated interest rate
(a "Cap"), a restriction or restrictions on the minimum stated interest rate (a
"Floor"), a restriction or restrictions on the amount of increase or decrease in
the stated interest rate (a "Governor"), or other similar restriction only if:
(a) the Cap, Floor, or Governor is fixed throughout the term of the related Bond
59
or (b) the Cap, Floor, Governor, or similar restriction is not reasonably
expected, as of the issue date, to cause the yield on the Bond to be
significantly less or significantly more than the expected yield on the Bond
determined without such Cap, Floor, Governor, or similar restriction, as the
case may be. Although the OID Regulations are unclear, it appears that a VRDI,
the principal rate on which is subject to a Cap, Floor, or Governor that itself
is a qualified floating rate, bears interest at an objective rate.
Under the OID Regulations, an objective rate is a rate (other than a
qualified floating rate) that (i) is determined using a single fixed formula,
(ii) is based on objective financial or economic information, and (iii) is not
based on information that either is within the control of the issuer (or a
related party) or is unique to the circumstances of the issuer (or related
party), such as dividends, profits, or the value of the issuer's (or related
party's) stock. That definition would include a rate that is based on changes in
a general inflation index. In addition, a rate would not fail to be an objective
rate merely because it is based on the credit quality of the issuer.
Under the OID Regulations if interest on a Variable Rate Bond is
stated at a fixed rate for an initial period of less than one year followed by a
variable rate that is either a qualified floating rate or an objective rate for
a subsequent period, and the value of the variable rate on the issue date is
intended to approximate the fixed rate, the fixed rate and the variable rate
together constitute a single qualified floating rate or objective rate. A
variable rate conclusively will be presumed to approximate an initial fixed rate
if the value of the variable rate on the issue date does not differ from the
value of the fixed rate by more than 25 basis points.
Under the OID Regulations, all interest payable on a Variable Rate
Bond that qualifies as a VRDI and provides for stated interest unconditionally
payable in cash or property at least annually at a single qualified floating
rate or a single objective rate (a "Single Rate VRDI Bond") is treated as
qualified stated interest. The amount and accrual of OID on a Single Rate VRDI
Bond is determined, in general, by converting such Bond into a hypothetical
fixed rate bond and applying the rules applicable to fixed rate bonds described
under "Original Issue Discount" above to such hypothetical fixed rate bond.
Qualified stated interest or original issue discount allocable to an accrual
period with respect to a Single Rate VRDI Bond also must be increased (or
decreased) if the interest actually accrued or paid during such accrual period
exceeds (or is less than) the interest assumed to be accrued or paid during such
accrual period under the related hypothetical fixed rate bond.
Except as provided below, the amount and accrual of OID on a
Variable Rate Bond that qualifies as a VRDI but is not a Single Rate VRDI Bond
(a "Multiple Rate VRDI Bond") is determined by converting such Bond into a
hypothetical equivalent fixed rate bond that has terms that are identical to
those provided under the Multiple Rate VRDI Bond, except that such hypothetical
equivalent fixed rate bond will provide for fixed rate substitutes in lieu of
the qualified floating rates or objective rates provided for under the Multiple
Rate VRDI Bond. A Multiple Rate VRDI Bond that provides for a qualified floating
rate or rates or a qualified inverse floating rate is converted to a
hypothetical equivalent fixed rate bond by assuming that each qualified floating
rate or the qualified inverse floating rate will remain at its value as of the
issue date. A Multiple Rate VRDI Bond that provides for an objective rate or
rates is converted to a hypothetical equivalent fixed rate bond by assuming that
each objective rate will equal a fixed rate that reflects the yield that
reasonably is expected for the Multiple Rate VRDI Bond. Qualified stated
interest or original issue discount allocable to an accrual period with respect
to a Multiple Rate VRDI Bond must be increased (or decreased) if the interest
actually accrued or paid during such accrual period exceeds (or is less than)
the interest assumed to be accrued or paid during such accrual period under the
hypothetical equivalent fixed rate bond.
Under the OID Regulations, the amount and accrual of OID on a
Multiple Rate VRDI Bond that provides for stated interest at either one or more
qualified floating rates or at a qualified inverse floating rate and in addition
provides for stated interest at a single fixed rate (other than an initial fixed
rate that is intended to approximate the subsequent variable rate) is determined
using the method described above for all other Multiple Rate VRDI Bonds except
that prior to its conversion to a hypothetical equivalent fixed rate bond, such
Multiple Rate VRDI Bond is treated as if it provided for a qualified floating
rate (or a qualified inverse floating rate), rather than the fixed rate. The
qualified floating rate (or qualified inverse floating rate) replacing the fixed
rate must be such that the fair market value of the Multiple Rate VRDI Bond as
of its issue date would be approximately the same as the fair market value of an
otherwise identical debt instrument that provides for the qualified floating
rate (or qualified inverse floating rate), rather than the fixed rate.
Bonds of certain Series may provide for interest based on a weighted
average of the interest rates on some or all of the Mortgage Loans securing such
Bonds ("Weighted Average Bonds"). Under the OID Regulations, it appears that
Weighted Average Bonds secured by Mortgage Loans that are exclusively ARM Loans
60
bear interest at an "objective rate" provided the ARM Loans themselves bear
interest at qualified floating rates. However, under the OID Regulations,
Weighted Average Bonds secured by Mortgage Loans that do not bear interest at
qualified floating rates ("Non-Objective Weighted Average Bonds" or NOWA Bonds")
do not bear interest at an objective or a qualified floating rate and,
consequently, do not qualify as VRDIs. Accordingly, unless and until the Service
provides contrary administrative guidance on the income tax treatment of NOWA
Bonds, the Tax Administrator intends to treat such Bonds as debt obligations
that provide for one or more contingent payments, and will account for the
income thereon as described in " -- Interest Weighted Bonds and Non-VRDI Bonds"
herein.
Bonds of certain Series may provide for the payment of interest at a
rate determined as the difference between two interest rate parameters, one of
which is a variable rate and the other of which is a fixed rate or a different
variable rate ("Inverse Floater Bonds"). Under the OID Regulations, Inverse
Floater Bonds generally bear interest at objective rates because their rates
either constitute "qualified inverse floating rates" under those Regulations or,
although not qualified floating rates themselves, are based on one or more
qualified floating rates. Consequently, if such Bonds are not issued at an
Excess Premium and their interest rates otherwise meet the test for qualified
stated interest, the income on such Bonds will be accounted for under the rules
applicable to VRDIs described above. However, an Inverse Floater Bond may have
an interest rate parameter equal to the weighted average of the interest rates
on some or all of the underlying Mortgage Loans in a case where one or more of
those rates is a fixed rate or otherwise may not qualify as a VRDI. Unless and
until the Service provides contrary administrative guidance on the income tax
treatment of such Inverse Floater Bonds, the Tax Administrator intends to treat
such Bonds as debt obligations that provide for one or more contingent payments,
and will account for the income thereon as described in " -- Interest Weighted
Bonds and Non-VRDI Bonds" herein.
ANTI-ABUSE RULE
Concerned that taxpayers might be able to structure debt instruments
or transactions, or to apply the bright-line or mechanical rules of the OID
Regulations in a way that produces unreasonable tax results, the Treasury issued
regulations containing an anti-abuse rule. Those regulations provide that if a
principal purpose in structuring a debt instrument, engaging in a transaction,
or applying the OID Regulations is to achieve a result that is unreasonable in
light of the purposes of the applicable statutes, the Service can apply or
depart from the OID Regulations as necessary or appropriate to achieve a
reasonable result. A result is not considered unreasonable under regulations,
however, in the absence of a substantial effect on the present value of a
taxpayer's tax liability.
INTEREST WEIGHTED BONDS AND NON-VRDI BONDS
The treatment of a NOWA Bond, a Variable Rate Bond that is issued at
an Excess Premium, or any other Variable Rate Bond that does not qualify as a
VRDI (each a "Non-VRDI Bond") or an Interest Weighted Bond is unclear under
current law. The OID Regulations are ambiguous as to whether interest payments
(other than qualified stated interest) on a Non-VRDI Bond or an Interest
Weighted Bond are considered to be contingent payments subject to special
original issue discount rules described in the next paragraph or whether such
payments should be treated as Deemed Principal Payments subject to the regular
original issue discount rules described in "Original Issue Discount" above.
Moreover, to the extent that the contingent payment rules are applicable, their
impact on instruments that are subject to Section 1272(a)(6) of the Code is
unclear.
The OID Regulations contain provisions (the "Contingent Payment
Regulations") that address the federal income tax treatment of debt obligations
with one or more contingent payments ("Contingent Payment Obligations"). Under
the Contingent Payment Regulations, any variable rate debt instrument that is
not a VRDI is classified as a Contingent Payment Obligation. However, the
Contingent Payment Regulations, by their terms, do not apply to debt instruments
that are subject to Section 1272(a)(6) of the Code. In the absence of further
guidance, the Tax Administrator will account for Non-VRDI Bonds, Interest
Weighted Bonds, and any other Bonds that are Contingent Payment Obligations in
accordance with Code Section 1272(a)(6). Income will be accrued on such Bonds
based on a constant yield that is derived from a projected payment schedule as
of the Closing Date. The projected payment schedule will take into account the
Pricing Payment Assumptions and the interest payments that are expected to be
made based on the value of any relevant indices on the issue date. To the extent
that actual payments differ from projected payments for a particular taxable
year, appropriate adjustments to interest income and expense accruals will be
made for that year. In the case of a Weighted Average Bond, the projected
payment schedule will be derived based on the assumption that the principal
balances of the Mortgage Loans that collateralize the Bond pay down pro rata.
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The method described in the foregoing paragraph for accounting for
Interest Weighted Bonds, Non-VRDI Bonds, and any other Bonds that are Contingent
Payment Obligations is consistent with Code section 1272(a)(6) and the
legislative history thereto. Because of the uncertainty with respect to the
treatment of such Bonds under the OID Regulations, however, there can be no
assurance that the Service will not assert successfully that a method less
favorable to Bondholders will apply. In view of the complexities and the current
uncertainties as to income inclusions with respect to Non-VRDI Bonds, Interest
Weighted Bonds and other Bonds that are Contingent Payment Obligations, each
investor should consult his own tax advisor to determine the appropriate amount
and method of income inclusion on such Bonds for federal income tax purposes.
MARKET DISCOUNT
A subsequent purchaser of a Bond at a discount from its outstanding
principal amount (or, in the case of a Bond having original issue discount, its
"adjustable issue price") will acquire such Bond with market discount. The
purchaser generally will be required to recognize the market discount (in
addition to any original issue discount remaining with respect to the Bond) as
ordinary income. A person who purchases a Bond at a price lower than the Bond's
outstanding principal amount but higher than its adjusted issue price does not
acquire the Bond with market discount, but will be required to report original
issue discount, appropriately adjusted to reflect the excess of the price paid
over the adjusted issue price. See "Original Issue Discount." A Bond will not be
considered to have market discount if the amount of such market discount is de
minimis, i.e., less than the product of (i) 0.25% of the remaining principal
amount (or, in the case of a Bond having original issue discount, the adjusted
issue price of such Bond), multiplied by (ii) the WAM of the Bond (determined as
for original issue discount) remaining after the date of purchase. Regardless of
whether the subsequent purchaser of a Bond with more than a de minimis amount of
market discount is a cash-basis or accrual-basis taxpayer, market discount
generally will be taken into income as principal payments (including, in the
case of a Bond having original issue discount, any Deemed Principal Payments)
are received, in an amount equal to the lesser of (i) the amount of the
principal payment received or (ii) the amount of market discount that has
"accrued" (as described below), but that has not yet been included in income.
The purchaser may make a special election, which generally applies to all market
discount instruments held or acquired by the purchaser in the taxable year of
election or thereafter, to recognize market discount currently on an uncapped
accrual basis (the "Current Recognition Election"). In addition, the purchaser
may make an All OID Election with respect to a Bond purchased with market
discount. See " -- Original Issue Discount."
Until the Treasury promulgates applicable regulations, the purchaser
of a Bond with market discount generally may elect to accrue the market discount
either: (i) on the basis of a constant interest rate; (ii) in the case of a Bond
not issued with original issue discount, in the ratio of stated interest payable
in the relevant period to the total stated interest remaining to be paid from
the beginning of such period; or (iii) in the case of a Bond issued with
original issue discount, in the ratio of original issue discount accrued for the
relevant period to the total remaining original issue discount at the beginning
of such period. Regardless of which computation method is elected, the Pricing
Prepayment Assumptions must be used to calculate the accrual of market discount.
A Bondholder who has acquired any Bond with market discount
generally will be required to treat a portion of any gain on a sale or exchange
of the Bond as ordinary income to the extent of the market discount accrued to
the date of disposition under one of the foregoing methods, less any accrued
market discount previously reported as ordinary income as partial principal
payments were received. Moreover, such Bondholder generally must defer interest
deductions attributable to any indebtedness incurred or continued to purchase or
carry the Bond to the extent they exceed income on the Bond. Any such deferred
interest expense, in general, is allowed as a deduction not later than the year
in which the related market discount income is recognized. If a Bondholder makes
a Current Recognition Election or an All OID Election, the interest deferral
rule will not apply. Under the Contingent Payment Regulations, a secondary
market purchaser of a Non-VRDI Bond or an Interest Weighted Bond at discount
generally would continue to accrue interest and determine adjustments on such
Bond based on the original projected payment schedule devised by the issuer of
such Bond. See " -- Original Issue Discount -- Interest Weighted Bonds and
Non-VRDI Bonds" herein. The holder of such a Bond would be required, however, to
allocate the difference between the adjusted issue price of the Bond and its
basis in the Bond as positive adjustments to the accruals or projected payments
on the Bond over the remaining term of the Bond in a manner that is reasonable
(e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not
yet been issued, and uncertainty exists with respect to many aspects of those
rules. For example, the treatment of a Bond subject to redemption at the option
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of the Issuer that is acquired at a market discount is unclear. It appears
likely, however, that the market discount rules applicable in such a case would
be similar to the rules pertaining to original issue discount. Due to the
substantial lack of regulatory guidance with respect to the market discount
rules, it is unclear how those rules will affect any secondary market that
develops for a given Class of Bonds. Prospective investors should consult their
own tax advisors regarding the application of the market discount rules to the
Bonds.
AMORTIZABLE PREMIUM
A purchaser of a Bond who purchases the Bond at a premium over the
total of its Deemed Principal Payments may elect to amortize such premium under
a constant yield method that reflects compounding based on the interval between
payments on the Bonds. 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 Bond will be calculated using the
Pricing Prepayment Assumptions. Under the Code, except as otherwise provided in
Treasury regulations, amortized premium generally would be treated as an offset
to interest income on a Bond and not as a separate deduction item. If a holder
makes an election to amortize premium on a Bond, such election will apply to all
taxable debt instruments (including all Bonds) 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 Service. Purchasers who pay a premium for the Bonds
should consult their tax advisors regarding the election to amortize premium and
the method to be employed.
Amortizable premium on a Bond that is subject to redemption at the
option of the Seller generally must be amortized as if the optional redemption
price and date were the Bond's principal amount and maturity date if doing so
would result in a smaller amount of premium amortization during the period
ending with the optional redemption date. Thus, a Bondholder would not be able
to amortize any premium on a Bond that is subject to optional redemption at a
price equal to or greater than the Bondholder's acquisition price unless and
until the redemption option expires. In cases where premium must be amortized on
the basis of the price and date of an optional redemption, the Bond will be
treated as having matured on the redemption date for the redemption price and
then having been reissued on that date for that price. Any premium remaining on
the Bond at the time of the deemed reissuance will be amortized on the basis of
(i) the original principal amount and maturity date or (ii) the price and date
of any succeeding optional redemption, under the principles described above.
Under the Contingent Payment Regulations, a secondary market
purchaser of a Non-VRDI Bond or an Interest Weighted Bond at a premium generally
would continue to accrue interest and determine adjustments on such Bond based
on the original projected payment schedule devised by the issuer of such Bond.
See " -- Original Issue Discount -- Interest Weighted Bonds and Non-VRDI Bonds"
herein. The holder of such a Bond would allocate the difference between its
basis in the Bond and the adjusted issue price of the Bond as negative
adjustments to the accruals or projected payments on the Bond over the remaining
term of the Bond in a manner that is reasonable (e.g., based on a constant yield
to maturity).
GAIN OR LOSS ON DISPOSITION
If a Bond is sold, the Bondholder will recognize gain or loss equal
to the difference between the amount realized on the sale and his adjusted basis
in the Bond. The adjusted basis of a Bond generally will equal the cost of the
Bond to the Bondholder, increased by any original issue discount or market
discount previously includible in the Bondholder's gross income with respect to
the Bond and reduced by the portion of the basis of the Bond allocable to
payments on the Bond (other than qualified stated interest) previously received
by the Bondholder and by any amortized premium. Similarly, a Bondholder who
receives a scheduled or prepaid principal payment with respect to a Bond will
recognize gain or loss equal to the difference between the amount of the payment
and the allocable portion of his adjusted basis in the Bond. Except to the
extent that the market discount rules apply and except as provided below, any
gain or loss on the sale or other disposition of a Bond generally will be
capital gain or loss. Such gain or loss will be long-term gain or loss if the
Bond is held as a capital asset for more than 12 months.
A portion of any gain from the sale of a Bond that might otherwise
be capital gain may be treated as ordinary income to the extent that such Bond
is held as part of a "conversion transaction" within the meaning of Selection
1258 of the Code. A conversion transaction generally is one in which the
taxpayer has taken two or more positions in Bonds or similar property that
reduce or eliminate market risk, if substantially all of the taxpayer's return
is attributable to the time value of the taxpayer's net investment in such
transaction. The amount of gain realized in a conversion transaction that is
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recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate "applicable federal rate" (which rate is computed and published
monthly by the Service) at the time the taxpayer entered into the conversion
transaction, subject to appropriate reduction for prior inclusion of interest
and other ordinary income from the transaction.
MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING. A Bond may, under certain circumstances, be
subject to "backup withholding" at the rate of 31% with respect to "reportable
payments," which include interest payments and principal payments to the extent
of accrued original issue discount as well as distributions of proceeds from a
sale of Bonds. This withholding generally applies if the Bondholder of a Bond
(i) fails to furnish the Trustee with its taxpayer identification number
("TIN"); (ii) furnishes the Trustee or the Issuer 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 the Issuer or such Bondholder's securities broker with a certified statement,
signed under penalty of perjury, that the TIN is its correct number and that the
Bondholder is not subject to backup withholding. Backup withholding will not
apply, however, with respect to certain payments made to Bondholders, including
payments to certain exempt recipients (such as exempt organizations) and to
certain Nonresidents (as defined below) complying with requisite certification
procedures. Bondholders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the Bondholders and to the Internal
Revenue Service 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 Bonds within a reasonable time after the end of each calendar
year.
FOREIGN BONDHOLDERS. Under the Code, interest and original issue
discount income (including accrued interest or original issue discount
recognized on sale or exchange) paid or accrued with respect to Bonds held by
Bondholders who are nonresident alien individuals, foreign corporations, foreign
partnerships or certain foreign estates and trusts ("Nonresidents") or
Bondholders holding on behalf of a Nonresident generally will be treated as
"portfolio interest" and therefore will not be subject to any United States tax
provided that (i) such interest is not effectively connected with a trade or
business in the United States of the Bondholder and (ii) the Issuer (or other
person who would otherwise be required to withhold tax from such payments) is
provided with an appropriate statement that the beneficial owner of a Bond is a
Nonresident. Interest (including original issue discount) paid on Bonds to
Bondholders who are foreign persons will not be subject to withholding if such
interest is effectively connected with a United States business conducted by the
Bondholder. Such interest (including original issue discount) will, however,
generally be subject to the regular United States income tax.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
BONDHOLDERS 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 BONDS.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences," potential investors should consider
the state income tax consequences of the acquisition, ownership, and disposition
of the Bonds. State 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. Therefore, potential investors
should consult their own tax advisors with respect to the various state tax
consequences of an investment in the Bonds.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on those pension, profit sharing, and
other employee benefit plans to which it applies ("Plans") and on those persons
who are fiduciaries or parties in "interest" with respect to such Plans. In
considering an investment of the assets of a Plan in Bond, a fiduciary should
consider, among other things, (i) the purposes, requirements, and liquidity
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needs of such Plan; (ii) the definition of Plan assets under ERISA and the
applicable U.S. Department of Labor ("DOL") regulations; (iii) whether the
investment satisfies the diversification requirements of Section 404(a)(1)(C) of
ERISA; (iv) whether such an investment is appropriate for the Plan and prudent,
considering the nature of the investment and the fact that no market in which
such fiduciary can sell or otherwise dispose of Offered Bonds is expected to
arise. The prudence of a particular investment must be determined by the
responsible fiduciary (usually the trustee or investment manager) with respect
to each Plan taking into account all of the facts and circumstances of the
investment.
Sections 406 and 407 of ERISA and Section 4975 of the Code prohibit
certain transactions that involve (i) a Plan and any party in interest under
ERISA or "disqualified person" under the Code with respect to the Plan and (ii)
Plan assets. A violation of those prohibited transaction rules may generate
other disqualified persons. Consequently, a Plan contemplating an investment in
the Bonds should consider whether the Issuer, any other person associated with
the issuance and administration of the Bonds, or any Affiliate of the foregoing
is or might become a party in interest or a disqualified person with respect to
the Plan. In addition, a Plan should consider whether other persons who are
parties in interest or disqualified persons might acquire ownership rights in
the Issuer or its assets by virtue of the "Look-Through Rule" described below,
or otherwise. In either case, the acquisition or holding of Bonds by or on
behalf of the Plan could be considered to give rise to an indirect prohibited
transaction under ERISA and the Code in the nature of an extension of credit by
the Plan. Conversely, if a party in interest or disqualified person with respect
to a Plan acquires or holds Bonds while the Plan is deemed to own ownership
rights in the Issuer or its assets by virtue of the "Look-Through Rule"
described below, an indirect prohibited transaction also could arise. However,
certain exemptions to the prohibited transaction rules could be applicable to
the situations described in this paragraph, depending on the type and
circumstances of the Plan fiduciary making the decision to acquire the Bond
(including a Bond recharacterized as an ownership interest in the Issuer or its
assets). Those exemptions potentially include Prohibited Transaction Class
Exemption ("PTCE") 90-1, regarding investments by insurance company pooled
separate accounts, PTCE 91-38, regarding investments by bank collective
investment funds, and PTCE 84-14, regarding transactions effected by a
"qualified professional asset manager."
If a Plan were deemed to have acquired indirectly ownership rights
in the Issuer or its assets, certain transactions involving the operations of
the Issuer might be deemed to be prohibited transactions under ERISA and the
Code. Regulations of the DOL set forth in 29 C.F.R. 2510.3-101 (the "Plan Asset
Regulations") define "plan assets" to include not only securities held by a Plan
but also the underlying assets of the Issuer of any equity securities (the
"Look-Through Rule") unless one or more exceptions specified in the regulations
are satisfied. The Plan Asset Regulations define an equity security as a
security other than a security that is treated as debt for state law purposes
and that has no substantial equity features. Consequently, to the extent a Class
of Bonds is treated as debt for purposes of the Plan Asset Regulations, the
Look-through Rule should not apply to a Plan's purchase or holding of Bonds of
that Class. If a Class of Bonds is treated as equity for those purposes (a
"Recharacterized Class"), however, the Look-Through Rule would apply unless one
or more exceptions specified in the Plan Asset Regulations is satisfied.
Under the Plan Asset Regulations, two exceptions might be available
to a Recharacterized Class of Bonds. The first (the "Publicly Offered
Exception") is available to a Recharacterized Class of Bonds that is registered
under the Securities Exchange Act of 1934, as amended, freely transferable, and
held by more than 100 unrelated investors. The second is available if,
immediately after the most recent acquisition of a Bond of a Recharacterized
Class, benefit plan investors (which include government plans and individual
retirement accounts) do not own 25% or more of the value of any Class of
Recharacterized Bonds (the "Insignificant Participation Exception"). Prospective
Plan investors should be aware that even if the Look-Through Rule does not apply
to a Recharacterized Class as a result of the applicability of the Publicly
Offered Exception or the Insignificant Participation Exception, the purchase of
Bonds of such Class nonetheless could constitute a prohibited transaction if the
Underwriter and certain of its Affiliates were considered parties in interest or
disqualified persons, such as where the Underwriter is a fiduciary or other
service provider for a Plan. PTCE 75-1 generally exempts purchases by a Plan
from an underwriter who is a party in interest or disqualified person, if, among
other things, the underwriter is not acting as a fiduciary for the Plan in such
circumstances. Such a Plan considering the purchase of Bonds should exercise
caution with respect to such purchase and consult with its counsel regarding the
availability of relief under PTCE 75-1.
Due to the complexity of the rules and penalties under ERISA and the
Code applicable to Plans, potential Plan investors should consult their advisors
and counsel regarding (i) the characterization of each Class of Bonds as debt or
equity for ERISA purposes and (ii) the application of the Publicly Offered
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Exception, the Insignificant Participation Exception or other available
exemptions from the prohibited transaction rules of ERISA and the Code.
Potential investors also should be aware that ERISA requires that the assets of
a Plan be valued at their fair market value as of the close of the plan year and
that the Issuer does not plan to provide any valuations to Bondholders.
LEGAL INVESTMENT
As set forth in the related Prospectus Supplement, one or more
Classes of Offered Bonds of any Series may constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") so long as they are secured by first liens on residential
properties and are rated in one of the two highest rating categories by at least
one nationally recognized statistical rating organization and, as such, will be
legal investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including, but not limited to,
state-chartered savings banks, commercial banks, savings and loan associations
and insurance companies, as well as trustees and state government employee
retirement systems) 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 regulation to the same
extent that under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Bonds of a Series that
are secured by second liens on residential properties will not be treated as
"mortgage related securities" under SMMEA, regardless of the rating assigned
such Bonds.
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," the Bonds will constitute legal
investments for entities subject to such legislation only to the extent provided
in such legislation. Several states have enacted legislation overriding SMMEA.
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 any securities, or require the sale or other disposition of
any securities, so long as such contractual commitment was made or such
securities 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
with mortgage related 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 mortgage related securities
for their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. Section 24 (Seventh), subject in
each case to such regulations as the applicable federal regulatory authority may
prescribe. Bonds that do not constitute "mortgage related securities" under
SMMEA will require registration, qualification or an exemption under applicable
state securities laws and may not be "legal investments" to the same extent as
"mortgage related securities" under SMMEA.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase certain types of the Bonds
or to purchase Bonds 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 Bonds constitute legal investments
for such investors.
USE OF PROCEEDS
The Issuer will apply all or substantially all of the net proceeds
from the sale of each Series offered hereby and by the related Prospectus
Supplement to purchase the Mortgage Loans, to repay indebtedness that has been
incurred to obtain funds to acquire the Mortgage Loans, to establish the Reserve
Fund, if any, for the Series and to pay costs of structuring and issuing the
Bonds.
PLAN OF DISTRIBUTION
The Issuer may sell the Bonds offered hereby either directly or
through one or more underwriters or underwriting syndicates or through
designated agents. The Issuer also may sell the Bonds initially to an Affiliate,
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and such Affiliate may sell the Bonds, from time to time, either directly or
through one or more underwriters, underwriting syndicates or through designated
agents. The Bonds of a Series may be acquired by underwriters for their own
account and may be resold from time to time in one or more transactions, at a
fixed public offering price or prices, which may change, or at varying prices
determined at the time of sale. The Issuer also may authorize, from time to
time, underwriters acting as agents to offer and sell the Bonds upon the terms
and conditions set forth in the related Prospectus Supplement.
The related Prospectus Supplement or Supplements for each Series
will set forth the terms of the offering of such Series and of each Class of
Bonds within such Series, including the name or names of the underwriters, the
proceeds to and their use by the Issuer, and either the initial public offering
price, the discounts and commissions to the underwriters and any discounts or
concessions allowed or reallowed to certain dealers, or the method by which the
price at which the underwriters will sell the Bonds will be determined. If Bonds
of a Series are offered other than through underwriters, the related Prospectus
Supplement will contain information regarding the nature of such offering and
any agreements to be entered into between the Issuer and purchasers of Bonds of
such Series.
Underwriters, dealers and agents may be entitled, under agreements
entered into with the Issuer, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Securities Act of
1933. Certain of the underwriters and their Affiliates may engage in
transactions with, and perform services for, the Issuer or its Affiliates.
The place and time of delivery for the Bonds of a Series in
respect of which this Prospectus is delivered will be set forth in the
related Prospectus Supplement.
LEGAL MATTERS
Certain legal matters in connection with the Bonds offered hereby
will be passed upon for the Issuer by Hunton & Williams, Richmond, Virginia, or
counsel to the Issuer identified in the Prospectus Supplement and for the
underwriters by the firm specified in the related Prospectus Supplement.
FINANCIAL INFORMATION
Neither Dynex nor IHC is obligated with respect to the Bonds.
Accordingly, the Issuer has determined that neither the financial statements of
Dynex nor those of IHC are material to the offering made hereby. Any prospective
purchaser who desires to review financial information concerning the Issuer,
however, will be provided with a copy of the most recent financial statements of
the Issuer upon request.
ADDITIONAL INFORMATION
The Issuer has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Bonds. This Prospectus, which is a part of the
Registration Statement, omits certain information contained in the Registration
Statement pursuant to the rules and regulations of the Commission. The
Registration Statement and the exhibits thereto can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain of its Regional Offices
located as follows: Chicago Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade
Center, New York, New York 10048. Copies of such material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The statements contained in this Prospectus concerning the contents
of any contract or other document referred to are not necessarily complete.
Although such statements disclose all material provisions of such contract or
other document, where such contract or other document is an exhibit to the
Registration Statement, reference is made to such exhibit for a full statement
of the provisions thereof.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Issuer pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 after the date of this
Prospectus and prior to the termination of the offering of the Bonds hereunder
shall be deemed to be incorporated into and made a part of this Prospectus from
the date of filing of such documents.
The Issuer hereby undertakes to provide a copy of any and all
information that has been incorporated by reference into the Registration
Statement (not including exhibits to the information so incorporated by
reference unless such exhibits are specifically incorporated by reference into
the information that the Registration Statements incorporate) upon written or
oral request of any person, without charge to such person, provided that such
request is made to MERIT Securities Corporation, 10900 Nuckols Road, Glen Allen,
Virginia 23060, telephone: (804) 217-5800.
REPORTS TO BONDHOLDERS
The Issuer will cause to be provided to Bondholders the monthly
remittance reports concerning the Trust Estate securing the Bonds and the annual
reports concerning the Issuer. See "The Indenture -- Reports to Bondholders"
herein.
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GLOSSARY
Capitalized terms used but not otherwise defined herein are defined
below, in some cases in abbreviated fashion. The Indenture, the Master Servicing
Agreement, the Prospectus Supplement or the Servicing Agreement may contain a
more complete definition of certain of the terms defined herein, and reference
should be made to the Indenture, the Master Servicing Agreement, the Prospectus
Supplement and the Servicing Agreement for a more complete definition of all
such terms.
"ACCOUNTING DATE" means with respect to each Payment Date the last
day of the month preceding the month in which such Payment Date occurs or such
other date as may be specified in the related Prospectus Supplement.
"ACCRETION CLASS" or "ACCRETION BONDS" means a Class of Bonds
comprised of Bonds upon which interest is accrued and added to the principal
thereof periodically, but which is not entitled to payments of principal or
interest until a specified date or specified Classes of the same Series have
been paid in full.
"ADDITIONAL COLLATERAL" means any Loan added to the Trust Estate for
a Series of Bonds (other than a Substitute Loan) after the initial closing for
the Series of Bonds.
"ADJUSTABLE RATE LOAN" means an adjustable rate Loan, the Loan Rate
of which is subject to periodic adjustment in accordance with the terms of the
related Note or Contract.
"ADJUSTABLE RATE MORTGAGE LOAN" means a Mortgage Loan that is an
Adjustable Rate Loan.
"ADVANCE" means, as to any Loan, any P&I Advance, T&I Advance or
Property Protection Advance made by a Servicer or a Special Servicer or, upon
the default by a Servicer on its obligation to make such an Advance, by the
Master Servicer or such other party as may be specified in the related
Prospectus Supplement.
"AFFILIATE" means any person or entity controlling, controlled by or
under common control with a specified entity. "Control" means the power to
direct the management and policies of a person or entity, directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise. "Controlling" and "Controlled" will have meanings correlative to the
foregoing.
"APPROVED SALE" means, as to any Loan, (i) a sale of the related
Mortgaged Premises, Manufactured Home, Real Property or Facilities acquired by
the Insured because of a default by the Borrower if the related Pool Insurer has
given prior approval to such sale, (ii) a Foreclosure or trustee's sale of the
related Mortgaged Premises, Manufactured Home, Real Property or Facilities at a
price exceeding the maximum amount specified by the Pool Insurer, (ii) the
acquisition of the Mortgaged Premises under any related Primary Mortgage
Insurance Policy by the related Mortgage Insurer and (iv) the acquisition of the
related Mortgaged Premises, Manufactured Home, Real Property or Facilities by
the Pool Insurer.
"BALLOON PAYMENT MORTGAGE LOAN" means a Mortgage Loan or Model Home
Loan that does not require any scheduled amortization of principal prior to its
scheduled maturity or the principal of which is amortized over a longer period
that the Loan's scheduled term to maturity.
"BOND INSURANCE" means, unless otherwise provided in the related
Prospectus Supplement, insurance guaranteeing timely or ultimate payment of
principal and interest on certain Classes of Bonds.
"BOND REGISTER" means the register in which the Issuer shall provide
for the registration of Bonds of a Series and for the registration of transfers
of Bonds of the Series in certificated form.
"BONDS" means the Issuer's Collateralized Bonds issued pursuant to
the Indenture.
"BONDHOLDER" or "HOLDER" means the person in whose name a Bond is
registered in the Bond Register for the related Series.
"BOOK-ENTRY BONDS" means a Class or Classes of Bonds that are
initially issued in book-entry form through a depository.
"BORROWER" means the individual or individuals obligated to repay a
Loan. (In the case of a Mortgage Loan or Model Home Loan the Borrower may be the
beneficiary or beneficiaries of an Illinois land trust if the Mortgaged Premises
or Model Home is located in Illinois.)
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"BUSINESS DAY" means any day that is not a Saturday, Sunday or other
day on which commercial banking institutions in the city in which the corporate
trust office of the Trustee is then located, or in the city or cities in which
the offices of the Master Servicer are then located, are authorized or obligated
by law or executive order to be closed.
"CLASS" means any class of the Bonds of a Series, as specified in
the related Prospectus Supplement.
"CLASS INTEREST RATE" means with respect to any Class of Bonds the
annual rate, which may be a variable rate, at which interest accrues on the
Bonds of the Class, as specified, or determined as specified, in the related
Prospectus Supplement.
"CLOSING DATE" means the date, which shall be set forth in the
Prospectus Supplement, on which a Series of Bonds is issued.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLLATERAL" means the Mortgage Loans, other Mortgage Collateral,
Model Home Loans, Manufactured Home Loans and Consumer Finance Loans pledged to
secure a Series.
"COLLATERAL PROCEEDS ACCOUNT" means the account created and
maintained by the Trustee for each Series of Bonds.
"COLLATERAL VALUE" unless otherwise defined in the related
Prospectus Supplement, means, with respect to any item of Collateral, an amount
generally equal to (i) the Scheduled Principal Balance of the item of Collateral
(or of the related Loan in the case of REO Property or Repo Property) or (ii) as
specified in the related Prospectus Supplement, the Scheduled Principal Balance
of such item of Collateral multiplied by a fraction the numerator of which is
the Net Rate of the Loan and the denominator of which is the Collateral Value
Discount Rate.
"COLLATERAL VALUE DISCOUNT RATE" means the percentage rate that,
multiplied by the required payments on the Collateral securing a Series of
Bonds, will assure the availability of sufficient funds to pay on the Bonds.
"COMPOUND VALUE" means, as to a Class of Accretion Bonds, (a) with
respect to any date prior to the first Payment Date, the original principal
amount of the Class and (b) with respect to any determination date thereafter,
the original principal amount of the Class, plus all interest accrued and added
to the principal amount thereof through the Accounting Date immediately
preceding the determination date, less all previous payments of principal of the
Class. The principal amount of any Accretion Bond at any time will be equal to
its Compound Value.
"CONDEMNATION AWARD" means all awards, payments, proceeds or damages
received pursuant to any action or proceeding relating to any condemnation or
other taking, whether direct or indirect, of a Mortgaged Premises or for
conveyances in lieu of condemnation.
"CONSUMER FINANCE LOAN" means an installment sales contract for the
sale and installation of heating or air-conditioning facilities, insulation
facilities or similar facilities, and in each case related equipment and
materials, installed in single family (one- to four-family) attached or detached
residential housing, and any security interest in any facilities, equipment and
materials purchased with the proceeds of the contract.
"CONTRACT" means, with respect to a Manufactured Home Loan or a
Consumer Finance Loan, the installment sales contract for the sale of the
related Manufactured Home or Facilities.
"CONVERTED LOAN" means a Loan that, pursuant to the terms of the
related Note or Contract, has converted from an adjustable Loan Rate to a fixed
Loan Rate or from one fixed Loan Rate to a lower fixed Loan Rate.
"CONVERTED MORTGAGE LOAN" means a Converted Loan that is a Mortgage
Loan.
"CURRENT INTEREST BOND" means a Bond other than an Accretion Bond or
a Principal Only Bond.
"CUSTODIAL P&I ACCOUNT" means the account established by each
Servicer into which the Servicer deposits collections of principal and interest
on the Loans.
"CUT-OFF DATE" means, with respect to a Series, the date specified
in the related Prospectus Supplement and used as a basis for identifying the
payments of principal of and interest due on the Loans that are for the benefit
of the Bondholders.
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"DELINQUENCY" means that all or part of the Borrower's Monthly
Payment is not paid on or before the related Due Date.
"DISCOUNT BONDS" means Bonds that have a purchase price lower than
the Parity Price.
"DUE DATE" means with respect to a Loan the day of each month on
which the Borrower's Monthly Payment is due as stated in the related Note or
Contract.
"DUE PERIOD" means with respect to any Payment Date for a Mortgage
Loan, the period commencing on the second day of the calendar month preceding
the calendar month in which the Payment Date occurs and continuing through the
first day of the calendar month in which the Payment Date occurs. "Due Period"
means for any Loan other than a Mortgage a period that will be described in the
related Prospectus Supplement.
"DYNEX" means Dynex Capital, Inc., a Virginia corporation.
"ELIGIBLE INVESTMENTS" means those investments permitted under the
Indenture and acceptable to the Rating Agencies.
"EVENT OF DEFAULT" means an event of default under the Indenture.
"FACILITIES" means the facilities, equipment and materials purchased
and installed in a single family (one- to four-family) attached or detached
residential property with the proceeds of a Consumer Finance Loan.
"FHLMC" means Federal Home Loan Mortgage Corporation.
"FLOOD INSURANCE" means insurance against flood damage to the
collateral underlying a Loan, required for such collateral located in "flood
hazard" areas identified by the Secretary of HUD or the Director of the Federal
Emergency Management Agency.
"FLOOD INSURANCE POLICY" means an Insurance Policy that provides
Flood Insurance.
"FNMA" means FNMA.
"FORECLOSURE" means a proceeding pursuant to which a Security
Instrument is satisfied or released by foreclosure (whether by power of sale or
judicial proceeding), deed in lieu of foreclosure or other comparable means.
"GARN-ST. GERMAIN ACT" means the Garn-St. Germain Depository
Institutions Act of 1982, as amended.
"GROSS MARGIN" means, with respect to any Adjustable Rate Loan, the
fixed percentage per annum specified in the related Note or Contract, that is
added to the applicable Index on each related Interest Adjustment Date to
determine the new Loan Rate for the Adjustable Rate Loan.
"HIGH COUPON CLASS" or "HIGH COUPON BONDS" means a Class of Bonds
that pays only nominal principal and has a disproportionately high interest
rate.
"HUD" means the United States Department of Housing and Urban
Development.
"IHC" means Issuer Holding Corp., a Virginia corporation.
"INDENTURE" means the indenture between the Issuer and the Trustee,
pursuant to which a Series of Bonds is issued, as such indenture may be
supplemented or amended from time to time by a Series Supplement.
"INDEX" means, with respect to any Adjustable Rate Loan, the index
specified in the related Note or Contract that is added to the Gross Margin on
each related Interest Adjustment Date to determine the new Note Rate or Loan
Rate for the Adjustable Rate Loan.
"INSURANCE POLICY" means any insurance policy covering Collateral,
including Primary Mortgage Insurance, Pool Insurance, Standard Hazard Insurance,
Special Hazard Insurance, Flood Insurance and Title Insurance.
"INSURANCE PROCEEDS" means proceeds payable from an Insurance
Policy.
"INSURED" means, with respect to a Series, the Issuer or the related
Trustee, each as assignee of the Issuer or the Participant.
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"INTEREST ADJUSTMENT DATE" means, with respect to each Adjustable
Rate Loan, the date on which the related Loan Rate changes in accordance with
the terms of the related Note or Contract.
"ISSUER" means MERIT Securities Corporation, a Virginia corporation.
"LAND SECURED LOAN" means a Manufactured Home Loan secured at
origination by a Manufactured Home and a parcel of real estate.
"LEVEL PAYMENT LOAN" means a Loan the terms of which provide for
regular, level payments of principal and interest throughout its entire term.
"LEVEL PAYMENT MORTGAGE LOAN" means a Mortgage Loan that is a Level
Payment Loan.
"LIQUIDATION" means (i) application of a payment to Collateral that
results in the release of the lien of the Security Instrument on the Collateral,
whether through Foreclosure, condemnation, prepayment in full or otherwise or,
with respect to REO Property or Repo Property, an REO Disposition or Repo
Disposition or (ii) the sale of any defaulted Loan.
"LIQUIDATION PROCEEDS" means the amount received by the Servicer or
Special Servicer in connection with any Liquidation of a Loan.
"LOAN" means, with respect to a Series of Bonds, an item of Mortgage
Collateral, a Model Home Loan, a Manufactured Home Loan or a Consumer Finance
Loan, as the context may require, that constitutes part of the Collateral for
the Series.
"LOAN RATE" means, with respect to an item of Collateral, the
interest rate payable by the Borrower or other obligor according to the terms of
the Collateral.
"LOSS" means and includes for any Prepayment Period (i) any Realized
Loss on a defaulted item of Collateral and (ii) any reduction by a bankruptcy
court of either the Unpaid Principal Balance or the Loan Rate of an item of
Collateral subject to a bankruptcy proceeding.
"MANUFACTURED HOME" means a unit of manufactured housing, including
all accessions thereto, securing the indebtedness of the Borrower under the
related Manufactured Home Loan.
"MANUFACTURED HOME LOAN" means a manufactured home installment sales
contract, and any security interest in a Manufactured Home purchased with the
proceeds of the contract, and includes a Land Secured Loan.
"MASTER SERVICER" means Dynex or the entity specified in the
Prospectus Supplement for a Series that will administer and supervise the
performance by the Servicers of their duties and responsibilities under
Servicing Agreements in respect to Loans securing a related Series.
"MASTER SERVICER CUSTODIAL ACCOUNT" means a trust account
established by the Master Servicer into which the Servicer remits by wire
transfer the Servicer Remittance in respect of the Loans.
"MASTER SERVICER REMITTANCE DATE" means the date specified in the
Master Servicing Agreement by which the Master Servicer must remit funds in the
Master Servicer Custodial Account to the Collateral Proceeds Account for a
Series.
"MASTER SERVICING AGREEMENT" means, with respect to a Series of
Bonds, the master servicing agreement between the Issuer and the Master
Servicer, as amended and supplemented.
"MAXIMUM RATE" means, with respect to an Adjustable Rate Loan, the
maximum lifetime Loan Rate payable on the Loan.
"MODEL HOME" means the Mortgaged Premises securing a Model Home
Loan.
"MODEL HOME LOAN" means a mortgage loan that is (i) secured by a
single family (one- to four-family), attached or detached, residential property
used as a model home and (ii) pledged to the Trustee as an item of Collateral
for a Series of Bonds.
"MONTHLY PAYMENT" means with respect to any Loan, the total monthly
payment due in the applicable month under the terms of the related Note or
Contract.
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"MORTGAGE COLLATERAL" means Mortgage Loans, related REO Property and
certain other assets evidencing interests in mortgage loans, including without
limitation mortgage-backed certificates, pledged to secure a Series.
"MORTGAGE INSURER" means any insurance company or other entity that
provides a Primary Mortgage Insurance Policy.
"MORTGAGE LOAN" means a mortgage loan secured by a single family
(one- to four-family), attached or detached residential property and evidenced
by a Note and Security Instrument that the Issuer has pledged to the Trustee as
Collateral for a Series of Bonds.
"MORTGAGED PREMISES" means land and improvements thereon subject
to the lien of a Security Instrument in connection with a Mortgage Loan or a
Model Home Loan.
"NET RATE" means, with respect to any Loan, the Note Rate or Loan
Rate thereon minus applicable servicing and administration fees, expressed as a
percentage of the applicable Loan.
"NON-RECOVERABLE ADVANCE" means any Advance previously made or
proposed to be made with respect to a Loan by the Servicer (or the Special
Servicer or Master Servicer) pursuant to the related Servicing Agreement that,
in the good faith judgment of the Servicer (or the Special Servicer or Master
Servicer) will not or, in the case of a proposed Advance, would not, be
ultimately recoverable by the Servicer (or the Special Servicer or Master
Servicer) from future collections with respect to the Loan (including
collections of or from Insurance Proceeds, Additional Collateral or Liquidation
Proceeds relating to the Loan).
"NOTE" means a manually executed written instrument, delivered in
connection with a Mortgage Loan or Model Home Loan, evidencing the Borrower's
promise to repay a stated sum of money, plus interest, to the noteholder by a
specific date according to a schedule of principal and interest payments.
"NOTE RATE" means, with respect to a Mortgage Loan or Model Home
Loan, the interest rate payable by the Borrower according to the terms of the
related Note.
"OFFERED BONDS" means the Bonds actually offered pursuant to a
Prospectus Supplement appended to this Prospectus.
"ORIGINATOR" means with respect to a Loan, the person that
originates it.
"PARITY PRICE" is the price at which a Class has a yield to maturity
equal to its coupon, after giving effect to any payment delay.
"PARTICIPANT" means IHC or an Affiliate thereof.
"PAYMENT DATE" means, as to a Series, a date specified in the
related Prospectus Supplement for payment on the Bonds of such Series.
"PERIODIC RATE CAP" means, with respect to any Adjustable Rate Loan,
the limit on the percentage increase or decrease that may be made in the related
Loan Rate on any Interest Adjustment Date.
"PERSON" means an individual corporation, partnership, joint
venture, limited liability company, joint stock company, trust (including any
beneficiary thereof), unincorporated organization or government or any agency or
political subdivision thereof.
"P&I ADVANCE" means an advance of principal and interest (net of
servicing fees) by the Servicer or the Special Servicer (or, upon a default by
the Servicer or Special Servicer, by the Master Servicer or by another party
specified in the related Prospectus Supplement) on a Loan subject to a
Delinquency.
"POOL INSURER" means any insurance company or other person that
provides a Pool Insurance Policy for a Series.
"POOL INSURANCE" means insurance covering (subject to certain
limitations) losses, to the extent not covered by a Primary Mortgage Insurance
Policy, incurred with respect to a Loan by reason of the default of the related
Borrower.
"POOL INSURANCE POLICY" mean an Insurance Policy that provides Pool
Insurance.
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"PREMIUM BONDS" means a Class comprised of Bonds that have a
purchase price greater than the related Parity Price.
"PREPAYMENT PERIOD" means with respect to a Loan, as to any Payment
Date, the time period used to identify prepayments or other unscheduled payments
of principal or interest received with respect to the Loan that will be used to
pay Bondholders on that Payment Date.
"PRIMARY MORTGAGE INSURANCE" means insurance covering a Mortgage
Loan against loss of the insured portion of the Unpaid Principal Balance of the
Mortgage Loan together with accrued and unpaid interest thereon.
"PRIMARY MORTGAGE INSURANCE POLICY" means an Insurance Policy that
provides Primary Mortgage Insurance.
"PRINCIPAL DISTRIBUTION AMOUNT" means, unless otherwise specified in
the Prospectus Supplement, with respect to any Payment Date for a Series of
Bonds, the amount, if any, by which (i) the aggregate Collateral Value, as of
the immediately preceding Payment Date (or, with respect to the first Payment
Date, as of the Cut-off Date), of the Collateral securing the Series exceeds
(ii) the aggregate Collateral Value of the Collateral securing the Series as of
the current Payment Date.
"PRINCIPAL ONLY CLASS" or "PRINCIPAL ONLY BONDS" means a Class of
Bonds that does not pay or accrue interest.
"PRINCIPAL PREPAYMENT" means, with respect to any Loan securing a
Series, a payment of principal on such Loan in excess of the scheduled principal
payments.
"PROPERTY PROTECTION ADVANCE" means an Advance made by a Servicer or
the Special Servicer in connection with the protection of the collateral
underlying a loan, including, without limitation, expenses related to
Foreclosure proceedings and Servicing Fees.
"RATING AGENCY" means, for any Class of Bonds, any nationally
recognized statistical rating agency, or its successor, that on the Closing Date
rated the Class at the request of the Issuer. If such agency or a successor is
no longer in existence, "Rating Agency" will be a nationally recognized
statistical rating agency, or other comparable Person, designated by the Issuer,
notice of which designation will be given to the Trustee and the Master
Servicer. References herein to any rating category of a Rating Agency will mean
such rating category without regard to any plus or minus or numerical
designation.
"REAL PROPERTY" means a parcel of real estate securing a Land
Secured Loan.
"REALIZED LOSS" means (a) with respect to each defaulted Loan (or in
the case of any REO Property or Repo Property, the related Loan) as to which a
Liquidation has been made, an amount equal to (i) the sum of (A) the Unpaid
Principal Balance of the Loan as of the date of such Liquidation, (B) interest
at the applicable Note Rate or Loan Rate, from the date through which interest
was last paid through the end of the calendar month in which the Liquidation
occurred, on the Unpaid Principal Balance of such Loan outstanding during each
Due Period in which accrued interest was not paid, (C) any Property Protection
Advances and Advances for taxes, assessments and comparable items and insurance
premiums, as required by the Servicing Agreement or Special Servicing Agreement,
and (D) any other expenses (including any servicing related fees) related to the
Liquidation of the Loan, minus (ii) the sum of (A) any funds received in
connection with the Liquidation of the Loan prior to or during the month in
which such Liquidation occurred, and (B) any Insurance Proceeds received with
respect to the Loan and (b) with respect to each Loan modified in accordance
with the applicable Servicing Agreement, an amount equal to (i) the sum of (A)
the Unpaid Principal Balance of the Loan as of the date of modification, (B)
interest at the applicable Note Rate or Loan Rate, from the date through which
interest was last paid through the end of the calendar month in which the
modification occurred, on the Unpaid Principal Balance of the Loan outstanding
during each Due Period in which accrued interest was not paid, (C) any Property
Protection Advances and Advances for taxes, assessments and comparable items and
insurance premiums, as required by the Servicing Agreement, the Master Servicing
Agreement or the Special Servicing Agreement and (D) any other expenses
(including any servicing related fees) related to the modification of the Loan,
minus (ii) the product of (A) the ratio of the Monthly Payment (net of the
dollar equivalent of all ongoing servicing related fees on the first Due Date)
on the modified Loan divided by the Monthly Payment (net of the dollar
equivalent of all servicing related fees on such Due Date) on the prior Loan,
and (B) the Unpaid Principal Balance of the modified Loan.
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"REMITTANCE DATE" means, the date specified in the related Servicing
Agreement by which the funds in the Custodial P&I Account must be remitted to
the Master Servicer Custodial Account, which in no case will be later in any
month than the Master Servicer Remittance Date.
"REPO DISPOSITION" means the receipt by the related Servicer in
connection with a Repo Property of Insurance Proceeds, Condemnation Awards and
other payments and recoveries that the Servicer recovers from the sale or other
final disposition thereof.
"REPO PROPERTY" means a Manufactured Home or Facilities (and any
related Real Property) acquired by a Servicer on behalf of the Trustee pursuant
to a repossession, Foreclosure or other similar proceeding in respect of a
related Loan.
"REO" or "REO PROPERTY" means Mortgaged Premises acquired by the
Servicer or Special Service on behalf of the Trusty by Foreclosure or by
deed-in-lieu of foreclosure.
"REO DISPOSITION" means the receipt by the Servicer in connection
with an REO of Insurance Proceeds, Condemnation Awards and other payments and
recoveries that the Servicer recovers from the sale or other final disposition
thereof.
"RESERVE FUND" means, unless otherwise provided in the related
Prospectus Supplement, any fund in a Trust Estate other than the Collateral
Proceeds Account.
"SCHEDULED PRINCIPAL BALANCE" means, with respect to each Loan, REO
Property or Repo Property as of a determination date, the scheduled principal
balance of the Loan (or of the related Loan, in the case of a REO Property or
Repo Property) as of the Cut-off Date, increased by the amount of negative
amortization, if any, with respect thereto, and reduced by (a) the principal
portion of all Monthly Payments due on or before such determination date,
whether paid by the Borrower or advanced by a Servicer or other party, (b) all
amounts allocable to unscheduled principal payments received on or before the
last day of the Prepayment Period preceding such date of determination, and (c)
without duplication, any Realized Loss with respect thereto.
"SECOND LIEN MORTGAGE LOAN" means a Mortgage Loan secured by a
second mortgage or deed of trust on Mortgaged Premises.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITY INSTRUMENT" means a written instrument creating a valid
lien on the collateral for a Loan, including any riders thereto. A Security
Instrument may be in a form of a mortgage, deed of trust, deed to secure debt,
security deed or security agreement.
"SENIOR BONDS" or "SENIOR CLASS" means any Class of Bonds of a
Series, designated as such in the Prospectus Supplement, that is entitled to
preferential priority rights, as to a Subordinated Class of Bonds, to payment of
principal and interest from the proceeds of the collateral securing such Series.
"SERIES" means the Bonds issued pursuant to a Series Supplement.
"SERIES SUPPLEMENT" means an indenture that is supplemental to the
Indenture and that authorizes a particular Series.
"SERVICER REMITTANCE" means a Servicer's aggregate payment due each
month to the Master Servicer Custodial Account for Loans that have been pledged
as security for a Series of Bonds, which payment, unless otherwise specified in
the Prospectus Supplement for a Series of Bonds, is equal to (A) the sum of the
following:
(i) all payments of principal and interest with respect to
the Collateral (including net Liquidation Proceeds and
Insurance Proceeds) collected during the related Due
Period and deposited in the Custodial P&I Account;
(ii) any Advance by the Servicer that represents principal
of or interest on a defaulted item of Collateral with
respect to such Payment Date;
(iii) any Monthly Payments due during, but collected prior to,
the related Due Period; and
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(iv) any fees relating to late charges, assumption fees,
prepayment premiums and similar charges and fees (but
not default interest);
less (B) the sum of the following:
(i) all amounts due the Servicer as the
servicing fee, including late charges,
assumption fees, prepayment premiums and
similar charges and fees (but not default
interest);
(ii) any Monthly Payments collected but due on a
date subsequent to the related Due Period;
and
(iii) all amounts required to reimburse the
Servicer for Non-Recoverable Advances.
"SERVICER" means an entity identified in the related Prospectus
Supplement that will perform servicing functions with respect to Collateral
included in the Trust Estate for a Series.
"SERVICING AGREEMENT" means, with respect to a Series of Bonds, each
servicing agreement, as amended and supplemented, pursuant to which the related
servicer of Collateral has agreed to perform all duties incident to the
servicing of the Collateral.
"SPECIAL HAZARD INSURANCE" means, with respect to a Series of Bonds,
insurance covering (a) loss to Mortgaged Premises or Manufactured Homes
underlying defaulted Loans caused by reason of certain hazards not covered by
Standard Hazard Insurance on such Mortgaged Premises or Manufactured Homes and
(b) loss from partial damage to such Mortgaged Premises or Manufactured Homes
caused by reason of application of the co-insurance clause contained in the
related Standard Hazard Insurance Policies.
"SPECIAL HAZARD INSURANCE POLICY" means an Insurance Policy that
provides Special Hazard Insurance.
"SPECIAL HAZARD INSURER" means, with respect to a Series, the issuer
of the Special Hazard Insurance Policy named in the related Series Supplement,
or any successor thereto, or the named Insurer in any replacement policy
obtained by the Master Servicer for the Series.
"SPECIAL SERVICER" means an entity, as may be specified in the
Prospectus Supplement for a Series, that will service delinquent or defaulted
Loans, REO Property or Repo Property pledged as security for a Series pursuant
to the terms of a Special Servicing Agreement between the entity and the
Servicer or Master Servicer.
"STANDARD HAZARD INSURANCE" means, with respect to a Loan, insurance
against physical damage to, or the destruction of, the related Mortgaged
Premises or Manufactured Home caused by fire, lightning, explosion, smoke,
windstorm, hail, riot, strike or civil commotion.
"STANDARD HAZARD INSURANCE POLICY" means an Insurance Policy, issued
by a company authorized to issue such a policy in the state in which the
collateral for the related Loan is located, that provides Standard Hazard
Insurance.
"STATED MATURITY DATE" means, with respect to any Class of Bonds of
a Series, the date specified in the Bonds as the fixed date on which the final
installment of the principal of each Bond is due and payable.
"SUBORDINATED BONDS" or "SUBORDINATED CLASS" means any Class of
Bonds of a Series as to which the right to receive payment of principal and
interest from the proceeds of the Collateral securing the Series is subordinate
to the priority rights of Bondholders of a Senior Class of Bonds of such Series
to the extent specified in the related Prospectus Supplement.
"SUBSTITUTE COLLATERAL" means an item of Collateral pledged to the
Trustee to secure a Series of Bonds in substitution for an item of defective
Collateral.
"SUBSTITUTE LOAN" means a Loan pledged to secure a Series of Bonds
in substitution for a defaulted Loan, REO Property or Repo Property securing a
Series of Bonds.
"SURPLUS" means an amount in the Collateral Proceeds Account in
excess of the amount required to pay principal of and interest on the Bonds of a
Series and certain expenses.
"T&I ADVANCE" means an Advance by the Servicer or Special Servicer
of escrow amounts for tax and insurance payments with respect to any Loan
subject to a Delinquency.
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"TITLE INSURANCE" means the insurance provided by a Title Insurance
Policy.
"TITLE INSURANCE POLICY" means an American Land Title Association
(ALTA) mortgage loan title policy form 1970, or other form of Title Insurance
Policy acceptable to the Issuer, including all riders and endorsements thereto.
"TRUSTEE" means the bank, trust company or other fiduciary named in
the Prospectus Supplement for a Series of Bonds as the trustee under the
Indenture pursuant to which the Series is issued.
"TRUST ESTATE" means, with respect to each Series of Bonds, all
right, title and interest pledged or assigned to the Trustee for the Series
pursuant to the Series Supplement in and to benefits occurring to the Issuer
from the Collateral and from any debt service fund, Reserve Fund, Insurance
Policy, Servicing Agreement, Master Servicing Agreement, Additional Collateral
and other credit enhancement that constitutes security for the Series of Bonds.
"UCC" means the Uniform Commercial Code.
"UCC STATE" means a state in which a lien on a Manufactured Home is
"perfected," pursuant to the provisions of the applicable UCC, by filing UCC-3
financing statements or other appropriate transfer instruments with all
appropriate UCC filing offices.
"UNDERWRITER" means any firm that underwrites a Series of Bonds.
"UNPAID PRINCIPAL BALANCE" means with respect to any Loan, the
outstanding principal balance payable by the Borrower under the terms of the
Note or Contract.
77
No person has been authorized to give any information or make any
representations, other than those contained in this Prospectus and Prospectus
Supplement, in connection with the offerings made hereby, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Issuer, the Underwriters or any other person. This Prospectus
and Prospectus Supplement does not constitute an offer to sell or a solicitation
of an offer to buy any securities other than those to which it relates or an
offer to any person in any jurisdiction in which it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus and Prospectus
Supplement nor any offer or sale made hereunder shall, under any circumstances,
create any implication that the information set forth herein is correct as of
any time subsequent to the date hereof.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Summary of Terms............................... S-1
Risk Factors................................... S-12
Description of the Bonds....................... S-13
Security for the Bonds......................... S-22
Servicing of the Collateral.................... S-29
Maturity and Prepayment Considerations......... S-33
Yield Considerations........................... S-38
Use of Proceeds................................ S-39
Underwriting................................... S-39
Legal Matters.................................. S-40
Ratings........................................ S-40
ERISA Considerations........................... S-41
ANNEX I........................................ I-1
PROSPECTUS
Prospectus Summary............................. 1
Risk Factors................................... 6
Description of the Bonds....................... 16
Maturity and Prepayment Considerations......... 19
Yield Considerations........................... 19
Security for the Bonds......................... 20
Origination of the Collateral.................. 31
Servicing of the Collateral.................... 33
The Indenture.................................. 38
Certain Legal Aspects of the Collateral........ 42
The Issuer..................................... 53
Certain Federal Income Tax Consequences........ 54
State Tax Considerations....................... 64
ERISA Considerations........................... 64
Legal Investment............................... 66
Use of Proceeds................................ 66
Plan of Distribution........................... 66
Legal Matters.................................. 67
Financial Information.......................... 67
Additional Information......................... 67
Incorporation of Certain Documents By
Reference.................................... 68
Reports to Bondholders......................... 68
Glossary....................................... 69
Until ninety days have passed from the date of this Prospectus Supplement,
all dealers effecting transactions in the Bonds, whether or not participating in
this distribution, may be required to deliver this Prospectus Supplement and the
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
$996,964,000
(Approximate)
MERIT SECURITIES
CORPORATION
Collateralized Bonds, SERIES 9
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PROSPECTUS SUPPLEMENT
JUNE 20, 1997
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LEHMAN BROTHERS
WHEAT FIRST BUTCHER SINGER