Prospectus supplement to prospectus dated December 3, 2001
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$322,320,000
ABFS Mortgage Loan Trust 2001-4
Mortgage-Backed Notes, Series 2001-4
$322,320,000 5.35%(1) Class A Notes
[GRAPHIC OMITTED](R)
Bear Stearns Asset Backed Securities, Inc.
Depositor
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(1) The note rate for the Class A Notes will increase to 5.85% if the notes
remain outstanding after the clean-up call date.
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You should read the section entitled "Risk Factors" starting on page S-4 of this
prospectus supplement and page 4 of the accompanying prospectus and consider
these factors before making a decision to invest in the notes.
The notes represent non-recourse obligations of the trust estate only and are
not interests in or obligations of any other person.
Neither the notes nor the underlying mortgage loans will be insured or
guaranteed by any governmental agency or instrumentality.
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The trust estate--
o The trust estate consists primarily of one pool of fixed-rate business and
consumer purpose home equity loans secured by first- or second-lien
mortgages primarily on residential real properties.
The notes--
o The notes will be secured primarily by a pledge of the pool of mortgage
loans, as described in this prospectus supplement.
The notes will be initially under-collateralized to a limited extent.
Credit enhancement --
o The notes will be unconditionally and irrevocably guaranteed as to the
timely distribution of interest and as to specified distributions of
principal pursuant to the terms of a financial guaranty insurance policy
to be issued by
[MBIA GRAPHIC OMITTED]
o The policy will not cover shortfalls of interest on the notes which may
result from prepayments of the underlying mortgage loans, or from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940.
o Excess interest will be used in the early years of the transaction to
create and build over-collateralization.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus supplement. Any representation to the
contrary is a criminal offense.
The Attorney General of the State of New York has not passed on or
endorsed the merits of this offering. Any representation to the contrary is
unlawful.
The notes offered by this prospectus supplement will be purchased by
Bear, Stearns & Co. Inc. and Credit Suisse First Boston Corporation and offered
from time to time to the public in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. Proceeds to the depositor
from the sale of the notes are anticipated to be approximately $321,462,597
before the deduction of expenses payable by the depositor, estimated to be
approximately $500,000. The notes will be available for delivery to investors in
book-entry form through the facilities of The Depository Trust Company,
Clearstream Luxembourg and the Euroclear System on or about December 20, 2001.
Bear, Stearns & Co. Inc. Credit Suisse First Boston
Important notice about the information presented in this
prospectus supplement and the accompanying prospectus
We provide information to you about the notes in two separate documents
that provide more detail in progression: (1) the accompanying prospectus, which
provides general information, some of which may not apply to your series of
notes, and (2) this prospectus supplement, which describes the specific terms of
your series of notes. If the accompanying prospectus contemplates multiple
options, you should rely on the information in this prospectus supplement as to
the applicable option.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the Mortgage-Backed Notes, Series 2001-4 in any
state where the offer is not permitted.
For 90 days following the date of this prospectus supplement, all
dealers selling notes will deliver a prospectus supplement and prospectus. This
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters of the notes with respect to their unsold allotments
or subscriptions.
We cannot sell the notes to you unless you have received both this
prospectus supplement and the accompanying prospectus.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further information concerning a particular topic. The following table of
contents provides the pages on which these captions are located.
S-ii
Table of Contents
Prospectus supplement
Summary...........................................S-1 Servicing Fees and Other Compensation
Risk Factors......................................S-4 and Payment of Expenses...........................S-51
Transaction Overview.............................S-10 Periodic Advances and Servicer Advances...........S-52
Parties.......................................S-10 Prepayment Interest Shortfalls....................S-53
The Transaction...............................S-11 Relief Act Shortfalls.............................S-53
The Mortgage Loan Pool...........................S-11 Optional Purchase of Delinquent Mortgage Loans....S-53
The Originators, the Seller and the Servicer.....S-22 Servicer Reports..................................S-53
The Originators...............................S-23 Collection and Other Servicing Procedures.........S-54
Marketing Strategy............................S-27 Hazard Insurance..................................S-55
Underwriting Procedures and Practices.........S-28 Realization Upon Defaulted Mortgage Loans.........S-56
The Servicer..................................S-30 Removal and Resignation of the Servicer...........S-56
Delinquency and Loan Loss Experience..........S-31 Termination; Optional Clean-up Call...............S-58
Management's Discussion and Analysis..........S-33 The Policy...........................................S-58
The Owner Trustee................................S-33 Drawings Under the Policy.........................S-60
The Indenture Trustee and the Collateral Agent...S-34 The Note Insurer.....................................S-61
Description of the Notes and the Trust MBIA Information.....................................S-61
Certificates .................................S-34 Financial Strength Ratings of MBIA................S-64
Book-Entry Registration.......................S-35 Prepayment and Yield Considerations..................S-64
Definitive Notes..............................S-39 Material Federal Income Tax Consequences.............S-69
Sale of the Mortgage Loans....................S-39 Tax Characterization of the Trust.................S-69
Delivery of Mortgage Loan Documents...........S-40 Tax Consequences to Holders of the Notes..........S-69
Representations and Warranties of the Seller..S-42 State and Local Tax Consequences.....................S-71
Distributions on the Mortgage Loans...........S-44 ERISA Considerations.................................S-71
Note Rate.....................................S-46 Plan of Distribution.................................S-72
Initial Over-Funding..........................S-46 Legal Investment.....................................S-73
Over-collateralization Provisions.............S-46 Incorporation of Certain Information by Reference....S-73
Flow of Funds.................................S-48 Experts..............................................S-74
Indenture Events of Default...................S-49 Legal Matters........................................S-74
Reports to Noteholders........................S-50 Ratings..............................................S-74
Amendment.....................................S-50 Glossary.............................................S-75
Control Rights of Note Insurer................S-51
Servicing of the Mortgage Loans..................S-51
Prospectus
Risk Factors........................................4 FASIT Securities......................................109
Description of the Securities......................14 ERISA Considerations..................................115
The Trust Funds....................................19 Legal Matters.........................................122
Credit Enhancement.................................39 Financial Information.................................122
Servicing of Loans.................................44 Available Information.................................122
The Agreements.....................................53 Incorporation of Certain Information by Reference.....122
Material Legal Aspects of the Loans................64 Ratings...............................................123
The Depositor......................................78 Legal Investment Considerations.......................124
Use of Proceeds....................................78 Plan of Distribution..................................124
Material Federal Income Tax Considerations.........79 Glossary of Terms.....................................125
State Tax Considerations..........................109
S-iii
Summary
This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to consider
in making your investment decision. You should read this entire prospectus
supplement and the accompanying prospectus carefully to understand all of the
terms of the offering of the notes.
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The Notes and the Trust Certificates
The ABFS Mortgage Loan Trust 2001-4 will issue the mortgage-backed notes, series
2001-4: the Class A Notes. The Class A Notes will be secured by the assets of
the trust, which consist primarily of the mortgage loans. The notes are being
offered to you by this prospectus supplement. The trust will also issue one
class of trust certificates, representing the entire beneficial ownership
interest in the trust. The holder of a trust certificate is entitled to receive
specified payments consisting of excess interest from the mortgage loans, but
only after all other payments have been made in respect of the notes. The trust
is comprised of one mortgage loan pool.
The Trust Estate
The trust estate consists of:
o the mortgage loans, together with the mortgage files relating
thereto and all collections thereon and proceeds thereof
collected after the cut-off date,
o all rights of the depositor under the agreement by which the
depositor acquired the mortgage loans from the Originators,
o the assets as from time to time are identified as REO
properties and collections thereon and proceeds thereof,
o cash that is deposited into the collection accounts, and
invested in accordance with the indenture and the sale and
servicing agreement,
o the indenture trustee's rights with respect to the mortgage
loans under all insurance policies required to be maintained
in accordance with the servicing requirements, and any
insurance proceeds,
o liquidation proceeds, and
o released mortgaged property proceeds.
In addition, the noteholders will have the benefit of the note
insurance policy.
Distributions
Distributions on the notes will be on the 15th day of each month, or,
if the 15th day is not a business day, on the next business day, beginning on
January 15, 2002, to the holders of record on the preceding record date.
S-1
The record date for the Class A Notes will be the last business day of
the month preceding the related distribution date, or, in the case of the
January 15, 2002 distribution date, the closing date.
Payments of Interest
On each distribution date, the notes are entitled to receive current
interest.
o Current Interest. The current interest for a distribution date is the
interest which accrues on a class of notes at the applicable note rate
on the outstanding principal balance of the note during the accrual
period.
o Accrual Period. The accrual period for the Class A Notes is the
calendar month preceding the distribution date.
All computations of interest accrued on the Class A Notes will be made
on the basis of a 360-day year consisting of twelve 30-day months.
Payments of Principal
The holders of the Class A Notes are entitled to receive distributions
of principal on each distribution date which will be equal to the collections of
principal on the mortgage loans,
o plus additional payments of principal funded from excess
interest, as needed to create or maintain the
over-collateralization at its required level,
o minus amounts of principal not distributed, as needed to reduce
the over-collateralization to its required level.
The additional, accelerated payments of principal will be made during
the early months of the transaction, to eliminate the initial
under-collateralization and to increase the amount of over-collateralization to
its required level. Subsequently, if at any time losses on the underlying
mortgage loans reduce the amount of over-collateralization to below its required
level, the additional, accelerated payments of principal will again commence, to
the extent needed to maintain the amount of over-collateralization at its then
required level. These additional, accelerated payments of principal will be
funded from excess interest on the underlying mortgage loans which would
otherwise be applied to other subordinated purposes, or distributed to the
certificateholders.
Credit Enhancement
The credit enhancement provided for the benefit of the holders of the
notes consists solely of:
o excess spread,
o over-collateralization, and
o the note insurance policy.
The Mortgage Loans
The mortgage loans to be included in the trust estate will be primarily
fixed-rate, closed-end, monthly pay, business purpose loans and consumer purpose
home equity loans secured by first or second mortgages or deeds of trust
primarily on residential real properties.
The mortgage loans will have an aggregate outstanding principal balance
as of the statistical calculation date of $184,439,552.24. As of the statistical
calculation date, each mortgage loan in the mortgage loan group is secured by a
first or second lien on the related property.
S-2
On the closing date, the trust will purchase the mortgage loans. The
aggregate principal balance of the mortgage loans will be approximately
$316,000,000.00 as of the cut-off date.
Servicing of the Mortgage Loans
American Business Credit, Inc. will act as servicer and will be
obligated to service and administer the mortgage loans on behalf of the trust,
for the benefit of the note insurer and the holders of the notes.
Optional Termination of the Notes
The servicer may, at its option, purchase the mortgage loans and call
the notes on any distribution date when the aggregate principal balance of the
mortgage loans is equal to or less than 10% of the aggregate principal balances
of the mortgage loans as of the cut-off date. This purchase of the mortgage
loans would result in the payment in full of the Class A Notes on such
distribution date. If the mortgage loans are not purchased on the first
distribution date on which the above option may be exercised, the interest rate
payable on the Class A Notes will be increased by 0.50% per annum. The note
insurer must consent to the purchase of the mortgage loans if the resulting
amount available for payment on the notes would result in a draw under the note
insurance policy.
ERISA Considerations
Subject to the conditions described under "ERISA Considerations"
herein, the notes may be purchased by an employee benefit plan or other
retirement arrangement subject to ERISA or Section 4975 of the Internal Revenue
Code.
Material Federal Income Tax Consequences
For federal income tax purposes, Dewey Ballantine LLP, tax counsel to
the trust, is of the opinion that:
o the notes will be treated as indebtedness, and
o the trust will not be treated as an association, or a publicly
traded partnership, taxable as a corporation or a taxable
mortgage pool. By your acceptance of a note, you agree to
treat the notes as indebtedness.
Interest on the notes will be taxable as ordinary income (a) when
received by a holder using the cash method of accounting and (b) when accrued by
a holder using the accrual method of accounting.
Legal Investment
The notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.
Ratings
In order to be issued, the notes must be rated "AAA" by Standard &
Poor's and "Aaa" by Moody's, taking into account the note insurance policy
issued with respect to the notes. These ratings may be lowered, qualified or
withdrawn by the rating agencies.
S-3
Risk Factors
In addition to the risk factors discussed in the prospectus,
prospective noteholders should consider, among other things, the following
additional factors in connection with the purchase of the notes. Unless
otherwise noted, all percentages are based upon the mortgage loan group that
existed on a statistical calculation date of November 12, 2001.
Less stringent underwriting standards and the resultant potential for
delinquencies on the mortgage loans could lead to losses on your securities.
The mortgage loans were made, in part, to borrowers who, for one reason
or another, are not able, or do not wish, to obtain financing from
traditional sources such as commercial banks. These mortgage loans may
be considered to be of a riskier nature than mortgage loans made by
traditional sources of financing, so that the holders of the notes may
be deemed to be at greater risk than if the mortgage loans were made to
other types of borrowers.
The underwriting standards used in the origination of the mortgage
loans held by the trust are generally less stringent than those of
Fannie Mae or Freddie Mac with respect to a borrower's credit history
and in certain other respects. Borrowers on the mortgage loans may have
an impaired or unsubstantiated credit history. As a result of this less
stringent approach to underwriting, the mortgage loans purchased by the
trust may experience higher rates of delinquencies, defaults and
foreclosures than mortgage loans underwritten in a manner which is more
similar to the Fannie Mae and Freddie Mac guidelines.
Geographic concentration of the mortgage loans in particular jurisdictions may
result in greater losses if those jurisdictions experience economic downturns.
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets,
and, consequently, may experience higher rates of loss and delinquency
on mortgage loans generally. Any concentration of the mortgage loans in
such a region may present risk considerations in addition to those
generally present for similar mortgage-backed securities without such
concentration. The mortgaged properties underlying the mortgage loans
are located primarily on the eastern seaboard of the United States.
This may subject the mortgage loans held by the trust to the risk that
a downturn in the economy in this region of the country would more
greatly affect the mortgage loan group than if the mortgage loan group
was more diversified.
In particular, the following percentages of mortgage loans in the
mortgage loan group on the statistical calculation date were secured by
mortgaged properties located in the following states:
S-4
New York New Jersey Massachusetts Florida Pennsylvania Michigan Illinois Ohio
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Mortgage Loan
Group 23.05% 9.95% 8.06% 7.78% 7.74% 6.85% 6.50% 5.12%
Because of the relative geographic concentration of the mortgage loans
within the States of New York, New Jersey, Massachusetts, Florida,
Pennsylvania, Michigan, Illinois and Ohio, losses on the mortgage loans
may be higher than would be the case if the mortgage loans were more
geographically diversified. For example, certain of the mortgaged
properties may be more susceptible to certain types of special hazards,
such as earthquakes, hurricanes, floods, and other natural disasters
and major civil disturbances, than residential or commercial properties
located in other parts of the country. In addition, the economies of
New York, New Jersey, Massachusetts, Florida, Pennsylvania, Michigan,
Illinois and Ohio may be adversely affected to a greater degree than
the economies of other areas of the country by certain regional
developments. Because of the relative geographic concentration of the
mortgage loans within States such as New York and New Jersey, the
events of September 11, 2001, may have an adverse effect on the
mortgage loans. If the New York, New Jersey, Massachusetts, Florida,
Pennsylvania, Michigan, Illinois and Ohio residential or commercial
real estate markets experience an overall decline in property values
after the dates of origination of the respective mortgage loans, then
the rates of delinquencies, foreclosures and losses on the mortgage
loans may increase and such increase may be substantial.
A portion of the mortgage loans require large balloon payments at maturity;
these balloon loans may involve a greater risk of default due to these large
payments, which could lead to losses on your notes.
Approximately 43.48% of the mortgage loans on the statistical
calculation date are not fully amortized over their terms and instead
require substantial balloon payments on their maturity dates. Because
the principal balances of these balloon loans do not fully amortize
over their terms, these balloon loans may involve greater risks of
default than mortgage loans whose principal balance is fully amortized
over the term of the mortgage loan. A borrower's ability to pay the
balloon amount due at maturity of his or her balloon loan will depend
on the borrower's ability to obtain adequate refinancing or funds from
other sources to repay the balloon loan. The originators have only
limited historical default data with respect to their balloon loans and
they do not believe that their data is sufficient to predict the
default experience of the balloon loans.
Even assuming that the mortgaged properties provide adequate security
for the balloon loans, substantial delays and foreclosure costs could
be encountered in connection with the liquidation of defaulted mortgage
loans and corresponding delays in the receipt of proceeds by the
holders of the notes could occur.
S-5
A portion of the mortgage loans are secured by subordinate mortgages; in the
event of a default, these mortgage loans are more likely to experience losses.
Approximately 12.08% of the mortgage loans on the statistical
calculation date are secured by subordinate or junior mortgages which
are subordinate to the rights of the holder of the related senior
mortgages. As a result, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the principal
balance of the mortgage loan only to the extent that the claims, if
any, of each related senior mortgagee are satisfied in full, including
any related foreclosure costs. In addition, a holder of a junior
mortgage may not foreclose on the mortgaged property securing such
mortgage unless it either pays the entire amount of the senior
mortgages to the senior mortgagees at or prior to the foreclosure sale
or undertakes the obligation to make payments on each senior mortgage
in the event of default thereunder. In servicing business and consumer
purpose home equity loans in its portfolio, the servicer will generally
satisfy or reinstate each such first mortgage at or prior to the
foreclosure sale only to the extent that it determines any amount so
paid will be recoverable from future payments and collections on the
mortgage loans or otherwise. The trust will have no source of funds to
satisfy any senior mortgage or make payments due to any senior
mortgagee.
An overall decline in the residential or commercial real estate markets
could adversely affect the values of the mortgaged properties and cause
the outstanding principal balances of the mortgage loans, together with
the primary senior financing thereon, to equal or exceed the value of
the mortgaged properties. This type of a decline would adversely affect
the position of a second mortgagee before having the same effect on the
related first mortgagee. A rise in interest rates over a period of time
and the general condition of the mortgaged property as well as other
factors may have the effect of reducing the value of the mortgaged
property from the appraised value at the time the mortgage loan was
originated. If there is a reduction in value of the mortgaged property,
the ratio of the amount of the mortgage loan to the value of the
mortgaged property may increase over what it was at the time the
mortgage loan was originated. This type of increase may reduce the
likelihood of liquidation or other proceeds being sufficient to satisfy
the mortgage loan after satisfaction of any senior liens.
Prepayments on the mortgage loans could lead to shortfalls in the distribution
of interest on your note.
The dates on which scheduled payments are due on the mortgage loans
occur throughout a month. When a principal prepayment in full is made
on a mortgage loan, the mortgagor is charged interest only up to the
date of such prepayment, instead of for a full month. However, such
principal receipts will only be passed through to the holders of the
notes once a month on the distribution date which follows the calendar
month in which such prepayment was received by the servicer. The
servicer is obligated to pay, without any right of reimbursement, those
shortfalls in interest collections payable on the notes that are
attributable to the difference between the interest paid by a mortgagor
in connection with a prepayment in full and thirty days' interest on
such mortgage loan, but only to the extent of the servicing fees for
such mortgage loan for such calendar month.
S-6
If the servicer fails to make such distributions or the shortfall
exceeds the servicing fee, there will be less funds available for the
distribution of interest on the notes. Such shortfalls of interest, if
they result in the inability of the trust to pay the full amount of the
current interest on the notes, are not covered by the note insurance
policy.
Over-Funding feature effects timing of principal payments and draws under the
note insurance policy
The Notes are issued initially with an over-funding feature, which
means that we are issuing a greater principal amount of Notes than the
aggregate principal amount of mortgage loans in the mortgage loan
group. Specifically, the original Class A Note principal balance
exceeds the original aggregate pool balance of the mortgage loan group
by approximately $6,320,000.00.
As discussed under "Description of the Notes and the Trust Certificates
- Over-collateralization Provisions", excess cashflow consisting
generally of excess interest - interest collected on the mortgage loans
in excess of the interest paid out on the Notes, together with fees -
will be applied in the early months of the transaction to eliminate the
under-collateralization which results from the over-funding feature,
and thereafter to build over-collateralization to its required level.
Although the note insurer will generally be required to fund, under the
note insurance policy, the amount of under-collateralization, that
provision will not initially apply to this beginning level of
under-collateralization, although the note insurance policy will
ultimately cover any Over-collateralization Deficit.
Distributions to and rights of investors may be adversely affected in the event
of any bankruptcy of the seller.
The sales of the mortgage loans from the originators to the seller, and
from the seller to the depositor are intended as "true sales" of the
mortgage loans for bankruptcy purposes. The sale of the mortgage loans
from the depositor to the trust will be treated by the depositor and
the trust as a sale of the mortgage loans. If the originators were to
become insolvent, a receiver or conservator for, or a creditor of, the
originators, may nonetheless argue that the transaction between the
originators and the seller is a pledge of mortgage loans as security
for a borrowing rather than a sale. If the court were to accept these
arguments, you could experience losses or delays in payments on your
notes because:
o the indenture trustee would not be able to exercise remedies with
respect to the mortgage loans on your behalf without permission
from the court;
S-7
o the court might require the indenture trustee to accept property
in exchange for the mortgage loans, and that property could be
found to be of less value than the mortgage loan;
o the court might prevent the indenture trustee or the noteholders
from taking some actions such as selling the mortgage loans or
appointing a successor servicer;
o the court might order the sale of the mortgage loans, resulting in
early payment of the notes; and
o tax or government liens on the seller's property that arose before
the transfer of the mortgage loans could be paid from the
collections on the mortgage loans before the collections could be
used to make payments on your notes.
The attempt to recharacterize the transfer, even if unsuccessful, could
result in delays in distributions to you. If the attempt were
successful, the indenture trustee's recovery on your behalf could be
limited to the then current value of the mortgage loans or other
collateral. Consequently, you could lose the right to future payments
and you might not receive your anticipated principal and interest on
the notes.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of
all branches of the military on active duty, including draftees and
reservists in military service and state national guard called to
federal duty:
o are entitled to have interest rates reduced and capped at 6% per
annum, on obligations (including mortgage loans) incurred prior to
the commencement of military service for the duration of military
service;
o may be entitled to a stay of proceeding on any kind of foreclosure
or repossession action in the case of defaults on obligations
entered into prior to military service for the duration of
military service; and
o may have the maturity of obligations incurred prior to military
service extended, the payments lowered and the payment schedule
readjusted for a period of time after the completion of military
service.
If a borrower's obligation to repay amounts otherwise due on a mortgage
loan included in the trust is relieved pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940, none of the trust, the servicer, the
seller, the depositor, the originators or the indenture trustee will be
required to advance these amounts, and any resulting loss may reduce
the amounts available to be paid to the holders of the notes. Any
shortfalls in interest collections on mortgage loans included in the
trust resulting from application of the Soldiers' and Sailors' Civil
Relief Act of 1940 will not be covered by the note insurance policy and
will be allocated to the trust certificates in reduction of the amounts
payable to such trust certificates on the related distribution date.
S-8
Recent developments may increase the risk of loss on the mortgage loans.
On September 11, 2001, the United States was subjected to multiple
terrorist attacks, resulting in the loss of many lives and massive
property damage and destruction in the New York and Washington, D.C.
metropolitan areas. Although the damaged and destroyed properties
consisted primarily of commercial and government buildings, these
tragic events may nevertheless have an adverse effect on the value of
residential real estate in the United States, particularly in the New
York and Washington D.C. metropolitan areas. In addition, it is
possible (although we cannot predict the likelihood) that these events,
or any consequential or subsequent events involving the United States,
may have a temporary or sustained adverse effect on the financial
markets (including the market for mortgage-backed securities) or the
U.S. economy generally or economic conditions in the New York or
Washington D.C. metropolitan areas or other areas of the United States.
We have not made a determination as to whether any of the borrowers
under the mortgage loans may have been a victim or the dependent of a
victim of the terrorist attacks or a person involved in the ongoing
rescue, recovery and response efforts, or a dependent of such person.
However, it is possible that there could be an increase in the number
of delinquencies and foreclosures of the mortgage loans as a result of
these events.
As a result of the terrorist attacks, President Bush has authorized the
placement of 55,000 military reservists on active duty status. To the
extent that any such person is a borrower under a loan, the interest
rate limitations and other provisions of the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended, would apply to the loan during
the period of active duty. It is possible that the number of reservists
placed on active duty status in the near future may increase. In
addition, other borrowers who enter military service after the
origination of their loans (including borrowers who are members of the
National Guard at the time of the origination of their loans and are
later called to active duty) would be covered by the terms of the
Soldiers' and Sailors' Civil Relief Act. See "Material Legal Aspects of
the Loans--Soldiers' and Sailors' Civil Relief Act of 1940" in the
prospectus.
Because the ratings of the notes are dependent upon the creditworthiness of the
note insurer, a downgrade of the note insurer could cause a downgrade of the
notes.
The ratings of the notes will depend primarily on the creditworthiness
of the note insurer as the provider of the policy relating to the
notes. Any reduction in the note insurer's financial strength and
claims-paying ability ratings could result in a reduction of the
ratings on the notes.
Some of the terms used in this prospectus supplement are capitalized.
These capitalized terms have specified definitions, which are included
at the end of this prospectus supplement under the heading "Glossary."
S-9
Transaction Overview
Parties
The Trust. ABFS Mortgage Loan Trust 2001-4, a Delaware statutory
business trust. The principal executive office of the trust is in Wilmington,
Delaware, in care of the owner trustee, at the address of the owner trustee
specified below.
The Depositor. Bear Stearns Asset Backed Securities, Inc., a Delaware
corporation. The principal executive office of the depositor is located at 245
Park Avenue, New York, New York 10167, and its telephone number is (212)
272-2000.
The Seller. ABFS 2001-4, Inc., a Delaware corporation. The principal
executive office of the seller is at 103 Springer Building, 3411 Silverside
Road, Wilmington, Delaware 19810, and its telephone number is (302) 478-6161.
The Originators. American Business Credit, Inc., a Pennsylvania
corporation, HomeAmerican Credit, Inc. d/b/a Upland Mortgage, a Pennsylvania
corporation, and American Business Mortgage Services, Inc., a New Jersey
corporation, originated or purchased the mortgage loans. For a description of
the business of the originators, see "The Originators, the Seller and the
Servicer" herein.
The Servicer and the Subservicers. American Business Credit, Inc. will
act as servicer of the mortgage loans, and Upland Mortgage and American Business
Mortgage Services, Inc. will act as subservicers with respect to different
portions of the mortgage loans. For a description of the business of the
servicer, see "The Originators, the Seller and the Servicer" herein.
The Indenture Trustee and the Collateral Agent. JPMorgan Chase Bank, a
New York banking corporation. The corporate trust office of the indenture
trustee is located at 450 West 33rd Street, 14th Floor, New York, New York
10001, and its telephone number is (212) 946-3200. For a description of the
indenture trustee, see "The Indenture Trustee and Collateral Agent" herein.
The Owner Trustee. U.S. Bank Trust, National Association, a national
banking association. The corporate trust office of the owner trustee is located
at 300 Delaware Avenue, 8th floor, Wilmington, Delaware 19801, and its telephone
number is (302) 622-8163. For a description of the owner trustee and its
responsibilities, see "The Owner Trustee" herein.
S-10
The Note Insurer. MBIA Insurance Corporation, a subsidiary of MBIA
Inc., a New York Stock Exchange listed company. The note insurer will issue a
financial guaranty insurance policy for the benefit of the holders of the Class
A Notes. For a description of the business and selected financial information of
the note insurer, see "The Policy" and "The Note Insurer" herein.
The Rating Agencies. Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. and Moody's Investors Service, Inc. will issue ratings with
respect to the notes.
The Transaction
Formation of the Trust and Issuance of the Trust Certificates. The
trust was formed pursuant to the terms of a Trust Agreement, dated as of
December 1, 2001, between the owner trustee, the depositor and the seller, and
the filing of a certificate of trust with the Secretary of State of the State of
Delaware. Under the Trust Agreement, the trust also will issue one class of
trust certificates, evidencing the entire beneficial ownership interest in the
trust.
Sale and Servicing of the Mortgage Loans. The mortgage loans have been
originated or purchased by the originators pursuant to their respective
underwriting guidelines, as described herein under "The Originators, the Seller
and the Servicer." The originators will sell the mortgage loans to the seller,
and the seller will sell the mortgage loans to the depositor pursuant to an
Unaffiliated Seller's Agreement, dated as of December 1, 2001, among the
originators, the seller and the depositor. The depositor will sell the mortgage
loans to the trust pursuant to a Sale and Servicing Agreement, dated as of
December 1, 2001, among the depositor, the trust, the servicer, the collateral
agent and the indenture trustee. The servicer will service the mortgage loans
pursuant to the terms of the Sale and Servicing Agreement.
Issuance of the Notes. Pursuant to the terms of an Indenture, dated as
of December 1, 2001, between the trust and the indenture trustee, the trust will
pledge the trust estate to the indenture trustee, for the benefit of the holders
of the notes and the note insurer, and issue the notes.
Issuance of the Policy. The note insurer will issue the policy pursuant
to the terms of an Insurance and Reimbursement Agreement, dated as of December
20, 2001, among the note insurer, the depositor, the seller, the trust, the
originators, the servicer and the indenture trustee.
S-11
The Mortgage Loan Pool
Difference between Statistical Calculation Date and Closing Date Pool.
The statistical information presented in this prospectus supplement concerning
the mortgage loans is based on the pool of mortgage loans that existed on a
statistical calculation date, in this case November 12, 2001. The principal
balance of the mortgage loan group aggregated $184,439,552.24 as of the
statistical calculation date. The seller expects that the actual closing date
pool will represent approximately $316,000,000.00 in aggregate principal balance
of mortgage loans in the mortgage loan group, as of the cut-off date. The
additional mortgage loans represent mortgage loans acquired or to be acquired by
the trust on or prior to the closing date. On the closing date, in addition to
the mortgage loans included in the statistical information as of the statistical
calculation date, the seller expects to deliver a substantial amount of
additional mortgage loans that will have been originated after the statistical
calculation date but before the closing date. In addition, with respect to the
mortgage loan group as of the statistical calculation date as to which
statistical information is presented herein, some amortization will occur prior
to the closing date. Moreover, certain mortgage loans included in the mortgage
loan group as of the statistical calculation date may prepay in full, or may be
determined not to meet the eligibility requirements for the final mortgage loan
group, and may not be included in the final mortgage loan group. As a result of
the foregoing, the statistical distribution of characteristics as of the closing
date for the final mortgage loan group will vary somewhat from the statistical
distribution of such characteristics as of the statistical calculation date as
presented in this prospectus supplement, although such variance should not be
material.
The mortgage loans will be predominantly business or consumer purpose
residential home equity loans used to refinance an existing mortgage loan, to
consolidate debt, or to obtain cash proceeds in order to provide funds for
working capital for business, business expansion, equipment acquisition, or
personal acquisitions by borrowing against the mortgagor's equity in the related
mortgaged property. The mortgaged properties securing the mortgage loans consist
primarily of single-family residences -- which may be detached, part of a
multi-family dwelling, a condominium unit, a townhouse, a manufactured home or a
unit in a planned unit development -- and to a limited extent commercial
multiple purpose, or mixed use properties. The mortgaged properties may be
owner-occupied properties, which include second and vacation homes, non-owner
occupied investment properties or business purpose properties.
Approximately 85.42% of the mortgage loans on the statistical
calculation date have a prepayment fee clause. Such prepayment fee clauses
generally provide that the mortgagor pay, upon prepayment, one or more of the
following:
o a fee equal to a percentage, which is negotiated at origination, of the
outstanding principal balance of the mortgage loan; or
o a fee which is designed to allow the holder of the mortgage note to
earn interest on the mortgage loan as if the mortgage loan remained
outstanding until a designated point in time.
The mortgaged properties underlying the mortgage loans are located
primarily on the eastern seaboard of the United States. For a description of
relevant state laws that may present material issues regarding the geographic
concentrations of the mortgage loans, see "Material Legal Aspects of the Loans"
in the accompanying prospectus.
The following sections describe the statistical characteristics of the
mortgage loan group. Unless otherwise noted, all statistical percentages in this
prospectus supplement are approximate and are measured by the aggregate
principal balance of the applicable mortgage loans in relation to the aggregate
principal balance of the mortgage loans in the mortgage loan group, in each
case, as of the statistical calculation date.
S-12
The loan-to-value ratios and the combined loan-to-value ratios, or
LTV's and CLTV's, described herein were calculated based upon the appraised
values of the related mortgaged properties used for loan origination. No
assurance can be given that such appraised values of the mortgaged properties
have remained or will remain at the levels that existed on the dates of
origination of the related mortgage loans. If property values decline such that
the outstanding principal balances of the mortgage loans, together with the
outstanding principal balances of any first liens, become equal to or greater
than the value of the mortgaged properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those historically experienced by
the servicer, as set forth below under "The Originators, the Seller and the
Servicer -- Delinquency and Loan Loss Experience," and in the mortgage lending
industry generally.
The Mortgage Loan Group. As of the statistical calculation date, the
mortgage loans in the mortgage loan group had the following characteristics:
o none of the mortgage loans were more than 30 days delinquent;
o there were 1,982 mortgage loans under which the related mortgaged
properties are located in 31 states;
o the aggregate principal balance, after application of all payments due
on or before the statistical calculation date, was $184,439,552.24;
o the minimum current principal balance was $14,916.60, the maximum
current principal balance was $500,000.00 and the average current
principal balance was $93,057.29;
o the mortgage interest rates ranged from 7.990% to 16.990% per annum,
and the weighted average mortgage interest rate was approximately
11.284% per annum;
o the original term to stated maturity ranged from 36 months to 360
months and the weighted average original term to stated maturity was
approximately 252 months;
o the remaining term to stated maturity ranged from 35 months to 360
months and the weighted average remaining term to stated maturity was
approximately 252 months;
o approximately 56.52% of the mortgage loans by aggregate principal
balance require monthly payments of principal that will fully amortize
these mortgage loans by their respective maturity dates, and
approximately 43.48% of the mortgage loans by aggregate principal
balance are balloon loans;
o the weighted average original CLTV was approximately 76.57%;
o approximately 87.92% of the mortgage loans by aggregate principal
balance are secured by first liens and approximately 12.08% of the
mortgage loans by aggregate principal balance are secured by second
liens; and
S-13
o approximately 23.05%, 9.95%, 8.06%, 7.78%, 7.74%, 6.85%, 6.50% and
5.12% of the mortgage loans by aggregate principal balance are secured
by mortgaged properties located in the States of New York, New Jersey,
Massachusetts, Florida, Pennsylvania, Michigan, Illinois and Ohio,
respectively.
The following tables set forth certain statistical information with
respect to the mortgage loans in the mortgage loan group. Due to rounding, the
percentages shown may not precisely total 100.00%.
S-14
Geographic Distribution of Mortgaged Properties
% of Mortgage
Loan Group by
Aggregate
Statistical
Number of Aggregate Calculation
Mortgage Unpaid Principal Date Principal
State Loans Balance Balance
- ----- -------------- ----------------- ---------------
New York................................... 351 $ 42,507,465.57 23.05%
New Jersey................................. 165 18,351,664.43 9.95
Massachusetts.............................. 117 14,869,768.51 8.06
Florida.................................... 181 14,349,908.22 7.78
Pennsylvania............................... 210 14,275,513.20 7.74
Michigan................................... 165 12,631,831.19 6.85
Illinois................................... 127 11,997,060.93 6.50
Ohio....................................... 130 9,438,143.84 5.12
Georgia.................................... 72 7,149,853.41 3.88
North Carolina............................. 74 5,492,590.64 2.98
Indiana.................................... 57 4,554,620.02 2.47
Virginia................................... 41 4,199,515.85 2.28
Other...................................... 292 24,621,616.43 13.35
-------------- ----------------- ---------------
Total: 1,982 $ 184,439,552.24 100.00%
============== ================= ================
Number of States Represented: 31
o "Other" includes states with under 2.00% individual concentrations of the
mortgage loans in the mortgage loan group.
S-15
Distribution of Original Combined Loan-to-Value Ratios
% of Mortgage
Loan Group by
Aggregate Aggregate
Number of Unpaid Statistical
Mortgage Principal Calculation Date
Original Combined Loan-to-Value Ratio Range (%) Loans Balance Principal Balance
- ----------------------------------------------- -------------- ------------------ ------------------
0.01 to 40.00.......................................... 107 $ 5,623,705.60 3.05%
40.01 to 50.00........................................... 93 7,443,161.61 4.04
50.01 to 60.00.......................................... 138 9,522,291.88 5.16
60.01 to 70.00.......................................... 253 22,409,527.00 12.15
70.01 to 80.00.......................................... 576 56,745,037.95 30.77
80.01 to 90.00.......................................... 804 82,002,490.45 44.46
90.01 to 100.00.......................................... 11 693,337.75 0.38
-------------- ------------------ ------------------
Total: 1,982 $ 184,439,552.24 100.00%
============== ================== ==================
o The minimum and maximum original combined loan-to-value ratios of the
mortgage loans in the mortgage loan group as of the statistical
calculation date are approximately 9.09% and 100.00% respectively, and
the weighted average original combined loan-to-value ratio of the
mortgage loans in the mortgage loan group as of the statistical
calculation date is approximately 76.57%.
Distribution of Gross Interest Rates
% of Mortgage
Loan Group by
Aggregate Aggregate
Number of Unpaid Statistical
Mortgage Principal Calculation Date
Range of Gross Interest Rates (%) Loans Balance Principal Balance
- --------------------------------- ------------- ----------------- ---------------------
7.000 to 7.999......................................... 1 $ 190,000.00 0.10%
8.000 to 8.999......................................... 12 1,799,304.29 0.98
9.000 to 9.999......................................... 476 58,148,041.82 31.53
10.000 to 10.999......................................... 528 54,463,802.22 29.53
11.000 to 11.999......................................... 318 26,709,535.33 14.48
12.000 to 12.999......................................... 245 15,485,987.37 8.40
13.000 to 13.999......................................... 180 9,588,409.74 5.20
14.000 to 14.999......................................... 30 1,549,904.57 0.84
15.000 to 15.999......................................... 44 3,905,604.58 2.12
16.000 to 16.999......................................... 148 12,598,962.32 6.83
------------- ----------------- ---------------------
Total: 1,982 $ 184,439,552.24 100.00%
============= ================= =====================
o The weighted average gross interest rate of the mortgage loans in the
mortgage loan group as of the statistical calculation date is
approximately 11.284%.
S-16
Distribution of Original Term to Stated Maturity
(in months)
% of Mortgage
Loan Group by
Aggregate
Number of Statistical
Mortgage Aggregate Unpaid Calculation Date
Range of Original Term (in months) Loans Principal Balance Principal Balance
- ---------------------------------- ------------- -------------------- -------------------
1 to 60.............................................. 25 $ 1,372,616.33 0.74%
61 to 120.............................................. 117 6,909,757.06 3.75
121 to 180.............................................. 767 61,427,417.57 33.30
181 to 240.............................................. 558 51,321,288.71 27.83
241 to 300.............................................. 71 8,567,343.58 4.65
301 to 360.............................................. 444 54,841,128.99 29.73
------------- -------------------- -------------------
Total: 1,982 $184,439,552.24 100.00%
============= ==================== ===================
o The weighted average original term to stated maturity of the mortgage
loans in the mortgage loan group as of the statistical calculation date
is approximately 252 months.
S-17
Distribution of Original Principal Balances
% of Mortgage
Loan Group by
Aggregate
Number of Aggregate Statistical
Mortgage Unpaid Principal Calculation Date
Range of Original Principal Balances ($) Loans Balance Principal Balance
---------------------------------------- ----------- ------------------- --------------------
0.01 to 25,000.00........................ 124 $ 2,750,366.66 1.49%
25,000.01 to 50,000.00........................ 504 19,085,589.21 10.35
50,000.01 to 75,000.00........................ 443 27,575,170.03 14.95
75,000.01 to 100,000.00....................... 217 18,840,746.39 10.22
100,000.01 to 125,000.00....................... 221 24,780,125.65 13.44
125,000.01 to 150,000.00....................... 142 19,530,195.73 10.59
150,000.01 to 175,000.00....................... 86 13,936,096.72 7.56
175,000.01 to 200,000.00....................... 78 14,585,283.69 7.91
200,000.01 to 225,000.00....................... 53 11,194,937.05 6.07
225,000.01 to 250,000.00....................... 35 8,373,863.19 4.54
250,000.01 to 275,000.00....................... 27 7,062,156.45 3.83
275,000.01 to 300,000.00....................... 28 8,104,153.67 4.39
300,000.01 and Greater.......................... 24 8,620,867.80 4.67
----------- ------------------- --------------------
Total: 1,982 $ 184,439,552.24 100.00%
=========== =================== ====================
o The average original principal balance of the mortgage loans in the
mortgage loan group as of the statistical calculation date is
$93,092.06
Distribution of Current Principal Balances
% of Mortgage
Loan Group by
Aggregate
Number of Aggregate Statistical
Mortgage Unpaid Principal Calculation Date
Range of Current Principal Balances ($) Loans Balance Principal Balance
--------------------------------------- --------- ------------------ -----------------
0.01 to 25,000.00........................ 124 $ 2,750,366.66 1.49%
25,000.01 to 50,000.00........................ 504 19,085,589.21 10.35
50,000.01 to 75,000.00........................ 443 27,575,170.03 14.95
75,000.01 to 100,000.00....................... 217 18,840,746.39 10.22
100,000.01 to 125,000.00....................... 221 24,780,125.65 13.44
125,000.01 to 150,000.00....................... 142 19,530,195.73 10.59
150,000.01 to 175,000.00....................... 86 13,936,096.72 7.56
175,000.01 to 200,000.00....................... 78 14,585,283.69 7.91
200,000.01 to 225,000.00....................... 53 11,194,937.05 6.07
225,000.01 to 250,000.00....................... 35 8,373,863.19 4.54
250,000.01 to 275,000.00....................... 27 7,062,156.45 3.83
275,000.01 to 300,000.00....................... 28 8,104,153.67 4.39
300,000.01 and Greater.......................... 24 8,620,867.80 4.67
--------- ------------------ -----------------
Total: 1,982 $184,439,552.24 100.00%
========= ================== =================
o The average current principal balance of the mortgage loans in the
mortgage loan group as of the statistical calculation date is
$93,057.29.
S-18
Distribution by Lien Status
% of Mortgage
Loan Group by
Aggregate
Aggregate Statistical
Number of Unpaid Calculation Date
Mortgage Principal Principal
Lien Status Loans Balance Balance
----------- ------------- ---------------- -------------------
First Lien............................................... 1,587 $162,151,568.37 87.92%
Second Lien.............................................. 395 22,287,983.87 12.08
------------- ---------------- -------------------
Total: 1,982 $184,439,552.24 100.00%
============= ================ ===================
Distribution by Amortization Type
% of Mortgage
Loan Group by
Aggregate
Aggregate Statistical
Number of Unpaid Calculation Date
Mortgage Principal Principal
Amortization Type Loans Balance Balance
----------------- --------- --------------- ----------------
Fully Amortizing......................................... 1,133 $104,250,947.95 56.52%
Balloon Loans............................................ 849 80,188,604.29 43.48
--------- --------------- ----------------
Total: 1,982 $184,439,552.24 100.00%
========= =============== ================
S-19
Distribution by Occupancy Status
% of Mortgage
Loan Group by
Aggregate
Aggregate Statistical
Number of Unpaid Calculation
Mortgage Principal Date Principal
Occupancy Status Loans Balance Balance
- ---------------- ------------ ------------------ -----------------
Owner Occupied........................................... 1,787 $167,547,868.23 90.84%
Investment Property...................................... 122 8,516,753.76 4.62
Business................................................. 56 6,589,985.11 3.57
Second Home.............................................. 17 1,784,945.14 0.97
------------ ------------------ -----------------
Total: 1,982 $184,439,552.24 100.00%
============ ================== =================
Distribution by Property Type
% of Mortgage
Loan Group by
Aggregate
Statistical
Number of Aggregate Calculation Date
Mortgage Unpaid Principal Principal
Property Type Loans Balance Balance
- ------------- ------------ ---------------- ----------------
Single Family Detached................................... 1,427 $128,122,172.91 69.47%
2-4 Family............................................... 186 21,936,646.70 11.89
Condominium.............................................. 84 7,778,615.81 4.22
Mixed Use................................................ 59 6,839,328.43 3.71
Planned Unit Development................................. 51 6,592,127.99 3.57
Townhouse................................................ 91 6,156,828.61 3.34
Manufactured Housing..................................... 54 3,465,918.93 1.88
Commercial............................................... 25 2,874,242.88 1.56
Multi-family (greater than 4) ........................... 4 562,169.98 0.30
Condominium Development.................................. 1 111,500.00 0.06
------------ ---------------- ----------------
Total: 1,982 $184,439,552.24 100.00%
============ ================ ================
S-20
Distribution by Delinquency Status
% of Mortgage
Loan Group by
Aggregate
Statistical
Number of Aggregate Calculation Date
Mortgage Unpaid Principal Principal
Number of Days Delinquent Loans Balance Balance
- ------------------------- -------------- ---------------- ----------------
Current.................................................. 1,982 $184,439,552.24 100.00%
-------------- ---------------- ----------------
Total: 1,982 $184,439,552.24 100.00%
============== ================ ================
S-21
The Originators, the Seller and the Servicer
American Business Credit, the servicer and an originator, is a
wholly-owned subsidiary of American Business Financial Services, Inc. Upland
Mortgage, an originator and a subservicer, is a wholly-owned subsidiary of
American Business Credit. American Business Mortgage, an originator and a
subservicer, is a wholly-owned subsidiary of American Business Credit. ABFS
2001-4, Inc., the seller, is owned by American Business Financial Services, Inc.
American Business Financial Services is a financial services holding
company operating, through its subsidiaries, primarily in the eastern half of
the United States. American Business Financial Services, through American
Business Credit, originates, sells and services loans to businesses secured by
real estate and other business assets, and, through Upland Mortgage and American
Business Mortgage, originates, sells and services non-conforming mortgage loans,
typically to credit impaired borrowers, secured by mortgages on single-family
residences. In addition, American Business Mortgage operates a bank alliance
program with several financial institutions pursuant to which Upland Mortgage
and American Business Mortgage will purchase home equity loans and first
mortgage loans that do not meet the underwriting guidelines of the selling
institution, but meet Upland Mortgage's or American Business Mortgage's
underwriting criteria.
The originators' customers currently consist primarily of two groups.
The first category of customers includes credit impaired borrowers who generally
are unable to obtain financing from banks or savings and loan associations that
have historically provided loans only to individuals with the most favorable
credit characteristics. These borrowers generally have impaired or
unsubstantiated credit characteristics and/or unverifiable income and respond
favorably to the originators' marketing efforts. The second category of
customers includes borrowers who would qualify for loans from traditional
lending sources but elect to utilize the originators' products and services. The
originators' experience has indicated that these borrowers are attracted to
originators' loan products as a result of its marketing efforts, the
personalized service provided by the originators' staff of lending officers and
the timely response to loan requests. Historically, both categories of customers
have been willing to pay the originators' origination fees and interest rates
which are generally higher than those charged by traditional lending sources.
The originators also market mortgage loans to borrowers with favorable credit
histories.
American Business Financial Services was incorporated in Delaware in
1985. American Business Financial Services is a publicly traded company and its
common stock is listed on the Nasdaq National Market System under the symbol
"ABFI." The principal executive offices of American Business Financial Services
and its operating entities are located at Balapointe Office Centre, 111
Presidential Boulevard, Suite 127, Bala Cynwyd, Pennsylvania 19004. Its
telephone number at such address is (610) 668-2440.
S-22
On August 2, 2001, Ernst & Young LLP resigned as the independent
accountants for American Business Financial Services. Ernst & Young had been
engaged as the auditor for American Business Financial Services on May 17, 2001,
replacing BDO Seidman, LLP. During the period of engagement through August 2,
2001, Ernst & Young LLP did not issue any reports on the financial statements of
American Business Financial Services. During American Business Financial
Services' most recent fiscal year and the subsequent interim period through
August 2, 2001, American Business Financial Services did not have any
disagreements with Ernst & Young LLP, on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Ernst & Young LLP, would
have caused it to make a reference to the subject matter of the disagreements in
connection with its report. BDO Seidman, LLP was reengaged as the independent
accountants for American Business Financial Services effective August 8, 2001.
BDO Seidman, LLP acted as the independent accountants for American Business
Financial Services during the two year period ended June 30, 2000 and through
May 17, 2001.
The Originators
The mortgage loans were or will be originated or purchased by the
originators directly in the ordinary course of their business. The originators
may originate or purchase loans in up to 47 states and the District of Columbia.
The originators' primary source of loan product is retail marketing, directly
targeting small businesses and consumers through various advertising media.
The business purpose mortgage loans were or will be originated by
American Business Credit, except for mortgage loans which are secured by
properties located in states where the originating or purchasing of mortgage
loans requires a mortgage banking license, in which case Upland Mortgage has or
will originate or purchase such mortgage loans. The consumer purpose mortgage
loans were or will be originated or purchased by Upland Mortgage and American
Business Mortgage.
American Business Credit. American Business Credit originates, services
and sells business purpose loans collateralized by real estate. American
Business Credit's operating subsidiaries include:
o Upland Mortgage, a consumer purpose residential mortgage company;
o American Business Mortgage, a residential mortgage company;
o Processing Service Center, Inc., a loan processor for first mortgage
loans and home equity loans generated by the bank alliance programs;
o American Business Leasing, Inc., a small-ticket equipment leasing
company;
o Big Cat, Inc., a holder of foreclosed real estate;
o Tiger Relocation Company, a holder of foreclosed real estate; and
o NJLQ Holdings, Inc., a holder of foreclosed liquor licenses in New
Jersey.
American Business Credit was incorporated in 1988 pursuant to the laws
of the Commonwealth of Pennsylvania and maintains its corporate headquarters in
Bala Cynwyd, Pennsylvania.
S-23
American Business Credit currently originates business purpose loans on
a regular basis in Connecticut, Delaware, Florida, Georgia, Illinois, Indiana,
Kentucky, Maryland, Michigan, Minnesota, Missouri, New Jersey, New York, North
Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont,
Virginia and Wisconsin through a network of salespeople and its business loan
web site, www.abceasyloan.com. American Business Credit focuses its marketing
efforts on small businesses who do not meet all of the credit criteria of
commercial banks and small businesses that its research indicates may be
predisposed to using its products and services.
American Business Credit originates business purpose loans to
corporations, partnerships, sole proprietors and other business entities for
various business purposes, including, but not limited to, working capital,
business expansion, equipment acquisition and debt consolidation. American
Business Credit does not target any particular industries or trade groups and,
in fact, takes precautions against concentration of loans in any one industry
group. All business purpose loans generally are secured by a first or second
mortgage lien on a principal residence of the borrower or a guarantor of the
borrower or some other parcel of real property, such as office and apartment
buildings and mixed use buildings, owned by the borrower, a principal of the
borrower, or a guarantor of the borrower. In addition, in most cases, these
loans are further collateralized by personal guarantees, pledges of securities,
assignments of contract rights, life insurance and lease payments and liens on
business equipment and other business assets.
American Business Credit's business purpose loans generally ranged from
$15,000 to $500,000 and had an average loan size of approximately $91,000 for
the loans originated during fiscal year 2001. Generally, American Business
Credit's business purpose loans (i) are made at fixed rates and for terms
ranging from five to 15 years; and (ii) charge origination fees for these loans
of 5.0% to 6.0% of the original principal balance. The weighted average interest
rate charged on the business purpose loans originated by American Business
Credit was 15.99% for fiscal year 2001. The business purpose loans securitized
during the fiscal year 2001 had a weighted average loan-to-value ratio, based
solely upon the real estate collateral securing the loans, of 62.2%. American
Business Credit originated $120.5 million of business purpose loans during
fiscal year 2001.
Generally, American Business Credit computes interest due on its
outstanding loans using the simple interest method. Where permitted by
applicable law, American Business Credit normally imposes a prepayment fee.
Although prepayment fees imposed vary based upon applicable state law, the
prepayment fees on American Business Credit's business purpose loan documents
can be a significant portion of the outstanding loan balance. Whether a
prepayment fee is imposed and the amount of such fee, if any, is negotiated
between the individual borrower and American Business Credit prior to closing of
the loan. American Business Credit makes loans for various business purposes
including, but not limited to, working capital, business expansion, equipment
acquisition and debt-consolidation. American Business Credit does not target any
particular industries or trade groups.
During fiscal year 2001, American Business Credit launched an Internet
loan distribution channel under the name www.abceasyloan.com. The
www.abceasyloan.com web site provides borrowers with convenient access to the
business loan application process, 7 days a week, 24 hours a day. Throughout the
loan processing period, borrowers who submit applications online are supported
by American Business Credit's staff of highly trained loan officers.
S-24
HomeAmerican Credit, Inc. d/b/a Upland Mortgage. Upland Mortgage,
American Business Credit's home equity lending subsidiary, is a Pennsylvania
corporation and was incorporated in May 1991. Upland Mortgage originates home
equity loans primarily to credit-impaired borrowers through various channels
including retail marketing which includes telemarketing operations, direct mail,
radio and television advertisements as well as through Upland Mortgage's
interactive web site, www.UplandMortgage.com. Home equity loans originated are
generally securitized, but some are sold to one of several third party lenders,
and with servicing released.
Upland Mortgage originates business loans on behalf of American
Business Credit in instances where state licensing laws require a mortgage
license in order to make such loans. In such circumstances, the credit criteria
and collateral requirements utilized by Upland Mortgage are identical to those
utilized by American Business Credit. As such, American Business Credit's
lending procedures and policies govern Upland Mortgage when it is originating
business purpose mortgage loans.
Home equity loan applications are obtained from potential borrowers
over the phone, in writing, in person or over the Internet through the web site.
The loan request is then processed and closed. The loan processing staff
generally provides its home equity borrowers with a loan approval within 24
hours and closes its home equity loans within approximately ten to fifteen days
of obtaining a loan approval.
Home equity loans generally range from $10,000 to $250,000 and had an
average loan size of approximately $82,000 for those originated during fiscal
year 2001. During fiscal year 2001, Upland Mortgage and American Business
Mortgage originated or purchased $1.1 billion of home equity loans. Generally,
home equity loans are made at fixed rates of interest and for terms ranging from
five to thirty years and generally have origination fees of approximately 2.0%
of the aggregate loan amount. For fiscal year 2001, the weighted average
interest rate received on such loans was 11.46%. The average loan-to-value ratio
was 78.4% for the loans originated during fiscal year 2001. Where permitted by
applicable law, a prepayment fee may be negotiated with the borrower and is
generally charged to the borrower on the prepayment of a home equity loan except
in the event the borrower refinances a home equity loan with Upland Mortgage or
American Business Mortgage.
During fiscal year 1999, Upland Mortgage launched an Internet loan
distribution channel under the name www.UplandMortgage.com. Through this
interactive web site, borrowers can examine available loan options, calculate
interest payments, and submit an application via the Internet. The Upland
Mortgage Internet platform provides borrowers with convenient access to the
mortgage loan application process, 7 days a week, 24 hours a day. Throughout the
loan processing period, borrowers who submit applications online are supported
by Upland Mortgage's staff of highly trained loan officers. During fiscal year
2000 and fiscal year 2001, Upland Mortgage continued to phase in advanced
Internet technology through its web site, www.UplandMortgage.com. In addition to
the ability to take online loan applications and utilize an automated rapid
credit approval process, both of which reduce time and manual effort required
for loan approval, the site features proprietary software, Easy Loan Advisor,
which provides personalized services and solutions to retail customers through
interactive web dialog. Upland Mortgage has applied to the U.S. Patent and
Trademark Office to patent this product.
S-25
American Business Mortgage Services, Inc. American Business Credit
acquired American Business Mortgage, a mortgage company based in Roseland, New
Jersey, in October 1997. Prior to January 1, 2001, American Business Mortgage
emphasized the origination of conventional first mortgage loans and the sale of
such loans in the secondary market with servicing released. Effective January 1,
2001, American Business Mortgage shifted its emphasis to home equity lending and
other product offerings. American Business Mortgage was formerly known as New
Jersey Mortgage and Investment Corp.
During fiscal year 2001, American Business Mortgage established a
website www.abmscorp.com to provide its business partners with an internet
interface. The website, among other things, provides brokers with 24 hours a
day, 7 days a week access to Easy Loan Advisor. This proprietary software
permits brokers to price and structure mortgage loans with American Business
Mortgage on a fast and efficient basis. Once a broker refers a deal to American
Business Mortgage, its experienced sales staff handles all aspects of the
mortgage loan transaction.
Beginning in 1996, the Upland Mortgage entered into exclusive business
arrangements with several financial institutions which provide for the purchase
of home equity loans that meet underwriting criteria for Upland Mortgage Group,
but do not meet the guidelines of the selling institution for loans to be held
in its portfolio. This program is called the Bank Alliance Program.
The Bank Alliance Program is a vehicle through which both American
Business Mortgage and Upland Mortgage acquire nonconventional home equity loans.
The program targets traditional financial institutions, such as banks, which
because of their strict underwriting and credit guidelines have generally
provided mortgage financing only to the most credit-worthy borrowers. The Bank
Alliance Program consists of agreements with 31 financial institutions and
provides Upland Mortgage and American Business Mortgage with the opportunity to
underwrite, process and purchase loans generated by the branch networks of such
institutions which consist of over 1,500 branches located in various states
throughout the country.
This program allows these financial institutions to originate loans to
credit-impaired borrowers in order to achieve community reinvestment goals and
to generate fee income and subsequently sell such loans to American Business
Mortgage and Upland Mortgage. Following the purchase of the loans through this
program, American Business Mortgage and Upland Mortgage hold these loans as
available for sale until they are sold in connection with a future
securitization. In addition to using Processing Service Center, Inc. to process
loans for it in connection with the Bank Alliance Program, American Business
Mortgage processes loans for itself. Upland Mortgage and American Business
Mortgage purchased approximately $97.6 million of loans pursuant to this program
during fiscal year 2001.
S-26
Prepayment fees are used by the originators. The originators currently
charge prepayment fees on substantially all of the business purpose loans, and
have increased the percentage of home equity loans originated with prepayment
fees to approximately 85% of home equity loans originated. Of all mortgage loans
generated by the American Business Financial Services subsidiaries, home equity
loans comprise approximately 90% of all loans and the remaining 10% are business
purpose loans. The type of prepayment fee obtained on a home equity loan is
normally a fixed percentage of the outstanding principal balance of the loan.
The ability to charge a prepayment fee is sometimes impacted by state
law, with respect to both home equity loans and business purpose loans. In the
case of home equity loans which have a "balloon" payment feature, whenever
possible, the originators use the Federal Alternative Mortgage Transactions
Parity Act of 1982 to preempt state laws which limit or restrict prepayment
fees. In states that have overridden the Parity Act and in the case of some
fully amortizing home equity loans, state laws may restrict prepayment fees
either by the amount of the prepayment fee or the time period during which it
can be imposed. Similarly, in the case of business purpose loans, some states
prohibit or limit prepayment fees where the loan is below a specific dollar
threshold or is secured by residential real property. See "Material Legal
Aspects of the Loans -- Enforceability of Prepayment and Late Payment Fees" in
the accompanying prospectus.
Marketing Strategy
The originators concentrate their marketing efforts primarily on two
potential customer groups. One group, based on historical profiles, has a
tendency to select their loan products because of their personalized service and
timely response to loan requests. The other group is comprised of
credit-impaired borrowers who satisfy the originators' underwriting guidelines.
American Business Mortgage also markets conventional first mortgage loans to
borrowers with favorable credit histories.
American Business Credit's marketing efforts for business purpose loans
focus on its niche market of selected small businesses located in its market
area which generally includes the eastern half of the United States. American
Business Credit targets businesses which it believes would qualify for loans
from traditional lending sources, but would elect to use its products and
services. American Business Credit's experience indicates that these borrowers
are attracted to it as a result of its marketing efforts, the personalized
service provided by its staff of highly trained lending officers and its timely
response to loan applications. Historically, such customers have been willing to
pay American Business Credit's origination fees and interest rates which are
generally higher than those charged by traditional lending sources.
American Business Credit markets business purpose loans through various
forms of advertising, its business loan web site, www.abceasyloan.com and a
direct sales force. Advertising media used includes large direct mail campaigns
and newspaper and radio advertising. American Business Credit's commissioned
sales staff, which consists of full-time highly trained salespersons, is
responsible for converting advertising leads into loan applications. American
Business Credit utilizes a proprietary training program involving extensive and
on-going training of its lending officers. American Business Credit's sales
staff uses significant person-to-person contact to convert advertising leads
into loan applications and maintains contact with the borrower throughout the
application process.
S-27
Upland Mortgage markets home equity loans through telemarketing, radio
and television advertising, direct mail campaigns and through its web site,
www.UplandMortgage.com. During fiscal year 2001, Upland Mortgage Group, which
includes Upland Mortgage and American Business Mortgage, redirected its
marketing mix to focus on targeted direct mail, which it believes delivers more
leads at a lower cost than broadcast marketing channels. Upland Mortgage Loan
Group's integrated approach to media advertising utilizes a combination of
direct mail and Internet advertising and is intended to maximize the effect of
its advertising campaigns.
Upland Mortgage's marketing efforts for home equity loans are focus on
the eastern region of the United States. Upland Mortgage utilizes its branch
offices in various eastern states to market its loans. Loan processing,
underwriting, servicing and collection procedures are performed at its
centralized operating office located in Bala Cynwyd, Pennsylvania.
American Business Mortgage originates home equity loans through its
network of loan brokers and other business alliance programs. American Business
Mortgage's marketing efforts are concentrated in the mid-Atlantic region of the
United States. The loan broker network channel is also supported by American
Business Mortgage's website, www.abmscorp.com, which provides brokers with
unlimited access to proprietary software for pricing and structuring mortgage
loans with American Business Mortgage.
Underwriting Procedures and Practices
Summarized below are some of the policies and practices which are
followed in connection with the origination of business purpose loans, home
equity loans and conventional first mortgage loans. These policies and practices
may be altered, amended and supplemented as conditions warrant in the discretion
of management.
Loan underwriting standards are applied to evaluate prospective
borrowers' credit standing and repayment ability as well as the value and
adequacy of the mortgaged property as collateral. Initially, the prospective
borrower is required to fill out a detailed application providing pertinent
credit information. As part of the description of the prospective borrower's
financial condition, the borrower is required to provide information concerning
assets, liabilities, income, credit, employment history and other demographic
and personal information. If the application demonstrates the prospective
borrower's ability to repay the debt as well as sufficient income and equity,
loan processing personnel generally obtain and review an independent credit
bureau report on the credit history of the borrower and verification of the
borrower's income. Once all applicable employment, credit and property
information is obtained, a determination is made as to whether sufficient
unencumbered equity in the property exists and whether the prospective borrower
has sufficient monthly income available to meet the prospective borrower's
monthly obligations.
S-28
The following table outlines the key parameters of the major credit
grades of the originators' current underwriting guidelines.
- ---------------------------------- ---------------------------------- ----------------------------------
"A" Credit Grade "B" Credit Grade
- ---------------------------------- ---------------------------------- ----------------------------------
General Repayment Has good credit but might have Pays the majority of accounts on
some minor delinquency. time but has some 30 and/or 60
day delinquency.
- ---------------------------------- ---------------------------------- ----------------------------------
Existing Mortgage Loans Current at application time and Current at application time and
a maximum of two 30 day a maximum of four 30 day
delinquencies in the past 12 delinquencies in the past 12
months. months.
- ---------------------------------- ---------------------------------- ----------------------------------
Non-Mortgage Credit Major credit and installment Major credit and installment
debt should be current but may debt can exhibit some minor 30
exhibit some minor 30 day and/or 60 day delinquency.
delinquency. Minor credit may Minor credit may exhibit up to
exhibit some minor delinquency. 90 day delinquency.
- ---------------------------------- ---------------------------------- ----------------------------------
Bankruptcy Filings Discharged more than 2 years Discharged more than 2 years
with reestablished credit. with reestablished credit.
- ---------------------------------- ---------------------------------- ----------------------------------
Debt Service-to-Income Generally not to exceed 50%. Generally not to exceed 50%.
- ---------------------------------- ---------------------------------- ----------------------------------
Owner Occupied: Generally 80% (exception to 90%) Generally 80% (exception to 85%)
Loan-to-value ratio for a 1-4 family dwelling for a 1-4 family dwelling
residence; 80% for a residence; 75% for a condominium.
condominium.
- ---------------------------------- ---------------------------------- ----------------------------------
Non-Owner Occupied: Generally 80% for a 1-4 family Generally 70% for a 1-4 family
Loan-to-value ratio dwelling or condominium. dwelling or condominium.
- ---------------------------------- ---------------------------------- ----------------------------------
[RESTUBBED TABLE]
- ---------------------------------- ---------------------------------- -------------------------------
"C" Credit Grade "D" Credit Grade
- ---------------------------------- ---------------------------------- -------------------------------
General Repayment Marginal credit history which is Designed to provide a
offset by other positive borrower with poor credit
attributes. history an opportunity to
correct past credit problems
through lower monthly
payments.
- ---------------------------------- ---------------------------------- -------------------------------
Existing Mortgage Loans Cannot exceed four 30-day Must be paid in full from
delinquencies or two 60 day loan proceeds and no more
delinquencies in the past 12 than 120 days delinquent.
months.
- ---------------------------------- ---------------------------------- -------------------------------
Non-Mortgage Credit Major credit and installment Major and minor credit
debt can exhibit some minor 30 delinquency is acceptable,
and/or 90 day delinquency. but must demonstrate some
Minor credit may exhibit more payment regularity.
serious delinquency.
- ---------------------------------- ---------------------------------- -------------------------------
Bankruptcy Filings Discharged more than 2 years Discharged prior to closing.
with reestablished credit.
- ---------------------------------- ---------------------------------- -------------------------------
Debt Service-to-Income Generally not to exceed 55%. Generally not to exceed 55%.
- ---------------------------------- ---------------------------------- -------------------------------
Owner Occupied: Generally 70% (exception to 85%) Generally 60% (exception to
Loan-to-value ratio for a 1-4 family dwelling 70%) for a 1-4 family
residence; 65% for a condominium. dwelling residence.
- ---------------------------------- ---------------------------------- -------------------------------
Non-Owner Occupied: Generally 60% for a 1-4 family N/A
Loan-to-value ratio dwelling or condominium.
- ---------------------------------- ---------------------------------- -------------------------------
S-29
Generally, business purpose loans collateralized by residential real
estate must have an overall loan-to-value ratio (based solely on the independent
appraised fair market value of the real estate collateral securing the loan) on
the properties collateralizing the loans of no greater than 75%. Business
purpose loans collateralized by commercial real estate must generally have an
overall loan-to-value ratio (based solely on the independent appraised fair
market value of the real estate collateral securing the loan) of no greater than
60% percent. In addition, in substantially all instances, American Business
Credit also receives additional collateral in the form of, among other things,
personal guarantees, pledges of securities, assignments of contract rights, life
insurance and lease payments and liens on business equipment and other business
assets, as available. The business purpose loans originated by American Business
Credit had an average loan-to-value ratio of 62.2% based solely on the real
estate collateral securing the loan for fiscal year 2001.
The maximum acceptable loan-to-value ratio for home equity loans held
as available for sale or securitization is generally 90%. The home equity loans
originated by the originators had an average loan-to-value ratio of 78.4% for
fiscal year 2001. Occasionally, exceptions to these maximum loan-to-value ratios
are made if other collateral is available or if there are other compensating
factors. From time to time, Upland Mortgage makes loans with loan-to-value
ratios in excess of 90% which may be sold with servicing released. Title
insurance is generally obtained in connection with all real estate secured
loans.
In determining whether the mortgaged property is adequate as
collateral, the originators appraise each property that is considered for
financing. The appraisal is completed by an independent qualified appraiser and
generally includes pictures of comparable properties and pictures of the
property securing the loan. With respect to business purpose loans, home equity
loans and conventional first mortgage loans, the appraisal is completed by an
independent qualified appraiser on a Fannie Mae form.
Any material decline in real estate values reduces the ability of
borrowers to use home equity to support borrowings and increases the
loan-to-value ratios of loans previously made, thereby weakening collateral
coverage and increasing the possibility of a loss in the event of borrower
default. Further, delinquencies, foreclosures and losses generally increase
during economic slowdowns or recessions. As a result, the originators cannot
assure that the market value of the real estate underlying the loans will at any
time be equal to or in excess of the outstanding principal amount of those
loans. Although the originators have expanded the geographic area in which they
originate loans, a downturn in the economy generally or in a specific region of
the country may have an effect on the originators' originations.
The Servicer
American Business Credit will be responsible for servicing the mortgage
loans in accordance with its established servicing procedures and the terms of
the Sale and Servicing Agreement. American Business Credit will contract with
Upland Mortgage and American Business Mortgage to act as subservicers with
respect to the servicing of the consumer purpose mortgage loans. Upland Mortgage
and American Business Mortgage follow the same servicing procedures described
below with respect to American Business Credit.
S-30
In servicing business purpose loans and home equity loans, the servicer
typically sends an invoice to borrowers on a monthly basis advising them of the
required payment and its due date. The collection process begins immediately
after a borrower fails to make a monthly payment. When a loan becomes 45 to 60
days delinquent, it is transferred to a workout specialist in the collections
department. The workout specialist tries to reinstate a delinquent loan, seek a
payoff, or occasionally enter into a modification agreement with a borrower to
avoid foreclosure. All proposed workout arrangements are evaluated on a
case-by-case basis, based upon the borrower's past credit history, current
financial status, level of cooperation, future prospects and the reasons for the
delinquency. If the loan becomes delinquent 61 days or more and a satisfactory
workout arrangement with the borrower is not achieved or the borrower declares
bankruptcy, the matter is immediately referred to the servicer's attorneys for
collection. Due to this timing, the foreclosure process on most delinquent loans
is commenced before the loan is 100 days past due.
The servicer has an in-house legal staff dedicated to the collection of
delinquent loans and the handling of bankruptcy cases. This allows troublesome
legal issues, if any, to be noted and, if possible, resolved earlier. The
servicer's in-house legal staff also attempts to find solutions for delinquent
loans, other than foreclosure. Every loan is analyzed to compare the property
value against the loan balance and solutions are presented to the borrower based
on the results of that analysis.
In those situations where foreclosures are handled by outside counsel,
the in-house legal staff manages outside counsel to ensure that the time period
for handling foreclosures meets or exceeds established industry standards.
Frequent contact between in-house and outside counsel insures that the process
moves quickly and efficiently in an attempt to achieve a timely and economical
resolution to contested matters. In managing these loans on a case by case basis
American Business Credit may advance funds to keep the first mortgage current or
may choose to pay off the senior mortgage. The servicer will also expend funds
to protect and preserve the property and to enhance the ability to sell a
recovered property.
Supporting American Business Credit's collection and accounting
functions is a network of computer hardware and software. American Business
Credit's current computer system produces mortgage loan invoices, payment
reminders and late notices. In addition to these collection functions, the
computer software provides an in-depth customer contact system which enables
American Business Credit's collectors to manage each borrower's loan history by
individually logging all correspondence into the system's data base. The system
also generates numerous management reports detailing collection activity and
accounting information.
Delinquency and Loan Loss Experience
The following tables set forth information relating to the delinquency
and loan loss experience on the mortgage loans included in American Business
Credit's, Upland Mortgage's and American Business Mortgage's servicing portfolio
for the periods shown. The delinquency and loan loss experience represents the
historical experience of American Business Credit, Upland Mortgage and American
Business Mortgage, and there can be no assurance that the future experience on
the mortgage loans in the trust will be the same as, or more favorable than,
that of the mortgage loans in American Business Credit's, Upland Mortgage's and
American Business Mortgage's overall servicing portfolio.
S-31
Delinquency and Foreclosure Experience
(Dollars in Thousands)
At June 30, 1999 At June 30, 2000 At June 30, 2001 At September 30, 2001
---------------- ---------------- ---------------- ---------------------
% of % of % of % of
Amount Amount Amount Amount Amount Amount Amount Amount
Serviced Serviced Serviced Serviced Serviced Serviced Serviced Serviced
---------- -------- ---------- -------- ---------- -------- ---------- --------
Servicing portfolio $1,007,738 100.00% $1,799,584 100.00% $2,523,621 100.00% $2,650,083 100.00%
60+ days past due loans:
61-90 days $ 4,624 0.46% $ 7,416 0.41% $ 16,166 0.64% $ 26,619 1.00%
more than 90 days $ 23,958 2.38% $ 38,962 2.17% $ 70,012 2.77% $ 85,639 3.23%
---------- ----- ------ ----- ---------- ----- ---------- -----
Total 60+ days past due loans $ 28,582 2.84% $ 46,378 2.58% $ 86,178 3.41% $ 112,258 4.23%
REO Properties $ 9,948 0.99% $ 13,122 0.73% $ 28,432 1.13% $ 30,070 1.14%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total 60+ days past due
loans, foreclosures pending
and REO Properties $ 38,530 3.82% $ 59,500 3.31% $ 114,610 4.54% $ 142,328 5.37%
========== ===== ========== ===== ========== ===== ========== =====
The preceding table was prepared using the following assumptions:
o the past due period is based on the actual number of days that a
payment is contractually past due; a loan as to which a monthly payment
was due 61-90 days prior to the reporting period is considered 61-90
days past due, etc.
o total past due loans includes pending foreclosures, and
o a REO Property is a property acquired and held as a result of
foreclosure or deed in lieu of foreclosure.
S-32
Loan Charge-Off Experience
(Dollars in Thousands)
Quarter Ended
September 31,
Year Ended Year Ended Year Ended -------------
June 30, 1999 June 30, 2000 June 30, 2001 2001
------------- ------------- ------------- ----
Amount Amount Amount Amount
Serviced Serviced Serviced Serviced
---------- ---------- ---------- ----------
Servicing portfolio.............................. $1,007,738 $1,799,584 $2,523,621 $2,650,083
Average outstanding.............................. $729,337 $1,354,500 $2,161,603 $2,586,852
Gross losses................................... $820 $3,359 $10,889 $2,644
Loan recoveries................................ $3 $40 $3 $0
--------- ---------- ----------- -----------
Net loan charge-offs........................... $ 817 $ 3,319 $ 10,886 $ 2,644
========= ========= ========== ==========
Net loan charge-offs as a
Percentage of servicing
Portfolio at period end..................... 0.08% 0.18% 0.43% 0.40%
==== ==== ==== ====
Net loan charge-offs as a
Percentage of average
Outstanding................................. 0.11% 0.25% 0.50% 0.41%
==== ==== ==== ====
The preceding table was prepared using the following assumptions:
o "average outstanding" presented is the arithmetic average of the
principal balances of the loans in the originators' servicing portfolio
outstanding at the opening and closing of business for such period; and
o "gross losses" means the outstanding principal balance plus accrued but
unpaid interest on liquidated mortgage loans.
o "net loan charge-offs as a percentage of servicing portfolio at period
end" and "net loan charge-offs as a percentage of average outstanding"
for the quarter ended at September 30, 2001 as annualized amounts.
Management's Discussion and Analysis
The above delinquency, foreclosure and loan charge-off statistics
represent the servicer's recent experience and indicate notable increases during
fiscal years 2000 and 2001. The servicer believes that this trend is a result of
the maturation of its servicing portfolio rather than a change in the credit
quality of the mortgage loans that have been originated recently. Furthermore,
the statistical data in the tables is based on all of the mortgage loans in the
servicing portfolio. The mortgage loans in the trust may have characteristics
which distinguish them from the majority of the mortgage loans in the servicing
portfolio. Accordingly, such data should not be considered to reflect the credit
quality of the mortgage loans included in the trust, or as a basis of assessing
the likelihood, amount or severity of losses on the mortgage loans included in
the trust. In addition, as discussed under "Risk Factors -- geographic
concentration of the mortgage loans in particular jurisdictions may result in
greater losses if those jurisdictions experience economic downturns" and "--
recent developments may increase the risk of loss on the mortgage loans",
because of the relative geographic concentration of the mortgage loans within
States such as New York and New Jersey, the events of September 11, 2001, may
have an adverse effect on the mortgage loans.
The Owner Trustee
U.S. Bank Trust National Association, a national banking association,
has its corporate trust offices located at 300 Delaware Avenue, 8th floor,
Wilmington, Delaware 19801. The owner trustee will perform limited
administrative functions on behalf of the trust pursuant to the Trust Agreement.
The owner trustee's duties are limited solely to its express obligations under
the Trust Agreement.
S-33
The Indenture Trustee and the Collateral Agent
JPMorgan Chase Bank, a New York banking corporation, has an office at
450 West 33rd Street, 14th Floor, New York, New York 10001. The indenture
trustee will act as initial authenticating agent, paying agent and note
registrar pursuant to the terms of the Indenture. The collateral agent's duties
are limited solely to its express obligations under the Sale and Servicing
Agreement.
Description of the Notes and the Trust Certificates
On the closing date, the trust will issue the notes pursuant to the
Indenture. The notes represent debt obligations of the trust secured by a pledge
of the trust estate issued in one class, the "Class A Notes," and will be
offered under this prospectus supplement. Pursuant to the Trust Agreement, the
trust will also issue one class of trust certificates representing the entire
beneficial ownership interest in the trust. There will be one trust certificate
which will be held by the seller. The trust certificate may not be transferred
without the consent of the note insurer and compliance with the transfer
provisions of the Trust Agreement. The Indenture, the Trust Agreement and the
Sale and Servicing Agreement are collectively referred to as the agreements in
this prospectus supplement. The forms of the agreements will be filed as
exhibits to the registration statement of which this prospectus supplement and
the accompanying prospectus are a part. The following summaries, together with
the related provisions in the accompanying prospectus, describe the material
provisions of the agreements. See "The Agreements" in the accompanying
prospectus.
The trust estate consists of,
o the mortgage loans, together with the mortgage files relating
thereto and all collections thereon and proceeds thereof
collected after the cut-off date,
o all rights of the depositor under the Unaffiliated Seller's
Agreement,
o such assets as from time to time are identified as REO
property and collections thereon and proceeds thereof,
o cash that is deposited into the collection accounts, and
invested in accordance with the Indenture and the Sale and
Servicing Agreement,
o the indenture trustee's rights with respect to the mortgage
loans under all insurance policies required to be maintained
pursuant to the Sale and Servicing Agreement and any insurance
proceeds,
o Liquidation Proceeds, and
o released mortgaged property proceeds.
S-34
In addition, the seller will cause the note insurer to issue the note
insurance policy under which it will guarantee distributions to the holder of
the Class A Notes as described herein.
The Class A Notes are primarily payable from collections on account of
the mortgage loan group.
The Class A Notes will be issued and available only in book-entry form,
through the facilities of DTC, in denominations of $1,000 initial principal
balance and integral multiples of $1,000 in excess thereof, except that one note
of the class may be issued in a different amount. Voting rights will be
allocated among holders of the Class A Notes in accordance with their respective
percentage interests.
Book-Entry Registration
The Class A Notes are sometimes referred to in this prospectus
supplement as "book-entry notes." No person acquiring an interest in the
book-entry notes will be entitled to receive a definitive note representing an
obligation of the trust, except under the limited circumstances described
herein. The beneficial owners of the Class A Notes may elect to hold their notes
through DTC in the United States, or Clearstream or Euroclear in Europe if they
are participants in such systems, or indirectly through organizations which are
participants in such systems. Transfers within DTC, Clearstream or Euroclear, as
the case may be, will be in accordance with the usual rules and operating
procedures of the relevant system. The Class A Notes will be issued in one or
more notes which in the aggregate equal the outstanding principal balance of the
Class A Notes and will initially be registered in the name of Cede & Co., the
nominee of DTC. So long as the Class A Notes are book-entry notes, such notes
will be evidenced by one or more notes registered in the name of Cede & Co.,
which will be the "holder" of such notes, as the nominee of DTC or one of the
relevant depositories. Cross-market transfers between persons holding directly
or indirectly through DTC, on the one hand, and counterparties holding directly
or indirectly through Clearstream or Euroclear, on the other, will be effected
in DTC, the relevant depositories of Clearstream or Euroclear, respectively, and
each a participating member of DTC. The interests of the holders of the Class A
Notes will be represented by book-entries on the records of DTC and
participating members thereof. All references herein to the Class A Notes
reflect the rights of beneficial owners only as such rights may be exercised
through DTC and its participating organizations for so long as such notes are
held by DTC.
Clearstream and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Clearstream'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, N.A. will act as depositary for Clearstream
and JPMorgan Chase Bank will act as depositary for Euroclear. Investors may hold
such beneficial interests in the book-entry notes in minimum denominations
representing principal amounts of $1,000. Except as described below, no
beneficial owner will be entitled to receive a physical or definitive notes.
Unless and until definitive notes are issued, it is anticipated that the only
"holder" of the Class A Notes will be Cede & Co., as nominee of DTC. Beneficial
owners will not be "holders" or "noteholders" as those terms are used in the
Indenture and the Sale and Servicing Agreement. Beneficial owners are only
permitted to exercise their rights indirectly through participants and DTC.
S-35
The beneficial owner's ownership of a book-entry note will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for such
purpose. In turn, the financial intermediary's ownership of such book-entry note
will be recorded on the records of DTC or on the records of a participating firm
that acts as agent for the financial intermediary, whose interest will in turn
be recorded on the records of DTC, if the beneficial owner's financial
intermediary is not a DTC participant and on the records of Clearstream or
Euroclear, as appropriate.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and to facilitate the clearance and settlement
of securities transactions between participants through electronic book-entries,
thereby eliminating the need for physical movement of notes. Participants
include securities brokers and dealers, including the underwriters, banks, trust
companies and clearing corporations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly through "indirect participants."
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers of book-entry
notes, such as the Class A Notes, among participants on whose behalf it acts
with respect to the book-entry notes and to receive and transmit distributions
of principal of and interest on the book-entry notes. Participants and indirect
participants with which beneficial owners have accounts with respect to the
book-entry notes similarly are required to make book-entry transfers and receive
and transmit such distributions on behalf of their respective beneficial owners.
Beneficial owners that are not participants or indirect participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, book-entry notes may do so only through participants and indirect
participants. In addition, beneficial owners will receive all distributions of
principal and interest from the indenture trustee, or a paying agent on behalf
of the indenture trustee, through DTC participants. DTC will forward such
distributions to its participants, which thereafter will forward them to
indirect participants or beneficial owners. Beneficial owners will not be
recognized by the indenture trustee, the servicer or any paying agent as holders
of the Class A Notes, and beneficial owners will be permitted to exercise the
rights of the holders of the Class A Notes only indirectly through DTC and its
participants.
Because of time zone differences, credits of securities received in
Clearstream 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 Clearstream participants on such business day. Cash received in
Clearstream or Euroclear as a result of sales of securities by or through a
Clearstream participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC.
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Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream 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 Clearstream
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines. The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to the relevant depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving distribution in accordance with
normal procedures for same day funds settlement applicable to DTC. Clearstream
participants and Euroclear participants may not deliver instructions directly to
the European Depositories.
Clearstream Banking, societe anonyme (formerly Cedelbank) is
incorporated under the laws of Luxembourg as a professional depository.
Clearstream holds securities for its participant organizations and facilitates
the clearance and settlement of securities transactions between Clearstream
participants through electronic book-entry changes in accounts of Clearstream
participants, thereby eliminating the need for physical movement of securities.
Transactions may be settled in Clearstream in any of 28 currencies, including
United States dollars. Clearstream provides to its Clearstream participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Clearstream interfaces with domestic markets in several countries. As
a professional depository, Clearstream is subject to regulation by the
Luxembourg Monetary Institute. Clearstream 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 Clearstream is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Clearstream participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against distribution,
thereby eliminating the need for physical movement of securities and any risk
from lack of simultaneous transfers of securities and cash. Transactions may now
be settled in any of 31 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Euroclear Bank S.A./N.V. 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 Euroclear
Clearance. Euroclear Clearance 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.
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The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law. The Terms and Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
distributions with respect to securities in Euroclear. All securities in
Euroclear are held on a fungible basis without attribution of specific
securities to specific securities clearance accounts. The Euroclear operator
acts under the Terms and Conditions only on behalf of Euroclear participants,
and has no record of or relationship with persons holding through Euroclear
participants.
Distributions on the book-entry notes will be made on each distribution
date by the indenture trustee to Cede & Co., as nominee of DTC. DTC will be
responsible for crediting the amount of such distributions to the accounts of
the applicable DTC participants in accordance with DTC's normal procedures. Each
DTC participant will be responsible for disbursing such distribution to the
beneficial owners of the book-entry notes 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 notes that it represents.
Under a book-entry format, beneficial owners of the book-entry notes
may experience some delay in their receipt of distributions, since such
distributions will be forwarded by the indenture trustee to Cede & Co., as
nominee of DTC. Distributions with respect to notes held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream participants or
Euroclear participants in accordance with the relevant system's rules and
procedures, to the extent received by the relevant depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
financial intermediaries, the ability of a beneficial owner to pledge book-entry
notes to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such book-entry notes, may be limited due
to the lack of physical notes for such book-entry notes. In addition, issuance
of the book-entry notes in book-entry form may reduce the liquidity of such
notes in the secondary market since certain potential investors may be unwilling
to purchase notes for which they cannot obtain physical notes.
Monthly and annual reports on the trust provided by the indenture
trustee to Cede & Co., as nominee of DTC, may be made available to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting DTC, and to the financial intermediaries to whose DTC
accounts the book-entry notes of such beneficial owners are credited.
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DTC has advised the depositor and the servicer that it will take any
action permitted to be taken by a holder of the Class A Notes under the
Indenture only at the direction of one or more participants to whose accounts
with DTC the book-entry notes are credited. Additionally, DTC has advised the
depositor that it will take such actions with respect to specified percentages
of voting rights only at the direction of and on behalf of participants whose
holdings of book-entry notes evidence such specified percentages of voting
rights. DTC may take conflicting actions with respect to percentages of voting
rights to the extent that participants whose holdings of book-entry notes
evidence such percentages of voting rights authorize divergent action.
None of the trust, the owner trustee, the depositor, the servicer, the
note insurer or the indenture trustee will have any responsibility for any
aspect of the records relating to or distributions made on account of beneficial
ownership interests of the book-entry notes held by Cede & Co., as nominee for
DTC, or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of notes among participants of DTC,
Clearstream and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
See "Risk Factors -- Book-Entry Registration" and "The Agreements -- Book -
Entry Securities" in the accompanying prospectus.
Definitive Notes
The Class A Notes, which will be issued initially as book-entry notes,
will be converted to definitive notes and reissued to beneficial owners or their
nominees, rather than to DTC or its nominee, only if (a) DTC or the servicer
advises the indenture trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as depository with respect to the
book-entry notes and DTC or the servicer is unable to locate a qualified
successor or (b) the indenture trustee, at its option, elects to terminate the
book-entry system through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all participants of the availability
through DTC of definitive notes. Upon delivery of definitive notes, the
indenture trustee will reissue the book-entry notes as definitive notes to
beneficial owners. Distributions of principal of, and interest on, the
book-entry notes will thereafter be made by the indenture trustee, or a paying
agent on behalf of the indenture trustee, directly to holders of definitive
notes in accordance with the procedures set forth in the Indenture.
Definitive notes will be transferable and exchangeable at the offices
of the indenture trustee or the note registrar. No service charge will be
imposed for any registration of transfer or exchange, but the indenture trustee
may require distribution of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
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Sale of the Mortgage Loans
Pursuant to the Unaffiliated Seller's Agreement, the originators will
sell, transfer, assign, set over and otherwise convey the mortgage loans,
without recourse, to the seller and the seller will sell, transfer, assign, set
over and otherwise convey the mortgage loans, including all principal
outstanding as of, and interest due and accruing after, the cut-off date,
without recourse, to the depositor on the closing date. Pursuant to the Sale and
Servicing Agreement, the depositor will sell, transfer, assign, set over and
otherwise convey without recourse to the trust, all right, title and interest in
and to each mortgage loan, including all principal outstanding as of, and
interest due and accruing after, the cut-off date. Each such transfer will
convey all right, title and interest in and to (a) principal outstanding as of
the cut-off date, and (b) interest due and accrued on each such mortgage loan
after the cut-off date; provided, however, that the originators will not convey,
and the originators reserve and retain all their respective right, title and
interest in and to (x) principal, including principal prepayments in full and
curtailments (i.e., partial prepayments), received on each such mortgage loan on
or prior to the cut-off date and (y) interest accrued on each mortgage loan on
or prior to the cut-off date.
Pursuant to the Indenture, the trust will pledge to the indenture
trustee in trust for the benefit of the holders of the notes and the note
insurer, all right, title and interest in and to each mortgage loan, including
all principal outstanding as of, and interest due and accruing after, the
cut-off date, as collateral security for the notes.
Delivery of Mortgage Loan Documents
In connection with the sale, transfer, assignment or pledge of the
mortgage loans to the trust, the depositor will cause to be delivered to the
collateral agent on behalf of the indenture trustee, on the closing date, the
following documents with respect to each mortgage loan which constitute the
mortgage file:
(a) the original mortgage note, endorsed without recourse
in blank by the related originator, including all
intervening endorsements showing a complete chain of
endorsement;
(b) the related original mortgage with evidence of
recording indicated thereon or, in certain limited
circumstances, a copy thereof certified by the
applicable recording office;
(c) the recorded mortgage assignment(s), or copies
thereof certified by the applicable recording office,
if any, showing a complete chain of assignment from
the originator of the related mortgage loan to the
related originator -- which assignment may, at such
originator's option, be combined with the assignment
referred to in clause (d) below;
(d) a mortgage assignment in recordable form, which, if
acceptable for recording in the relevant
jurisdiction, may be included in a blanket assignment
or assignments, of each mortgage from the related
originator to the indenture trustee;
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(e) originals of all assumption, modification and
substitution agreements in those instances where the
terms or provisions of a mortgage or mortgage note
have been modified or such mortgage or mortgage note
has been assumed; and
(f) an original title insurance policy or (x) a copy of
the title insurance policy, or (y) a binder thereof
or copy of such binder together with a certificate
from the originator that the original mortgage has
been delivered to the title insurance company that
issued such binder for recordation.
Pursuant to the Sale and Servicing Agreement, the collateral agent, on
behalf of the indenture trustee agrees to execute and deliver on or prior to the
closing date an acknowledgment of receipt of the original mortgage note, item
(a) above, with respect to each of the mortgage loans, with any exceptions
noted. The collateral agent, on behalf of the indenture trustee, agrees, for the
benefit of the holders of the notes and the note insurer, to review, or cause to
be reviewed, each mortgage file within thirty days after the closing date -- or,
with respect to any Qualified Substitute Mortgage Loan, within thirty days after
the receipt by the collateral agent thereof -- and to deliver a certification
generally to the effect that, as to each mortgage loan listed in the schedule of
mortgage loans,
o all documents required to be delivered to it pursuant to the
Sale and Servicing Agreement are in its possession;
o each such document has been reviewed by it and has not been
mutilated, damaged, torn or otherwise physically altered,
appears regular on its face and relates to such mortgage loan;
and
o based on its examination and only as to the foregoing
documents, certain information set forth on the schedule of
mortgage loans accurately reflects the information set forth
in the mortgage file delivered on such date.
If the collateral agent, during the process of reviewing the mortgage
files, finds any document constituting a part of a mortgage file which is not
executed, has not been received or is unrelated to the mortgage loans, or that
any mortgage file does not conform to the requirements above or to the
description thereof as set forth in the schedule of mortgage loans, the
collateral agent shall promptly so notify the indenture trustee, the servicer,
the seller and the note insurer in writing with details thereof. The seller
agrees to use reasonable efforts to cause to be remedied a material defect in a
document constituting part of a mortgage file of which it is so notified by the
collateral agent. If, however, within forty-five days after the collateral
agent's notice of such defect, the seller has not caused the defect to be
remedied and the defect materially and adversely affects the value of, or the
interest of the holders of the Class A Notes or the interests of the note
insurer, in the mortgage loan, the seller or the related originator will either
(a) substitute in lieu of such mortgage loan a Qualified Substitute Mortgage
Loan and, if the then outstanding principal balance of such Qualified Substitute
Mortgage Loan is less than the principal balance of such mortgage loan as of the
date of such substitution plus accrued and unpaid interest thereon, deliver to
the servicer a substitution adjustment equal to the amount of any such shortfall
or (b) purchase such mortgage loan at a price equal to the outstanding principal
balance of such mortgage loan as of the date of purchase, plus the greater of
(x) all accrued and unpaid interest thereon and (y) thirty days' interest
thereon, computed at the related mortgage interest rate, net of the servicing
fee if American Business Credit is the servicer effecting the repurchase, plus
the amount of any unreimbursed servicing advances made by the servicer, which
purchase price shall be deposited in the distribution account on the next
succeeding servicer remittance date after deducting therefrom any amounts
received in respect of such repurchased mortgage loan or loans and being held in
the distribution account for future distribution to the extent such amounts have
not yet been applied to principal or interest on such mortgage loan. In
addition, the seller and the originators shall be obligated to indemnify the
trust, the owner trustee, the indenture trustee, the collateral agent, the
holders of the Class A Notes and the note insurer for any third-party claims
arising out of a breach by the seller or the originators of representations or
warranties regarding the mortgage loans. The obligation of the seller and the
originators to cure such breach or to substitute or purchase any mortgage loan
and to indemnify constitute the sole remedies respecting a material breach of
any such representation or warranty to the holders of the Class A Notes, the
indenture trustee, the collateral agent, and the note insurer.
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Representations and Warranties of the Seller
The seller will represent, among other things, with respect to each
mortgage loan, as of the closing date, the following:
1. the information set forth in the schedule of mortgage loans with
respect to each mortgage loan is true and correct;
2. all of the original or certified documentation constituting the
mortgage files, including all material documents related thereto, has been or
will be delivered to the collateral agent, on behalf of the indenture trustee,
on or before the closing date;
3. the mortgaged property consists of a single parcel of real property
separately assessed for tax purposes, upon which is erected a detached or an
attached one-family residence or a detached two- to six-family dwelling, or an
individual condominium unit, or a townhouse, or a manufactured dwelling, or an
individual unit in a planned unit development, or a commercial property, or a
mixed use or a multiple purpose property. Such residence, dwelling or unit is
not,
o a unit in a cooperative apartment,
o a property constituting part of a syndication,
o a time share unit,
o a property held in trust, except to the extent such property
is mortgaged by a trustee duly qualified to serve as such in
the relevant jurisdiction,
o a log-constructed home,
o a recreational vehicle, or
o a mobile home;
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4. each mortgage or deed of trust is a valid first or second lien on a fee
simple, or its equivalent under applicable state law, estate in the real
property securing the amount owed by the mortgagor under the mortgage note
subject only to,
o the lien of current real property taxes and assessments which are
not delinquent,
o any related first mortgage loan,
o covenants, conditions and restrictions, rights of way, easements
and other matters of public record as of the date of recording of
such mortgage, such exceptions appearing of record being
acceptable to mortgage lending institutions generally in the area
wherein the property subject to the mortgage is located or
specifically reflected in the appraisal obtained in connection
with the origination of the related mortgage loan obtained by the
seller, and
o other matters to which like properties are commonly subject which
do not materially interfere with the benefits of the security
intended to be provided by such mortgage;
5. to the best of the seller's knowledge none of the mortgage loans are
Section 32 loans subject to the Home Ownership and Equity Protection Act;
6. immediately prior to the transfer and assignment by the seller to the
depositor, the seller had good title to, and was the sole owner of each mortgage
loan, free of any interest of any other person, and the seller has transferred
all right, title and interest in each mortgage loan to the depositor;
7. each mortgage loan conforms, and all such mortgage loans in the
aggregate conform, to the description thereof set forth in this prospectus
supplement; and
8. all of the mortgage loans were originated in accordance with the
underwriting criteria set forth in this prospectus supplement.
Pursuant to the Sale and Servicing Agreement, upon the discovery by any
of the noteholders, the seller, the servicer, any subservicer, the note insurer,
the collateral agent or the indenture trustee that any of the representations
and warranties contained in the Sale and Servicing Agreement have been breached
in any material respect as of the date made, with the result that the value of,
or the interests of the holders of the Class A Notes in the related mortgage
loan or the interests of the note insurer were materially and adversely
affected, notwithstanding that such representation and warranty was made to the
seller's or the originator's best knowledge and the seller or the originator
lacked knowledge of such breach, the party discovering such breach is required
to give prompt written notice to the other parties. Subject to certain
provisions of the Sale and Servicing Agreement, within sixty days of the earlier
to occur of the seller's or an originator's discovery or its receipt of notice
of any such breach, the seller or the originators will,
o promptly cure such breach in all material respects,
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o remove each mortgage loan which has given rise to the requirement
for action by the seller or the originators, substitute one or
more Qualified Substitute Mortgage Loans and, if the outstanding
principal balance of such Qualified Substitute Mortgage Loans as
of the date of such substitution is less than the outstanding
principal balance, plus accrued and unpaid interest thereon, of
the replaced mortgage loans as of the date of substitution,
deliver to the trust as part of the amounts remitted by the
servicer on such distribution date the amount of such shortfall,
or
o purchase such mortgage loan at a price equal to the principal
balance of such mortgage loan as of the date of purchase plus the
greater of (x) all accrued and unpaid interest thereon and (y)
thirty days' interest thereon computed at the mortgage interest
rate, net of the servicing fee if American Business Credit is the
servicer, plus the amount of any unreimbursed servicing advances
made by the servicer,
and deposit such purchase price into the distribution account on the next
succeeding servicer remittance date after deducting therefrom any amounts
received in respect of such repurchased mortgage loan or mortgage loans and
being held in the distribution account for future distribution to the extent
such amounts have not yet been applied to principal or interest on such mortgage
loan.
In addition, the seller and the originators shall be obligated to
indemnify the depositor, the owner trustee, the indenture trustee, the
collateral agent, the holders of the Class A Notes and the note insurer for any
third-party claims arising out of a breach by the seller or the originators of
representations or warranties regarding the mortgage loans. The obligation of
the seller and the originators to cure such breach or to substitute or purchase
any mortgage loan and to indemnify constitute the sole remedies respecting a
material breach of any such representation or warranty to the holders of the
Class A Notes, the indenture trustee, the collateral agent and the note insurer.
Distributions on the Mortgage Loans
The Sale and Servicing Agreement provides that the servicer, for the
benefit of the holders of the Class A Notes, shall establish and maintain the
collection account, which will generally be (x) an account maintained with a
depository institution or trust company whose long term unsecured debt
obligations are rated by each rating agency in one of its two highest rating
categories at the time of any deposit therein or (y) trust accounts maintained
with a depository institution acceptable to each rating agency and the note
insurer. The Sale and Servicing Agreement permits the servicer to direct any
depository institution maintaining the collection account to invest the funds in
the collection account in one or more permitted investments that mature, unless
payable on demand, no later than the business day preceding the date on which
the servicer is required to transfer the servicer remittance amount from the
collection account to the distribution account, as described below.
The servicer is obligated to deposit or cause to be deposited in the
collection account on each business day, amounts representing the following
distributions received and collections made by it after the cut-off date, other
than in respect of monthly distributions on the mortgage loans due and accrued
on each mortgage loan up to and including any due date occurring on or prior to
the cut-off date:
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o all distributions on account of principal, including
prepayments of principal;
o all distributions on account of interest on the mortgage
loans;
o all Net Liquidation Proceeds and all Insurance Proceeds to the
extent such Insurance Proceeds are not to be applied to the
restoration of the related mortgaged property or released to the
related borrower in accordance with the express requirements of
law or in accordance with prudent and customary servicing
practices;
o all Net REO Proceeds;
o all other amounts required to be deposited in the collection
account pursuant to the Sale and Servicing Agreement; and
o any amounts required to be deposited in connection with net
losses realized on investments of funds in the collection
account.
The indenture trustee will be obligated to set up a distribution
account with respect to the notes into which the servicer will deposit or cause
to be deposited the servicer remittance amount on the servicer remittance date
which shall be the 10th day of each month, or if such date is not a business
day, then the preceding business day.
The servicer remittance amount for a servicer remittance date is equal
to the sum, without duplication, of,
o all collections of principal and interest on the mortgage loans,
including principal prepayments, Net REO Proceeds and Liquidation
Proceeds, if any, collected by the servicer during the prior
calendar month;
o all Periodic Advances made by the servicer with respect to
payments due to be received on the mortgage loans on the related
due date; and
o any other amounts required to be placed in the collection account
by the servicer pursuant to the Sale and Servicing Agreement,
but excluding the following:
(a) amounts received on a particular mortgage loan, with respect
to which the servicer has previously made an unreimbursed
Periodic Advance, as late distributions of interest, or as
Liquidation Proceeds, to the extent of such unreimbursed
Periodic Advance;
(b) amounts received on a particular mortgage loan with respect to
which the servicer has previously made an unreimbursed
servicing advance, to the extent of such unreimbursed
servicing advance;
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(c) for such servicer remittance date, the aggregate servicing
fee;
(d) all net income from permitted investments that are held in the
collection account for the account of the servicer;
(e) all amounts actually recovered by the servicer in respect of
late fees, assumption fees, prepayment fees and similar fees;
(f) Net Foreclosure Profits; and
(g) certain other amounts which are reimbursable to the servicer,
as provided in the Sale and Servicing Agreement.
The amounts described in clauses (a) through (g) above may be withdrawn
by the servicer from the collection account on or prior to each servicer
remittance date.
Note Rate
The note rate applicable to the Class A Notes for any distribution date
are as follows:
Class A Note Rate: For any distribution date which occurs on or
prior to the Clean-Up Call Date, 5.35% per
annum, and for any distribution date
thereafter 5.85% per annum.
Initial Over-Funding
The Notes are issued initially with an over-funding feature, which
means that we are issuing a greater principal amount of Notes than the aggregate
principal amount of mortgage loans in the mortgage loan group. Specifically, the
original Class A Note principal balance exceeds the original aggregate pool
balance of the mortgage loan group by approximately $6,320,000.00.
As discussed below under "Over-collateralization Provisions", excess
cashflow consisting generally of excess interest - interest collected on the
mortgage loans in excess of the interest paid out on the Notes, together with
fees - will be applied in the early months of the transaction to eliminate the
under-collateralization which results from the over-funding feature, and
thereafter to build over-collateralization to its required level for the
mortgage loan group. Although the note insurer will generally be required to
fund, under the note insurance policy, the amount of under-collateralization for
the mortgage loan group, that provision will not initially apply to this
beginning level of under-collateralization, although the policy will ultimately
cover any Over-collateralization Deficit.
Over-collateralization Provisions
Over-collateralization Resulting from Cash Flow Structure. The
Indenture requires that, on each distribution date, the Excess Interest, if any,
with respect to the mortgage loan group that is not used to cover any losses in
the mortgage loan group during the prior Due Period will be applied on that
distribution date as an accelerated distribution of principal on the Class A
Notes but only to the limited extent hereafter described. The application of
Excess Interest as a distribution of principal will have the effect of,
initially, during the early months of the transaction, eliminating the initial
under-collateralization, and thereafter, building over-collateralization, by
accelerating the amortization of the Class A Notes relative to the amortization
of the mortgage loans in the mortgage loan group.
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After the time at which the targeted level of over-collateralization is
reached, if it is necessary to re-establish the required level of
over-collateralization, the Excess Interest will again be applied as an
accelerated distribution of principal on the Class A Notes. Notwithstanding the
foregoing, in the event delinquencies or losses on the underlying mortgage loans
exceed the levels specified in the Indenture, all available Excess Interest from
the mortgage loan group, will be used as a payment of principal to accelerate
the amortization of the Class A Notes.
The actual rate at which the accelerated amortization will occur will
be influenced by several factors, most importantly the rate of prepayment on the
underlying mortgage loans and the level of delinquencies. These and other
factors are described in more detail under "Prepayment and Yield Considerations"
in this prospectus supplement.
In the event that the required level of the Specified
Over-collateralized Amount with respect to the mortgage loan group is permitted
to decrease or "step down" on a distribution date in the future, the Indenture
provides that a portion of the principal which would otherwise be paid to the
holders of the Class A Notes on such distribution date shall instead be paid in
the priority set forth herein under "--Flow of Funds." This has the effect of
decelerating the amortization of the Class A Notes relative to the amortization
of the mortgage loan group, and of reducing the Over-collateralized Amount.
Further, if, on any distribution date, the Excess Over-collateralized Amount is,
or, after taking into account all other distributions to be made on such
distribution date would be, greater than zero -- i.e., the Over-collateralized
Amount is or would be greater than the Specified Over-collateralized Amount --
then certain amounts relating to principal which would otherwise be paid to the
holders of the Class A Notes on such distribution date shall instead be paid in
the priority set forth herein under "--Flow of Funds", in an amount equal to the
Over-collateralization Reduction Amount.
The Indenture provides that, on any distribution date, all amounts
collected on account of principal -- other than any such amount applied to the
distribution of an Over-collateralization Reduction Amount -- with respect to
the mortgage loan group during the prior calendar month will be paid to the
holders of the Class A Notes on such distribution date. In addition, the
Indenture provides that the principal balance of any mortgage loan which becomes
a Liquidated Mortgage Loan shall then equal zero. The Indenture does not contain
any rule which requires that the amount of any Liquidated Loan Loss be paid to
the holders of the Class A Notes on the distribution date which immediately
follows the event of loss; i.e., the Indenture does not require the current
recovery of losses. However, the occurrence of a Liquidated Loan Loss will
reduce the Over-collateralized Amount with respect to the mortgage loan group,
which, to the extent that such reduction causes the Over-collateralized Amount
to be less than the Specified Over-collateralized Amount applicable to the
related distribution date, will require the distribution of an
Over-collateralization Increase Amount on such distribution date, or, if
insufficient funds are available on such distribution date, on subsequent
distribution dates, until the Over-collateralized Amount equals the Specified
Over-collateralized Amount. The effect of the foregoing is to allocate losses to
the holders of the trust certificates by reducing, or eliminating entirely,
distributions of Excess Interest and Over-collateralization Reduction Amounts
which such holder would otherwise receive.
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Over-collateralization and the Policy. The Indenture requires the
indenture trustee to make a claim for an Insured Distribution under the policy
not later than the third business day prior to any distribution date as to which
the indenture trustee has determined that an Over-collateralization Deficit will
occur for the purpose of applying the proceeds of such Insured Distribution as a
distribution of principal to the holders of the Class A Notes on such
distribution date. The note insurer has the option on any distribution date to
make a distribution of principal, including in respect of Liquidated Loan
Losses, up to the amount that would have been payable to the holders of the
Class A Notes if sufficient funds were available therefor. However, investors in
the Class A Notes should realize that, under extreme loss or delinquency
scenarios, they may temporarily receive no distributions of principal.
Flow of Funds
On each distribution date, the indenture trustee, based solely on the
information received from the servicer in the servicer remittance report prior
to such distribution date, shall make distributions to the holders of the notes
and reimbursement to the note insurer under the Insurance and Reimbursement
Agreement, to the extent of funds on deposit in the distribution account,
including any Insured Distributions, as follows:
(a) to the indenture trustee, an amount equal to the fees then due
to it;
(b) to the note insurer the Premium Amount then due to it;
(c) the Interest Distribution Amount for the Class A Notes;
(d) the Reimbursement Amount owing to the note insurer;
(e) the Principal Distribution Amount, which will be distributed,
to the holders of the Class A Notes, until the aggregate
principal balance of the Class A Notes is reduced to zero;
(f) the amount of any Net Mortgage Loan Interest Shortfalls for
the Class A Notes;
(g) to the indenture trustee, an amount equal to the outstanding
expenses due the indenture trustee pursuant to the Indenture
and not otherwise paid or reimbursed by the servicer;
(h) to the servicer for reimbursement of any nonrecoverable
Periodic Advances and servicing advances; and
(i) then to the holders of the trust certificates, any further
remaining balance.
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Indenture Events of Default
Upon the occurrence of an event of default, the indenture trustee, upon
the direction of the note insurer -- or the majority holders of the notes if the
note insurer is in default under the Insurance and Reimbursement Agreement --
shall declare the aggregate outstanding principal balance of all the notes to be
due and payable together with all accrued and unpaid interest thereon without
presentment, demand, protest or other notice of any kind, all of which are
waived by the trust. An event of default, wherever used herein, means any one of
the following events:
1. the trust shall fail to pay or cause to be paid to the indenture
trustee, for the benefit of the holders of the notes, on any distribution date,
all or part of any Interest Distribution Amount due on the notes on such
distribution date and all or a part of any Net Mortgage Loan Interest Shortfalls
due on the notes on the maturity date of the notes (determined in each case
without giving effect to any payment on the Notes made with the proceeds of a
draw under the Note Insurance Policy); or
2. the trust shall fail to pay or cause to be paid to the indenture
trustee, for the benefit of the holders of the notes, (x) on any distribution
date an amount equal to the principal due on the outstanding notes on such
distribution date, to the extent that sufficient funds are on deposit in the
collection account or (y) on the final stated maturity date for the notes, the
aggregate outstanding principal balance of the notes (determined in each case
without giving effect to any payment on the Notes made with the proceeds of a
draw under the Note Insurance Policy); or
3. the trust shall breach or default in the due observance of any one
or more of the negative covenants under the Indenture; or
4. the trust shall consent to the appointment of a custodian, receiver,
trustee or liquidator, or other similar official, for itself, or of a
substantial part of its property, or shall admit in writing its inability to pay
its debts generally as they come due, or a court of competent jurisdiction shall
determine that the trust is generally not paying its debts as they come due, or
the trust shall make a general assignment for the benefit of creditors; or
5. the trust shall file a voluntary petition in bankruptcy or a
voluntary petition or an answer seeking reorganization in a proceeding under any
bankruptcy laws, as now or hereafter in effect, or an answer admitting the
material allegation of a petition filed against the trust in any such
proceeding, or the trust shall, by voluntary petition, answer or consent, seek
relief under the provisions of any now existing or future bankruptcy or other
similar law providing for the reorganization or winding-up of debtors, or
providing for an agreement, composition, extension or adjustment with its
creditors; or
6. an order, judgment or decree shall be entered in any proceeding by
any court of competent jurisdiction appointing, without the consent, express or
legally implied, of the trust, a custodian, receiver, trustee or liquidator, or
other similar official, of the trust or any substantial part of its property, or
sequestering any substantial part of its property, and any such order, judgment
or decree or appointment or sequestration shall remain in force undismissed,
unstayed or unvacated for a period of forty-five days after the date of entry
thereof; or
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7. a petition against the trust in a proceeding under applicable
bankruptcy laws or other insolvency laws, as now or hereafter in effect, shall
be filed and shall not be stayed, withdrawn or dismissed within forty-five days
thereafter, or if, under the provisions of any law providing for reorganization
or winding-up of debtors which may apply to the trust, any court of competent
jurisdiction shall assume jurisdiction, custody or control of the trust or any
substantial part of its property, and such jurisdiction, custody or control
shall remain in force unrelinquished, unstayed or unterminated for a period of
forty-five days; or
8. the note insurer shall notify the indenture trustee of an "event of
default" under the Insurance and Reimbursement Agreement.
Reports to Noteholders
On each distribution date the indenture trustee will deliver to the
depositor and each holder of a Class A Note a written remittance report,
provided to the indenture trustee and the note insurer by the servicer,
containing information, including, without limitation, the amount of the
distribution on such distribution date, the amount of such distribution
allocable to principal balance and allocable to interest, the aggregate
outstanding principal of the Class A Notes as of such distribution date, the
amount of any Insured Distribution included in such distribution on such
distribution date and such other information as required by the Indenture.
Amendment
The Indenture may be amended from time to time by the trust and the
indenture trustee by written agreement, upon the prior written consent of the
note insurer, without notice to, or consent of, the holders of the Class A
Notes, to cure any ambiguity, to correct or supplement any provisions therein,
to comply with any changes in the Code, or to make any other provisions with
respect to matters or questions arising under the Indenture which shall not be
inconsistent with the provisions of the Indenture or effect a significant change
in the permitted activities of the trust; provided, that such action shall not,
as evidenced by (i) an opinion of counsel delivered to, but not obtained at the
expense of, the indenture trustee or (ii) a letter from each rating agency
confirming that such amendment will not cause the reduction, qualification or
withdrawal of the then-current ratings of the Class A Notes, adversely affect in
any material respect the interests of any holder of the Class A Notes; provided,
further, that no such amendment shall reduce in any manner the amount of, or
delay the timing of, payments received on mortgage loans which are required to
be paid on any note without the consent of the holder of such note, or change
the rights or obligations of any other party to the Indenture without the
consent of such party.
The Indenture may be amended from time to time by the trust and the
indenture trustee with the consent of the note insurer, and the holders of the
majority of the percentage interest of the Class A Notes for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or of modifying in any manner the rights of the
holders; provided, however, that no such amendment shall reduce in any manner
the amount of, or delay the timing of, payments received on mortgage loans which
are required to be paid on any note without the consent of the holder of such
note or reduce the percentage of the Class A Notes whose holders are required to
consent to any such amendment without the consent of the holders of 100% of the
Class A Notes.
S-50
The Unaffiliated Seller's Agreement and the Sale and Servicing
Agreement contain substantially similar restrictions regarding amendment.
Control Rights of Note Insurer
Unless it is in default under the Note Insurance Policy or certain
events of bankruptcy or insolvency have occurred with respect to the note
insurer, the note insurer will have the right to exercise all rights, including
voting rights, which the holders of the notes are entitled to exercise under the
Indenture and the other transaction documents. In addition, the note insurer
shall have the right to participate in, to direct the enforcement or defense of,
and at the note insurer's sole option, to institute or assume the defense of,
any action, proceeding or investigation for any remedy available to the
indenture trustee with respect to any matter that could adversely affect the
trust, the trust estate or the rights or obligations of the note insurer, under
the Indenture and the other transaction documents, including (without
limitation) any insolvency or bankruptcy proceeding in respect of any
originator, the trust, the seller, the servicer, the depositor or any affiliate
thereof. Following written notice to the indenture trustee, the note insurer
shall have exclusive right to determine, in its sole discretion, the actions
necessary to preserve and protect the trust and the trust estate. The note
insurer shall be entitled to reimbursement for all costs and expenses incurred
in connection with such action, proceeding or investigation, including (without
limitation) reasonable attorneys' fees and any judgment or settlement entered
into affecting the note insurer or the note insurer's interests.
Servicing of the Mortgage Loans
American Business Credit will act as the servicer of the mortgage
loans. Upland Mortgage and American Business Mortgage will act as subservicers
with respect to a portion of the mortgage loans. See "The Originators, the
Seller and the Servicer" herein. The servicer and the subservicers will be
required to use the same care as they customarily employ in servicing and
administering mortgage loans for their own account, in accordance with accepted
mortgage servicing practices of prudent lending institutions, and giving due
consideration to the reliance of the note insurer and the holders of the notes
on them.
Servicing Fees and Other Compensation and Payment of Expenses
As compensation for its activities as servicer under the Sale and
Servicing Agreement, the servicer shall be entitled with respect to each
mortgage loan to the servicing fee, which shall be payable monthly from amounts
on deposit in the collection account. The servicing fee shall be an amount equal
to interest at one-twelfth of the servicing fee rate for such mortgage loan on
the outstanding principal balance of such mortgage loan. The servicing fee rate
with respect to each mortgage loan will be 0.50% per annum. In addition, the
servicer shall be entitled to receive, as additional servicing compensation, to
the extent permitted by applicable law and the related mortgage notes, any late
payment charges, assumption fees, prepayment fees or similar items. The servicer
shall also be entitled to withdraw from the collection account any net interest
or other income earned on deposits therein. The servicer shall pay all expenses
incurred by it in connection with its servicing activities under the Sale and
Servicing Agreement and shall not be entitled to reimbursement therefor except
as specifically provided in the Sale and Servicing Agreement.
S-51
Periodic Advances and Servicer Advances
Periodic Advances. The servicer is required to make Periodic Advances
on each servicer remittance date, subject to the servicer's determination that
such advance would be recoverable. Such Periodic Advances by the servicer are
reimbursable to the servicer subject to certain conditions and restrictions, and
are intended to provide both sufficient funds for the payment of interest to the
holders of the notes, plus an additional amount intended to maintain a specified
level of over-collateralization and to pay the indenture trustee's fees, and the
premium due the note insurer. Notwithstanding the servicer's good faith
determination that a Periodic Advance was recoverable when made, if such
Periodic Advance becomes a nonrecoverable advance, the servicer will be entitled
to reimbursement therefor from the trust estate. See "Description of the Notes
and the Trust Certificates -- Flow of Funds" herein.
Servicing Advances. The servicer is required to advance amounts with
respect to the mortgage loans, subject to the servicer's determination that such
advance would be recoverable and that a prudent mortgage lender would make a
like advance if it or an affiliate owned the related mortgage loan, constituting
"out-of-pocket" costs and expenses relating to,
o the preservation and restoration of the mortgaged property,
o enforcement proceedings, including foreclosures,
o expenditures relating to the purchase or maintenance of a
first lien not included in the trust estate on the mortgaged
property, and
o certain other customary amounts described in the Sale and
Servicing Agreement.
These servicing advances by the servicer are reimbursable to the
servicer subject to certain conditions and restrictions. In the event that
notwithstanding the servicer's good faith determination at the time such
servicing advance was made that it would be recoverable, such servicing advance
becomes a nonrecoverable advance, the servicer will be entitled to reimbursement
therefor from the trust estate.
Special Advances. On the closing date, from funds received from the
sale of the Notes, the indenture trustee is required to deposit amounts into an
interest reserve account with respect to mortgage loans which do not have an
initial interest payment due until December 2001 to cover interest shortfalls,
if any, on the first distribution date. Subject to certain terms and conditions
in the Indenture, any funds remaining in the interest reserve account following
distributions on the distribution date in January 2002 shall be released to the
servicer. The servicer is also required to advance amounts to the distribution
account on the first servicer remittance date in January 2002 with respect to
mortgage loans which do not have an initial interest payment due until January
2002.
Recovery of Advances. The servicer may recover Periodic Advances and
servicing advances to the extent permitted by the Sale and Servicing Agreement
or, if not recovered from the mortgagor on whose behalf such servicing advance
or Periodic Advance was made, from late collections on the related mortgage
loan, including Liquidation Proceeds, Insurance Proceeds and such other amounts
as may be collected by the servicer from the mortgagor or otherwise relating to
the mortgage loan. In the event a Periodic Advance or a servicing advance
becomes a nonrecoverable advance, the servicer may be reimbursed for such
advance from the distribution account.
S-52
The servicer shall not be required to make any Periodic Advance or
servicing advance which it determines would be a nonrecoverable Periodic Advance
or nonrecoverable servicing advance. A Periodic Advance or servicing advance is
"nonrecoverable" if in the good faith judgment of the servicer (as stated in an
officer's certificate of the servicer delivered to the indenture trustee), such
Periodic Advance or servicing advance would not ultimately be recoverable.
Prepayment Interest Shortfalls
Not later than the close of business on the 10th day of each month, the
servicer is required to remit to the indenture trustee a payment of Compensating
Interest in respect of Prepayment Interest Shortfalls and shall not have the
right to reimbursement therefor. Insured Distributions do not cover Prepayment
Interest Shortfalls.
Relief Act Shortfalls
The reduction, if any, in interest payable on the mortgage loans in the
mortgage loan group attributable to the application of the Soldiers' and
Sailors' Civil Relief Act of 1940 will not reduce the amount of Class A Current
Interest due to the holders of the notes. However, in the event the full amount
of Class A Current Interest is not available on any distribution date due to
Relief Act Shortfalls, the amount of such shortfall will not be covered by the
note insurance policy. Such shortfalls in Class A Current Interest will be paid
from the Excess Interest.
Optional Purchase of Delinquent Mortgage Loans
The seller, or any affiliate of the seller, has the option, but is not
obligated, to purchase from the trust any mortgage loan 180 days or more
delinquent subject to certain terms and conditions set forth in the Sale and
Servicing Agreement. Any such purchase price shall equal the outstanding
principal balance thereof as of the date of purchase, plus all accrued and
unpaid interest on such principal balance, computed at the related mortgage
interest rate -- net of the related servicing fee, if American Business Credit
is the servicer -- plus the amount of any unreimbursed Periodic Advances and
servicing advances made by the servicer with respect to such mortgage loan in
accordance with the provisions specified in the Sale and Servicing Agreement.
Servicer Reports
On each servicer remittance date, the servicer is required to deliver
to the note insurer, the indenture trustee and the collateral agent, a servicer
remittance report setting forth the information necessary for the indenture
trustee to make the distributions set forth under "--Flow of Funds" herein and
containing the information to be included in the written remittance report for
such distribution date delivered by the indenture trustee.
S-53
The servicer is required to deliver to the note insurer, the indenture
trustee, the collateral agent, and the rating agencies, not later than April
30th of each year, starting in 2002, an officer's certificate stating that,
o the servicer has fully complied with the servicing provisions of
the Sale and Servicing Agreement,
o a review of the activities of the servicer during the preceding
calendar year and of performance under the Sale and Servicing
Agreement has been made under such officer's supervision, and
o to the best of such officer's knowledge, based on such review,
the servicer has fulfilled all its obligations under the Sale and
Servicing Agreement for such year, or, if there has been a
default in the fulfillment of any such obligation, specifying
each such default known to such officer and the nature and status
thereof including the steps being taken by the servicer to remedy
such default.
Not later than April 30th of each year, starting in 2002, the servicer,
at its expense, is required to cause to be delivered to the note insurer, the
indenture trustee, the collateral agent and the rating agencies from a firm of
independent certified public accountants, who may also render other services to
the servicer, a statement to the effect that such firm has examined certain
documents and records relating to the servicing of the mortgage loans during the
preceding calendar year, or such longer period from the closing date to the end
of the following calendar year, and that, on the basis of such examination
conducted substantially in compliance with generally accepted auditing standards
and the requirements of the Uniform Single Attestation Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for Freddie Mac, such
servicing has been conducted in compliance with the Sale and Servicing Agreement
except for such significant exceptions or errors in records that, in the opinion
of such firm, generally accepted auditing standards and the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for Freddie Mac require it to report, in which case such exceptions and
errors shall be so reported.
Collection and Other Servicing Procedures
The servicer will be responsible for making reasonable efforts to
collect all payments called for under the mortgage loans and will, consistent
with the Sale and Servicing Agreement, follow such collection procedures as it
follows with respect to loans held for its own account which are comparable to
the mortgage loans. Consistent with the above, the servicer may, in its
discretion, waive any late payment charge and arrange with a mortgagor a
schedule for the liquidation of delinquencies, subject to the provisions of the
Sale and Servicing Agreement.
If a mortgaged property has been or is about to be conveyed by the
mortgagor, the servicer will be obligated to accelerate the maturity of the
mortgage loan, unless it reasonably believes it is unable to enforce that
mortgage loan's "due-on-sale" clause under applicable law. If it reasonably
believes it may be restricted for any reason from enforcing such a "due-on-sale"
clause, the servicer may enter into an assumption and modification agreement
with the person to whom such property has been or is about to be conveyed,
pursuant to which such person becomes liable under the mortgage note.
S-54
Any fee collected by the servicer for entering into an assumption
agreement will be retained by the servicer as additional servicing compensation.
In connection with any such assumption, the mortgage interest rate borne by the
mortgage note relating to each mortgage loan may not be decreased. For a
description of circumstances in which the servicer may be unable to enforce
"due-on-sale" clauses, see "Material Legal Aspects of the Loans -- Due-on-Sale
Clauses" in the accompanying prospectus.
Hazard Insurance
The servicer is required to cause to be maintained for each mortgaged
property a hazard insurance policy with coverage which contains a standard
mortgagee's clause in an amount equal to the lesser of (a) the maximum insurable
value of such mortgaged property or (b) the principal balance of such mortgage
loan plus the outstanding balance of any mortgage loan senior to such mortgage
loan, but in no event may such amount be less than is necessary to prevent the
borrower from becoming a coinsurer thereunder. As set forth above, all amounts
collected by the servicer under any hazard policy, except for amounts to be
applied to the restoration or repair of the mortgaged property or released to
the borrower in accordance with the servicer's normal servicing procedures, to
the extent they constitute Net Liquidation Proceeds or Insurance Proceeds, will
ultimately be deposited in the collection account. The ability of the servicer
to assure that hazard insurance proceeds are appropriately applied may be
dependent on its being named as an additional insured under any hazard insurance
policy, or upon the extent to which information in this regard is furnished to
the servicer by a borrower. The Sale and Servicing Agreement provides that the
servicer may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy issued by an insurer acceptable to the rating
agencies and the note insurer, insuring against losses on the mortgage loans. If
such blanket policy contains a deductible clause, the servicer is obligated to
deposit in the distribution account the sums which would have been deposited
therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms and therefore will not contain identical terms
and conditions, the terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
weather-related causes, earth movement, including earthquakes, landslides and
mudflows, nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive.
S-55
The hazard insurance policies covering the mortgaged properties
typically contain a co-insurance clause which in effect requires the insured at
all times to carry insurance of a specified percentage, generally 80% to 90%, of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(x) the replacement cost of the improvements less physical depreciation or (y)
such proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements.
Since residential and commercial properties, generally, have
historically appreciated in value over time, if the amount of hazard insurance
maintained on the improvements securing the mortgage loans were to decline as
the principal balances owing thereon decreased, hazard insurance proceeds could
be insufficient to restore fully the damaged property in the event of a partial
loss.
Realization Upon Defaulted Mortgage Loans
The servicer will foreclose upon, or otherwise comparably convert to
ownership, mortgaged properties securing such of the mortgage loans as come into
default when, in the opinion of the servicer, no satisfactory arrangements can
be made for the collection of delinquent payments. In connection with such
foreclosure or other conversion, the servicer will follow such practices as it
deems necessary or advisable and as are in keeping with the servicer's general
loan servicing activities and the Sale and Servicing Agreement; provided, that
the servicer will not expend its own funds in connection with foreclosure or
other conversion, correction of a default on a senior mortgage or restoration of
any property unless the servicer believes such foreclosure, correction or
restoration will increase Net Liquidation Proceeds.
Removal and Resignation of the Servicer
The note insurer may, pursuant to the Sale and Servicing Agreement,
remove the servicer upon the occurrence and continuation beyond the applicable
cure period (if any) of an event described in clause (h) below and the indenture
trustee shall, at the direction of the note insurer, or may, at the direction of
the majority holders of the notes, with the consent of the note insurer, in the
case of any direction of the majority holders of the notes, remove the servicer
upon the occurrence and continuation beyond the applicable cure period (if any)
of an event described in clause (a), (b), (c), (d), (e), (f), (g), (h) or (i)
below. Each of the following constitutes a "servicer event of default":
(a) any failure by the servicer to remit to the indenture trustee
any payment required to be made by the servicer under the
terms of the Sale and Servicing Agreement, other than
servicing advances covered by clause (b) below, which
continues unremedied for one business day after the date upon
which written notice of such failure, requiring the same to be
remedied, shall have been given to the servicer and the note
insurer by the indenture trustee or to the servicer and the
indenture trustee by the note insurer or the holders of notes
evidencing percentage interests of at least 25%; or
(b) the failure by the servicer to make any required servicing
advance which failure continues unremedied for a period of
thirty days after the date on which written notice of such
failure, requiring the same to be remedied, shall have been
given to the servicer by the indenture trustee or to the
servicer and the indenture trustee by any holder of a note or
the note insurer; or
S-56
(c) any failure on the part of the servicer duly to observe or
perform in any material respect any other covenants or
agreements on the part of the servicer contained in the Sale
and Servicing Agreement, the breach of any representation and
warranty set forth in the Sale and Servicing Agreement, which
continues unremedied for a period of thirty days after the
date on which written notice of such failure or breach, as
applicable, requiring the same to be remedied, shall have been
given to the servicer by the indenture trustee, or to the
servicer and the indenture trustee by any holder of a note or
the note insurer; or
(d) a decree or order of a court or agency or supervisory
authority having jurisdiction in an involuntary case under any
present or future federal or state bankruptcy, insolvency or
similar law or for the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the servicer and such
decree or order shall have remained in force, undischarged or
unstayed for a period of forty-five days; or
(e) the servicer shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar
proceedings of or relating to the servicer or of or relating
to all or substantially all of the servicer's property; or
(f) the servicer shall admit in writing its inability generally to
pay its debts as they become due, file a petition to take
advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors,
or voluntarily suspend payment of its obligations; or
(g) the delinquency or loss experience of the mortgage loans
exceeds certain levels specified in the Sale and Servicing
Agreement; or
(h) the note insurer shall notify the indenture trustee of any
"event of default" under the Insurance and Reimbursement
Agreement; or
(i) the occurrence of an event of default under the Indenture.
Except to permit American Business Mortgage and Upland Mortgage to act
as subservicers, the servicer may not assign its obligations under the Sale and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the seller, the note insurer, the collateral
agent, and the indenture trustee, or upon the determination that the servicer's
duties thereunder are no longer permissible under applicable law and such
incapacity cannot be cured by the servicer without the incurrence, in the
reasonable judgment of the note insurer, of unreasonable expense. No such
resignation shall become effective until a successor has assumed the servicer's
responsibilities and obligations in accordance with the Sale and Servicing
Agreement.
S-57
Upon removal or resignation of the servicer, the indenture trustee will
be the successor servicer. The indenture trustee, as successor servicer, will be
obligated to make Periodic Advances and servicing advances and certain other
advances unless it determines reasonably and in good faith that such advances
would not be recoverable. If, however, the indenture trustee is unwilling or
unable to act as successor servicer, or if the majority holders of the notes,
with the consent of the note insurer, or the note insurer so requests, the
indenture trustee (acting at the direction of the note insurer) shall appoint,
or petition a court of competent jurisdiction to appoint, in accordance with the
provisions of the Sale and Servicing Agreement and subject to the approval of
the note insurer, any established mortgage loan servicing institution acceptable
to the note insurer having a net worth of not less than $15,000,000 as the
successor servicer in the assumption of all or any part of the responsibilities,
duties or liabilities of the servicer.
The indenture trustee and any other successor servicer in such capacity
is entitled to the same reimbursement for advances and, unless otherwise agreed
by the note insurer, no more than the same servicing compensation as the
servicer. See "-- Servicing and Other Compensation and Payment of Expenses"
herein.
Termination; Optional Clean-up Call
The Servicer may, at its option, call the notes, purchase the mortgage
loans and terminate the trust on any distribution date when the aggregate
principal balance of the mortgage loans is equal to or less than 10% of the
aggregate principal balances of the mortgage loans as of the cut-off date. Such
purchase of the mortgage loans would result in the payment in full of the Class
A Notes on such distribution date. If the mortgage loans are not purchased on
the first distribution date on which the above option may be exercised, the
interest rate payable on the Class A Notes will be increased as described
herein. The note insurer must consent to the purchase of the mortgage loans if
the resulting amount available for payment on the notes would result in a draw
under the note insurance policy.
The trust shall also terminate upon notice to the indenture trustee of
either: (i) the later of the distribution to noteholders of the final payment or
collection with respect to the last mortgage loan (or Periodic Advances of same
by the servicer), or the disposition of all funds with respect to the last
mortgage loan and the remittance of all funds due under the Indenture and the
payment of all amounts due and payable to the note insurer and the indenture
trustee or (ii) mutual consent of the servicer, the note insurer and all
noteholders in writing; provided, however, that in no event shall the trust
terminate later than twenty-one years after the death of the last surviving
lineal descendant of the person named in the Trust Agreement.
The Policy
MBIA Insurance Corporation (the "Note Insurer") will issue a financial
guaranty insurance policy (the "Note Insurance Policy") with respect to the
Class A Notes. The Note Insurer, in consideration of the payment of a premium
and subject to the terms of the Note Insurance Policy, thereby unconditionally
and irrevocably guarantees to any noteholder that an amount equal to each full
and complete Insured Distribution will be received from the Note Insurer by the
indenture trustee or its successors, as indenture trustee for the noteholders,
on behalf of the noteholders, for distribution by the indenture trustee to each
noteholder, of that noteholder's proportionate share of the Insured
Distribution.
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The Note Insurer's obligations under the Note Insurance Policy, with
respect to a particular Insured Distribution, will be discharged to the extent
funds equal to the applicable Insured Distribution are received by the indenture
trustee, whether or not those funds are properly applied by the indenture
trustee. Insured Distributions will be made only at the time set forth in the
Note Insurance Policy, and no accelerated Insured Distributions will be made
regardless of any acceleration of the Class A Notes, unless the acceleration is
at the sole option of the Note Insurer.
The Note Insurance Policy does not cover shortfalls, if any,
attributable to the liability of the Trust or the indenture trustee for
withholding taxes, if any (including interest and penalties in respect of any
liability for withholding taxes). In addition, the Note Insurance Policy does
not cover any Net Mortgage Loan Interest Shortfalls, nor does the Note Insurance
Policy guarantee to the holders of the notes any particular rate of principal
distribution.
The Note Insurer will pay any Insured Distribution that is a Preference
Amount on the business day following receipt on a business day by the Note
Insurer's fiscal agent of the following:
o a certified copy of the order requiring the return of a
preference payment;
o an opinion of counsel satisfactory to the Note Insurer that the
order is final and not subject to appeal;
o an assignment in a form reasonably required by the Note Insurer,
irrevocably assigning to the Note Insurer all rights and claims
of the noteholder relating to or arising under the Class A Notes
against the debtor which made the preference payment or otherwise
with respect to the preference payment; and
o appropriate instruments to effect the appointment of the Note
Insurer as agent for the noteholder in any legal proceeding
related to the preference payment, which instruments are in a
form satisfactory to the Note Insurer;
provided that if the documents are received after 12:00 p.m., New York, New York
time, on that business day, they will be deemed to be received on the following
business day. Payments by the Note Insurer will be disbursed to the receiver or
trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the noteholder and not to any noteholder directly
unless the noteholder has returned principal or interest paid on the Class A
Notes to the receiver or trustee in bankruptcy, in which case that payment will
be disbursed to the noteholder.
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The Note Insurer will pay any other amount payable under the Note
Insurance Policy no later than 12:00 p.m., New York, New York time, on the later
of the distribution date on which the related Deficiency Amount is due or the
third business day following receipt in New York, New York on a business day by
the Note Insurer and State Street Bank and Trust Company, N.A., as a fiscal
agent for the Note Insurer or any successor fiscal agent appointed by the Note
Insurer of a notice from the indenture trustee specifying the Insured
Distribution which is due and owing on the applicable distribution date,
provided that if the notice is received after 12:00 p.m., New York, New York
time, on that business day, it will be deemed to be received on the following
business day. If any notice received by the Note Insurer or its fiscal agent is
not in proper form or is otherwise insufficient for the purpose of making a
claim under the Note Insurance Policy, it will be deemed not to have been
received by the Note Insurer or its fiscal agent for purposes of this paragraph,
and the Note Insurer or its fiscal agent, as the case may be, will promptly so
advise the indenture trustee and the indenture trustee may submit an amended
notice.
Insured Distributions due under the Note Insurance Policy, unless
otherwise stated therein, will be disbursed by the Note Insurer's fiscal agent
to the indenture trustee, on behalf of the noteholders, by wire transfer of
immediately available funds in the amount of the Insured Distribution less, in
respect of Insured Distributions related to Preference Amounts, any amount held
by the indenture trustee for the payment of the Insured Distribution and legally
available therefor.
The Note Insurance Policy expires and terminates in accordance with its
terms without any action on the part of the Note Insurer or any other person on
the date that is one year and one day following the date on which the
outstanding principal balance of the Class A Notes has been reduced to zero.
The fiscal agent is the agent of the Note Insurer only and the fiscal
agent will in no event be liable to noteholders or the indenture trustee for any
acts of the fiscal agent or any failure of the Note Insurer to deposit, or cause
to be deposited, sufficient funds to make payments due under the Note Insurance
Policy.
The Note Insurance Policy is not cancelable. The Premium on the Note
Insurance Policy is not refundable for any reason including payment, or
provision being made for payment, prior to maturity of the Class A Notes.
THE NOTE INSURANCE POLICY IS BEING ISSUED UNDER AND PURSUANT TO, AND
WILL BE CONSTRUED UNDER, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
The insurance provided by the Note Insurance Policy is not covered by
the Property/Casualty Insurance Fund specified in Article 76 of the New York
Insurance Law. Consequently, even if the Note Insurer were unable to meet its
insurance obligations under the Note Insurance Policy, no amounts will be
available from this fund to pay any claim under the Note Insurance Policy.
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Drawings Under the Policy
Not later than three business days prior to each distribution date, the
indenture trustee is required to determine, pursuant to the Indenture, for the
next distribution date, the Net Available Amount to be on deposit in the
distribution account on that distribution date. If there is a Deficiency Amount
for a distribution date, the indenture trustee is required to complete, pursuant
to the Indenture, a telephone or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A to the policy, the
original of which is subsequently delivered by registered or certified mail, and
submit the notice to the Note Insurer no later than 12:00 noon New York City
time on the third business day preceding the distribution date as a claim for an
Insured Distribution in an amount equal to the Deficiency Amount.
The Note Insurer
The following information has been obtained from MBIA Insurance
Corporation, the note insurer, for inclusion in this prospectus supplement. No
representation is made by the seller, the originators, the trust, the servicer,
the depositor, indenture trustee, the collateral agent, the owner trustee or the
underwriters or any of their affiliates as to the accuracy or completeness of
the information.
MBIA Insurance Corporation ("MBIA") is the principal operating
subsidiary of MBIA Inc., a New York Stock Exchange listed company (the
"Company"). The Company is not obligated to pay the debts of or claims against
MBIA. MBIA is domiciled in the State of New York and licensed to do business in
and subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. MBIA has three branches, one in the Republic of France, one in the
Republic of Singapore and one in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by MBIA, changes in control and transactions
among affiliates. Additionally, MBIA is required to maintain contingency
reserves on its liabilities in certain amounts and for certain periods of time.
MBIA does not accept any responsibility for the accuracy or
completeness of this prospectus supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the note insurer set forth under the heading "The
Note Insurer". Additionally, MBIA makes no representation regarding the notes or
the advisability of investing in the notes.
The Note Insurance Policy is not covered by the Property/Casualty
Insurance Security Fund specified in Article 76 of the New York Insurance Law.
Consequently, even if the Note Insurer were unable to meet its insurance
obligations under the Note Insurance Policy, no amounts will be available from
this fund to pay any claim under the Note Insurance Policy.
MBIA Information
The following documents filed by the Company with the Securities and
Exchange Commission are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
S-61
(2) The Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001.
(3) The Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001.
(4) The Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001.
(5) The report on Form 8-K filed by the Company on January 30,
2001.
Any documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this prospectus supplement and
prior to the termination of the offering of the securities offered hereby shall
be deemed to be incorporated by reference in this prospectus supplement, and to
be a part hereof. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein, or contained in this prospectus
supplement shall be deemed to be modified or superseded for purposes of this
prospectus supplement to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this prospectus supplement.
The consolidated financial statements of MBIA, a wholly owned
subsidiary of the Company and its subsidiaries as of December 31, 2000 and
December 31, 1999 and for each of the three years in the period ended December
31, 2000, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of the Company for the year ended
December 31, 2000 and the consolidated financial statements of MBIA and its
subsidiaries as of March 31, 2001, June 30, 2001 and September 30, 2001 and for
the three, six and nine month periods ended March 31, 2001, June 30, 2001 and
September 30, 2001 and March 31, 2000, June 30, 2000 and September 30, 2000
included in the Quarterly Report on Form 10-Q of the Company for the periods
ended March 31, 2001, June 30, 2001 and September 30, 2001, respectively, are
hereby incorporated by reference into this prospectus supplement and shall be
deemed to be a part hereof. All financial statements of MBIA and its
subsidiaries included in documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this prospectus supplement and prior to the
termination of the offering of the Notes shall be deemed to be incorporated by
reference into this prospectus supplement and to be a part hereof from the
respective dates of filing such documents.
The Company files annual, quarterly and special reports, information
statements and other information with the SEC under File No. 1-9583. Copies of
the SEC filings (including (1) the Company's Annual Report on Form 10-K for the
year ended December 31, 2000, (2) the Company's Quarterly Report on Form 10-Q
for the quarters ended March 31, 2001, June 30, 2001 and September 30, 2001, and
(3) the report on Form 8-K filed by the Company on January 30, 2001) are
available (i) over the Internet at the SEC's web site at http://www.sec.gov;
(ii) at the SEC's public reference room in Washington D.C.; (iii) over the
Internet at the Company's web site at http://www.mbia.com; and (iv) at no cost,
upon request to MBIA Insurance Corporation, 113 King Street, Armonk, New York
10504. The telephone number of MBIA is (914) 273-4545.
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The tables below present selected financial information of the note
insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") as well as generally
accepted accounting principles ("GAAP"):
SAP
---------------------------------------------------------
December 31, 2000 September 30, 2000
---------------------- --------------------------
(Audited) (Unaudited)
(in millions)
Admitted Assets $7,627 $8,463
Liabilities 5,245 6,049
Capital and Surplus 2,382 2,414
GAAP
---------------------------------------------------------
December 31, 2000 September 30, 2001
---------------------- --------------------------
(Audited) (Unaudited)
(in millions)
Assets $8,450 $9,505
Liabilities 3,642 4,252
Shareholder's Equity 4,808 5,253
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Financial Strength Ratings of MBIA
Moody's Investors Service, Inc. rates the financial strength of MBIA
"Aaa."
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. rates
the financial strength of MBIA "AAA."
Fitch, Inc. rates the financial strength of MBIA "AAA."
Each rating of MBIA should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of MBIA and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above ratings
may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
securities, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the securities.
MBIA does not guaranty the market price of the securities nor does it guaranty
that the ratings on the securities will not be revised or withdrawn.
Prepayment and Yield Considerations
The weighted average life of, and if purchased at other than par, the
yield to maturity on the Class A Notes, will be directly related to the rate of
payment of principal of the mortgage loans, including for this purpose voluntary
prepayment in full of mortgage loans prior to stated maturity, liquidations due
to defaults, casualties and condemnations, and repurchases of or substitutions
for mortgage loans by American Business Credit or an affiliate of American
Business Credit as required or permitted under the Sale and Servicing Agreement
or the Unaffiliated Seller's Agreement.
The actual rate of principal prepayments on the mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates of certain mortgage loans at
the time of origination, such mortgage loans may be subject to higher prepayment
rates than if prevailing rates remain at or above those at the time such
mortgage loans were originated. Conversely, if prevailing interest rates rise
appreciably above the interest rates of certain mortgage loans at the time of
origination, such mortgage loans may experience a lower prepayment rate than if
prevailing rates remain at or below those at the time such mortgage loans were
originated. However, there can be no assurance that the mortgage loans will
conform to the prepayment experience of conventional mortgage loans or to any
past prepayment experience or any published prepayment forecast. No assurance
can be given as to the level of prepayments that the mortgage loans in the trust
estate will experience.
S-64
As indicated above, if purchased at other than par, the yield to
maturity on the Class A Notes, will be affected by the rate of the payment of
principal on the mortgage loans. If the actual rate of payments on the mortgage
loans is slower than the rate anticipated by an investor who purchases the Class
A Notes at a discount, the actual yield to such investor will be lower than such
investor's anticipated yield. If the actual rate of payments on the mortgage
loans is faster than the rate anticipated by an investor who purchases the Class
A Notes at a premium, the actual yield to such investor will be lower than such
investor's anticipated yield.
The Indenture provides that none of the note insurer, the indenture
trustee, the owner trustee, the collateral agent, the seller, the depositor, the
originators or the servicer will be liable to any holder for any loss or damage
incurred by such holder as a result of any difference in the rate of return
received by such holder as compared to the related note rate, with respect to
any holder of notes upon reinvestment of the funds received in connection with
any premature repayment of principal on the notes, including any such repayment
resulting from any prepayment by the mortgagor, any liquidation of such mortgage
loan, or any repurchase of or substitution for any mortgage loan by the
depositor or the servicer.
The final stated maturity date is expected to be May 15, 2032 for the
Class A Notes. The final stated maturity date for the Class A Notes was
calculated using the assumption that the final stated maturity date would be the
distribution date in the sixth month following the latest possible maturity date
of any mortgage loan. The weighted average life of the notes is likely to be
shorter than would be the case if payments actually made on the mortgage loans
conformed to the foregoing assumptions, and the final distribution date with
respect to the notes could occur significantly earlier than the final stated
maturity date because:
o prepayments, including, for this purpose, prepayments
attributable to foreclosure, liquidation, repurchase and the
like, on mortgage loans are likely to occur;
o the over-collateralization provisions of the transaction result
in the application of Excess Interest to the distribution of
principal; and
o the servicer may, at its option as described herein, call the
notes when the aggregate outstanding principal balance of the
mortgage loans is equal to or less than 10% of the aggregate
original principal balance of the mortgage loans as of the
cut-off date.
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security is scheduled to be repaid to an investor. The weighted average
life of the notes will be influenced by the rate at which principal of the
related mortgage loans is paid, which may be in the form of scheduled
amortization or prepayments -- for this purpose, the term "prepayment " includes
liquidations due to default.
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Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The prepayment model used in the tables below,
Home Equity Prepayment, or HEP, is a prepayment assumption which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of a mortgage loan group for the life of such mortgage loans. For
example, 23% HEP assumes a constant prepayment rate of 2.3% per annum of the
then outstanding principal balance of the mortgage loans in the first month of
the life of the mortgage loans and an additional 2.3% per annum in each month
thereafter up to and including the tenth month. Beginning in the tenth month and
in each month thereafter during the life of the mortgage loans, 23% HEP assumes
a constant prepayment rate of 23% per annum. As used in the table below, 0%
prepayment assumption assumes prepayment rates equal to 0% of the prepayment
assumption, i.e., no prepayments on the mortgage loans having the
characteristics described below. The prepayment assumption does not purport to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any mortgage loans, including the mortgage
loans in the trust estate.
The following tables, addressing the weighted average lives of the
notes, have been prepared on the basis of the following modeling assumptions:
o the mortgage loans prepay at the indicated percentage of the
prepayment assumption,
o payments on the notes are received in cash on the 15th day of
each month commencing in January 2002,
o no defaults or delinquencies in, or modifications, waivers or
amendments respecting the payments by the mortgagors of principal
and interest on the mortgage loans occur,
o scheduled payments are assumed to be received on the first day of
each month commencing in December 2001, and prepayments represent
payments in full of individual mortgage loans and are assumed to
be received on the last day of each month, commencing in December
2001, and include thirty days' interest thereon,
o the notes are purchased on December 20, 2001,
o the servicer's optional clean-up call is exercised,
o the Specified Over-collateralized Amount is as set forth in the
Indenture, and
o the mortgage loans in the mortgage loan group consist of 6
mortgage loans having the following characteristics:
Net Original
Mortgage Mortgage Amortizing Remaining Remaining Term
Principal Interest Interest Term Amortizing Term to Maturity
Balance ($) Rate (%) Rate (%) (in months) (in months) (in months)
-------------- -------- -------- ----------- --------------- -------------
137,396,800.00 11.152 10.652 350 350 210
9,606,400.00 13.364 12.864 109 109 109
34,918,000.00 13.308 12.808 179 179 179
38,552,000.00 11.136 10.636 239 239 239
1,580,000.00 10.789 10.289 292 292 292
93,946,800.00 10.580 10.080 360 360 360
- ---------------
The foregoing modeling assumptions are assumptions and are not
necessarily indicative of actual performance.
Based upon the foregoing modeling assumptions, the tables below
indicate the weighted average life and earliest retirement date of the notes
assuming that the related mortgage loans prepay according to the indicated
percentages of the prepayment assumption.
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Weighted Average Lives
Class A Notes: To Maturity
Prepayment Weighted Average
Assumption (HEP) Life in Years Retirement Date
- --------------------------------- ------------------------- -----------------------
0% 15.26 11/15/31
15 5.24 3/15/24
20 4.13 12/15/19
23 3.65 6/15/19
30 2.84 3/15/16
35 2.45 2/15/14
Class A Notes: To Call
Prepayment Weighted Average
Assumption (HEP) Life in Years Retirement Date
- --------------------------------- ------------------------- -----------------------
0% 15.09 4/15/28
15 4.96 10/15/14
20 3.85 11/15/11
23 3.39 8/15/10
30 2.64 8/15/08
35 2.27 7/15/07
The preceding tables were prepared using the following assumptions:
o the weighted average life of the notes is determined by (a) multiplying
the amount of each principal distribution used to retire the notes by
the number of years from the closing date to the date on which such
principal distribution is received; (b) adding the results; and (c)
dividing the sum by the original principal balance of the notes,
o in the "To Call" table above, the notes are called due to the exercise
by the servicer of its clean-up call option to repurchase the mortgage
loans on the first distribution date on which the aggregate outstanding
principal balance of all the then outstanding mortgage loans is equal
to or less than 10% of the aggregate original principal balances of the
mortgage loans as of the cut-off date, and
o in the "To Maturity" table above no exercise of the servicer's clean-up
call repurchase option ever occurs.
----------------------
There is no assurance that prepayments will occur or, if they do occur,
that they will occur at any percentage of HEP.
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Material Federal Income Tax Consequences
You should consider the following discussion of certain material
federal income tax consequences to investors of the purchase, ownership and
disposition of the notes only in connection with "Material Federal Income Tax
Considerations" in the accompanying prospectus. The discussion in this
prospectus supplement and in the accompanying prospectus is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion in this prospectus supplement and in the accompanying
prospectus does not purport to deal with all federal tax considerations
applicable to all categories of investors. Some holders, including insurance
companies, tax-exempt organizations, financial institutions or broker dealers,
taxpayers subject to the alternative minimum tax, holders that will hold the
notes as part of a hedge, straddle, appreciated financial position or conversion
transaction and holders that will hold the notes as other than capital assets
may be subject to special rules not discussed below. You should consult with
your own tax advisors to determine the particular federal, state, local and any
other tax consequences of the purchase, ownership and disposition of the notes.
Tax Characterization of the Trust
Dewey Ballantine LLP is our tax counsel and is of the opinion that,
assuming the parties will comply with the terms of the governing agreements, the
trust will not be characterized as an association, or a publicly traded
partnership, taxable as a corporation or as a taxable mortgage pool for federal
income tax purposes.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The originators, the seller,
the depositor and the trust agree, and the holders of the notes will agree by
their purchase of the notes, to treat the notes as indebtedness for all federal,
state and local income tax purposes. 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 notes. In
general, whether instruments such as the notes constitute indebtedness for
federal income tax purposes is a question of fact, the resolution of which is
based primarily upon the economic substance of the instruments and the
transaction pursuant to which they are issued rather than merely upon the form
of the transaction or the manner in which the instruments are labeled.
The Internal Revenue Service (the "IRS") and the courts have set forth
various factors to be taken into account in determining, for federal income tax
purposes, whether or not an instrument constitutes indebtedness and whether a
transfer of property is a sale because the transferor has relinquished
substantial incidents of ownership in the property or whether such transfer is a
borrowing secured by the property.
On the basis of its analysis of such factors as applied to the facts
and its analysis of the economic substance of the contemplated transaction,
Dewey Ballantine LLP is of the opinion that, for federal income tax purposes,
(i) the notes will be treated as indebtedness and (ii) the trust will not be
treated as an association or as a publicly traded partnership taxable as a
corporation or as a taxable mortgage pool. See "Material Federal Income Tax
Considerations -- Taxation of Debt Securities" in the accompanying prospectus.
S-68
If the notes are characterized as indebtedness, interest paid or
accrued on a note will be treated as ordinary income to holders of the notes,
and principal payments on a note will be treated as a return of capital to the
extent of the holder's basis in the note allocable thereto. An accrual method
taxpayer will be required to include in income interest on the notes when
earned, even if not paid, unless it is determined to be uncollectible. The trust
will report to the holders of the notes of record and the IRS the amount of
interest paid and original issue discount, if any, accrued on the notes to the
extent required by law.
Possible Alternative Characterizations of the Notes. Although, as
described above, it is the opinion of Dewey Ballantine LLP that, for federal
income tax purposes, the notes will be characterized as indebtedness, this
opinion is not binding on the IRS, and thus no assurance can be given that such
a characterization will prevail. If the IRS successfully asserted that the notes
did not represent indebtedness for federal income tax purposes, holders of the
notes would likely be treated as owning an interest in a partnership and not an
interest in an association, or a publicly traded partnership, taxable as a
corporation or a taxable mortgage pool. If the holders of the notes were treated
as owning an equitable interest in a partnership, the partnership itself would
not be subject to federal income tax; rather each partner would be taxed
individually on their respective distributive share of the partnership's income,
gain, loss, deductions and credits. The amount, timing and characterization of
items of income and deduction for a holder of a note would differ if the notes
were held to constitute partnership interests, rather than indebtedness. Since
the parties will treat the notes as indebtedness for federal income tax
purposes, none of the servicer, the indenture trustee or the owner trustee will
attempt to satisfy the tax reporting requirements that would apply under this
alternative characterization of the notes. Investors that are foreign persons
should consult their own tax advisors in determining the federal, state, local
and other tax consequences to them of the purchase, ownership and disposition of
the notes. See "Other Matters" below.
Special Tax Attributes. The notes will not represent "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code or "[l]oans ... secured
by an interest in real property" within the meaning of Section 7701(a)(19)(C) of
the Code.
Discount and Premium. We do not anticipate issuing the notes with any
original issue discount See "Material Federal Income Tax Considerations--
Taxation of Debt Securities -- Interest and Acquisition Discount" in the
accompanying prospectus. The prepayment assumption that will be used for
purposes of computing original issue discount, if any, for each of the notes for
federal income tax purposes is 23% HEP. See "Prepayment and Yield
Considerations" in this prospectus supplement. In addition, a subsequent
purchaser who buys a note for less than its principal amount may be subject to
the "market discount" rules of the Code. See "Material Federal Income Tax
Considerations -- Taxation of Debt Securities -- Market Discount" in the
accompanying prospectus. A subsequent purchaser who buys a note for more than
its principal amount may be subject to the "market premium" rules of the Code.
See "Material Federal Income Tax Considerations -- Taxation of Debt Securities
- -- Premium" in the accompanying prospectus.
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Sale or Redemption of the Notes. If a note is sold or retired, the
seller will recognize gain or loss equal to the difference between the amount
realized on the sale and such holder's adjusted basis in the note. See "Material
Federal Income Tax Considerations -- Sale or Exchange " in the accompanying
prospectus.
Other Matters. For a discussion of backup withholding and taxation of
foreign investors in the notes, see "Material Federal Income Tax Considerations
- -- Miscellaneous Tax Aspects -- Backup Withholding" and "Material Federal Income
Tax Considerations -- Tax Treatment of Foreign Investors" and "Material Federal
Income Tax Considerations -- Tax Consequences to Holders of Notes" in the
accompanying prospectus.
State and Local Tax Consequences
You should consider the state and local income tax consequences
involved in purchasing, owning or disposing of the notes. State and local income
tax laws may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of any
state or locality. Therefore, you should consult with your own tax advisors
regarding the various federal, state and local tax consequences of investment in
the notes.
ERISA Considerations
The Employee Retirement Income Security Act of 1974 and the Code impose
certain restrictions on:
o employee benefit plans, as defined in Section 3(3) of ERISA,
o plans described in Section 4975(e)(1) of the Code, including
individual retirement accounts and Keogh plans,
o any entities whose underlying assets include plan assets by reason
of a plan's investment in such entities and
o persons who have certain specified relationships to such plans --
"parties-in-interest" under ERISA and "disqualified persons" under
the Code.
Section 406 of ERISA prohibits plans from engaging in certain
transactions involving the assets of such plans with parties-in-interest with
respect to such plans, unless a statutory or administrative exemption is
applicable to the transaction. Excise taxes under Section 4975 of the Code,
penalties under Section 502 of ERISA and other penalties may be imposed on plan
fiduciaries and parties-in-interest, or disqualified persons, that engage in
"prohibited transactions" involving assets of a plan. Individual retirement
arrangements and other plans that are not subject to ERISA, but are subject to
Section 4975 of the Code, and disqualified persons with respect to such
arrangements and plans, may be subject to excise taxes and other penalties if
they engage in prohibited transactions. In addition, based on the reasoning of
the United States Supreme Court in John Hancock Life Ins. Co. v. Harris Trust
and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company's general account may
be deemed to include assets of the plans investing in the general account --
e.g., through the purchase of an annuity contract. ERISA also imposes certain
duties on persons who are fiduciaries of plans subject to ERISA.
S-70
Certain transactions involving the purchase, holding or transfer of the
notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the trust were deemed to be assets of a plan. Under a
regulation issued by the United States Department of Labor, the assets of the
trust would be treated as assets of a plan for the purposes of ERISA and the
Code only if the plan acquires an "equity interest" in the trust and none of the
exceptions contained in the plan asset regulation is applicable. An equity
interest is defined under the plan asset regulation as an interest other than an
instrument which is treated as indebtedness under applicable local law and which
has no substantial equity features. Although there is little guidance on the
subject, the notes should be treated as indebtedness without substantial equity
features for purposes of the plan asset regulation. This determination is based
in part on the traditional debt features of the notes, including the reasonable
expectation of purchasers of the notes that the notes will be repaid when due,
as well as the absence of conversion rights, warrants and other typical equity
features. The debt treatment of the notes could change if the trust incurs
losses. However, even if the notes are treated as debt for such purposes, the
acquisition or holding of notes by or on behalf of a plan could be considered to
give rise to a prohibited transaction if the trust or any of its affiliates is
or becomes a party-in-interest or a disqualified person with respect to such
plan. In such case, certain exemptions from the prohibited transaction rules
could be applicable depending on the type and circumstances of the plan
fiduciary making the decision to acquire a note. Included among these exemptions
are: PTCE 90-1, regarding investments by insurance company pooled separate
accounts; PTCE 95-60, regarding investments by insurance company general
accounts; PTCE 91-38, regarding investments by bank collective investment funds;
PTCE 96-23, regarding transactions affected by in-house asset managers; and PTCE
84-14, regarding transactions effected by "qualified professional asset
managers." Each investor using the assets of a plan which acquires the notes, or
to whom the notes are transferred, will be deemed to have represented that the
acquisition and continued holding of the notes will be covered by one of the
exemptions listed above or by another Department of Labor Class Exemption.
Plan of Distribution
Subject to the terms and conditions of the Underwriting Agreement,
dated December 3, 2001, between the depositor and Bear, Stearns & Co., Inc., as
representative of the underwriters, the depositor has agreed to sell the Class A
Notes to the underwriters and the underwriters agreed to purchase from the
depositor the Class A Notes. The depositor is obligated to sell, and the
underwriters are obligated to purchase, all of the notes offered hereby if any
are purchased. The depositor is an affiliate of Bear, Stearns & Co. Inc.
In the underwriting agreement, the underwriters have agreed to purchase
the entire principal amount of the Class A Notes in the following amounts:
Principal
Amount of
Underwriter Class A Notes
- -------------------------- -------------
Bear, Stearns & Co. Inc. $306,204,000
Credit Suisse First Boston
Corporation $ 16,116,000
-------------
Total $322,320,000
=============
S-71
The underwriters have advised the depositor that they propose to offer
the Class A Notes purchased by the underwriters for sale from time to time in
one or more negotiated transactions or otherwise, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices. The underwriters may effect such transactions by selling such notes to
or through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the underwriters or
purchasers of the Class A Notes for whom they may act as agent. Any dealers that
participate with the underwriters in the distribution of the Class A Notes
purchased by the underwriters may be deemed to be underwriters, and any
discounts or commissions received by them or the underwriters and any profit on
the resale of Class A Notes by them or the underwriters may be deemed to be
underwriting discounts or commissions under the Securities Act of 1933.
In connection with the offering of the Class A Notes, the underwriters
and their affiliates may engage in transactions that stabilize, maintain or
otherwise affect the market price of the Class A Notes. Such transactions may
include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such person may bid for or purchase the Class A
Notes for the purpose of stabilizing its market price. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Class A Notes at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph are required, and,
if they are taken, may be discontinued at any time without notice.
The depositor has been advised by the underwriters that the
underwriters presently intend to make a market in the Class A Notes, as
permitted by applicable laws and regulations. The underwriters are not obligated
to make a market in the Class A Notes and any market making may be discontinued
at any time at the sole discretion of the underwriters. Accordingly, no
assurance can be given as to the liquidity of, or trading markets for, the Class
A Notes.
For further information regarding any offer or sale of the Class A
Notes pursuant to this prospectus supplement and the accompanying prospectus,
see "Plan of Distribution" in the accompanying prospectus.
The Underwriting Agreement provides that the depositor will indemnify
the underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
Legal Investment
The notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.
Incorporation of Certain Information by Reference
We are incorporating by reference all of the documents listed in the
accompanying prospectus under the heading "Incorporation of Certain Documents by
Reference" and the consolidated financial statements of MBIA Insurance
Corporation and subsidiaries included in, or as exhibits to, the Annual Report
on Form 10-K, as amended, for the year ended December 31, 2000 as described
under "The Note Insurer" each of which has been filed by MBIA Insurance
Corporation.
S-72
You should rely only on the information incorporated by reference or
provided in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone else to provide you with different information. You should
not assume that the information in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date on the
cover page of this prospectus supplement or the accompanying prospectus.
Experts
The consolidated balance sheets of MBIA Inc. and subsidiaries and MBIA
Insurance Corporation and Subsidiaries as of December 31, 2000 and December 31,
1999 and the related consolidated statements of income, changes in shareholder's
equity, and cash flows for each of the three years in the period ended December
31, 2000, incorporated by reference in this prospectus supplement, have been
incorporated herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The balance sheet of ABFS Mortgage Loan Trust 2001-4 as of December 10,
2001, set forth as Exhibit A hereto, has been audited by BDO Seidman LLP,
independent public accountants, as set forth in their report with respect
thereto, and is included herein in reliance upon the authority of that firm as
experts in giving said reports.
Legal Matters
Certain legal matters in connection with the notes will be passed upon
for the originators, the seller and the servicer by Blank Rome Comisky &
McCauley LLP, Philadelphia, Pennsylvania, for the trust by Stradley, Ronon,
Stevens & Young, LLP, Wilmington, Delaware, and for the depositor and the
underwriters by Morgan Lewis & Bockius LLP, New York, New York, and for the
seller by Dewey Ballantine LLP, New York, New York. The Indenture will be
governed under the laws of the State of New York and the trust will be governed
under the laws of the State of Delaware.
Ratings
It is a condition to the original issuance of the Class A Notes that
they will receive ratings of "AAA" by Standard & Poor's and "Aaa" by Moody's.
The ratings assigned to the Class A Notes will take into account the
claims-paying ability of the note insurer. The ratings on the Class A Notes do
not, however, constitute statements regarding the likelihood or frequency of
prepayments on the mortgage loans, or the anticipated yields in light of
prepayments. Explanations of the significance of such ratings may be obtained
from Moody's Investors Service, Inc., 99 Church Street, New York, New York 10007
and Standard & Poor's, a division of the McGraw Hill Companies, Inc., 55 Water
Street, New York, New York 10041. Such ratings will be the views only of such
rating agencies. There is no assurance that any such ratings will continue for
any period of time or that such ratings will not be revised or withdrawn. Any
such revision or withdrawal of such ratings may have an adverse effect on the
market price of the Class A Notes.
S-73
Glossary
The following terms have the meanings given below when used in this
prospectus supplement.
Available Amount for any distribution date is the amount on deposit in
the distribution account on that distribution date exclusive of the amount of
any Insured Distribution and the servicing fee.
Class A Carry-Forward Amount for any distribution date is the sum of
(a) the amount, if any, by which (x) the Class A Interest Distribution Amount as
of the immediately preceding distribution date exceeded (y) the amount of
interest actually paid to the holders of the Class A Notes on such immediately
preceding distribution date and (b) thirty days' interest on the amount
described in clause (a), calculated at an interest rate equal to the Class A
Note Rate.
Class A Current Interest for any distribution date is the interest that
accrued on the Class A Notes at the Class A Note Rate on the aggregate
outstanding principal balance of such class during the related accrual period.
Class A Interest Distribution Amount for any distribution date will be
an amount equal to the sum of the Class A Current Interest on such distribution
date, less the amount of any Class A Mortgage Loan Interest Shortfalls relating
to such distribution date, plus the Class A Carry-Forward Amount, less any
amounts paid by the note insurer in respect of such Class A Carry-Forward
Amount, in each case, as of such distribution date.
Class A Mortgage Loan Interest Shortfalls for any distribution date
will be the aggregate of the Mortgage Loan Interest Shortfalls, if any, for such
distribution date, to the extent such Mortgage Loan Interest Shortfalls are not
paid by the servicer as Compensating Interest.
Class A Note Rate with respect to any distribution date, the per annum
rate equal to 5.35%; provided, that, on any distribution date after the Clean-Up
Call Date, such rate will be 5.85%.
Clean-Up Call Date means the first distribution date on which the
aggregate outstanding principal balance of the mortgage loans is equal to or
less than 10% of the aggregate original principal balance of the mortgage loans
as of the Cut-off Date.
S-74
Compensating Interest means an amount equal to the lesser of (a) the
aggregate of the Prepayment Interest Shortfalls for the related distribution
date resulting from principal prepayments in full during the related due period
and (b) the aggregate of the servicing fees received by the servicer in the
related due period; provided, however, that Compensating Interest with respect
to any mortgage loan and any distribution date shall not exceed the servicing
fees due in respect of such mortgage loan on such distribution date.
Cross-Over Date for the mortgage loan group means the first
distribution date on which (x) the excess of (i) the aggregate, cumulative
amount of Over-collateralization Increase Amounts paid out since the Closing
Date over (ii) the aggregate, cumulative amount of the principal portion of all
Liquidated Loan Losses which have occurred in the mortgage loan group since the
Cut-Off Date exceeds (y) the Initial Over-Funding Amount for the mortgage loan
group.
Cut-Off Date means the close of business on November 30, 2001.
Deficiency Amount means, for any distribution date, the excess, if any,
of Required Distributions over the Available Amount.
Due Period means, with respect to each distribution date, the calendar
month preceding that distribution date.
Excess Interest for any distribution date is equal to the excess of (x)
the Net Available Amount for such distribution date over (y) the sum of
o the Interest Distribution Amount for such distribution date;
o the Principal Distribution Amount for such distribution date --
calculated for this purpose without regard to any
Over-collateralization Increase Amount or portion thereof
included therein;
o any Premium Amount, Reimbursement Amount or other amount owed to
the note insurer; and
o the indenture trustee's fees for such distribution date.
Excess Over-collateralized Amount means, with respect to any
distribution date, the excess, if any, of (a) the Over-collateralized Amount
that would apply on such distribution date after taking into account all
distributions that would be made on such distribution date if the
Over-collateralization Reduction Amounts were not deducted from the Principal
Distribution Amount over (b) the Specified Over-collateralized Amount.
Foreclosure Profits as to any servicer remittance date, are the excess,
if any, of (x) Net Liquidation Proceeds in respect of each mortgage loan that
became a Liquidated Mortgage Loan during the month immediately preceding the
month of such servicer remittance date over (y) the sum of such unpaid principal
balance of each such Liquidated Mortgage Loan plus accrued and unpaid interest
on the unpaid principal balance from the due date to which interest was last
paid by the mortgagor.
Initial Over-Funding Amount means approximately $6,320,000.00.
Insurance Proceeds are proceeds paid by any insurer other than the
note insurer pursuant to any insurance policy covering a mortgage loan to the
extent such proceeds are not applied to the restoration of the related mortgaged
property or released to the related mortgagor. "Insurance Proceeds" do not
include "Insured Distributions."
S-75
Insured Amounts means, with respect to any distribution date, any
Deficiency Amount for such distribution date.
Insured Distributions means, the aggregate amount actually paid by the
note insurer to the indenture trustee in respect of (i) Insured Amounts for a
distribution date and (ii) Preference Amounts for any given business day.
Interest Distribution Amount means the Class A Interest Distribution
Amount.
Liquidated Loan Loss as to any Liquidated Mortgage Loan is the excess,
if any, of (x) the unpaid principal balance of such Liquidated Mortgage Loan
plus accrued and unpaid interest on such unpaid principal balance from the due
date to which interest was last paid by the mortgagor over (y) the Net
Liquidation Proceeds.
Liquidated Mortgage Loan is (a) a mortgage loan that is being
liquidated by the servicer in connection with (x) the taking of all or a part of
a Mortgaged Property by exercise of the power of eminent domain or condemnation
or (y) the liquidation of a defaulted mortgage loan through a sale, foreclosure
sale, REO Property disposition or otherwise or (b) a mortgage loan which is
still outstanding on April 30, 2032 (the last day of the month preceding the
final scheduled maturity date for the notes).
Liquidation Expenses as to any Liquidated Mortgage Loan are all
expenses incurred by the servicer in connection with the liquidation of such
mortgage loan, including, without duplication, unreimbursed expenses for real
property taxes and unreimbursed servicing advances. In no event may Liquidation
Expenses with respect to a Liquidated Mortgage Loan exceed the related
Liquidation Proceeds.
Liquidation Proceeds are amounts, other than Insurance Proceeds,
received by the servicer in connection with (x) the taking of all or a part of a
Mortgaged Property by exercise of the power of eminent domain or condemnation or
(y) the liquidation of a defaulted mortgage loan through a sale, foreclosure
sale, REO Property disposition or otherwise.
Mortgage Loan Interest Shortfalls means Relief Act Shortfalls and
Prepayment Interest Shortfalls.
Net Available Amount for any distribution date is the amount on deposit
in the distribution account, exclusive of the amount of any Insured Distribution
and the servicing fee on that distribution date.
Net Foreclosure Profits as to any servicer remittance date, are the
excess, if any, of (x) the aggregate Foreclosure Profits with respect to such
servicer remittance date over (y) the aggregate Liquidated Loan Losses with
respect to such servicer remittance date.
Net Liquidation Proceeds as to any Liquidated Mortgage Loan, are
Liquidation Proceeds net of Liquidation Expenses and net of any unreimbursed
Periodic Advances made by the servicer, provided, that the Net Liquidation
Proceeds for a mortgage loan which becomes a Liquidated Mortgage Loan by
operation of clause (b) of the definition thereof shall be deemed to be zero.
S-76
Net Mortgage Loan Interest Shortfalls for any distribution date will be
the aggregate of the Class A Mortgage Loan Interest Shortfalls, for such
distribution date.
Net REO Proceeds as to any REO Property, are REO Proceeds net of any
related expenses of the servicer.
Net Weighted Average Mortgage Interest Rate means, with respect to any
Due Period, the weighted average interest rates on the mortgage loans (weighted
by principal balances), as of the first day of such Due Period, less the rate at
which each of the servicing fee, the indenture trustee fee, and the Premium
Amount is then calculated.
Over-collateralization Deficit for any distribution date, is the amount
by which (x) the aggregate outstanding principal balance of the Class A Notes,
after taking into account the payment of the Principal Distribution Amount
(except any amounts in respect of the Over-collateralization Deficit), exceeds
(y) the aggregate principal balance of the mortgage loans determined as of the
last day of the preceding calendar month, plus in the case of this clause (y),
and for any distribution date prior to the Cross-Over Date, the amount by which
(I) the Initial Over-funded Amount exceeds (II) an amount equal to (a) the
aggregate, cumulative amount of Over-collateralization Increase Amounts paid out
since the Closing Date minus (b) the aggregate, cumulative amount of the
principal portion of all Liquidated Loan Losses which have occurred since the
Cut-Off Date.
Over-collateralization Increase Amount for any distribution date is the
amount of Excess Interest to be applied as an accelerated distribution of the
principal balance of the notes until the level of over-collateralization reaches
the Specified Over-collateralized Amount. Such distribution is limited to the
extent of the Excess Interest.
Over-collateralization Reduction Amount with respect to any
distribution date, is the lesser of (a) the Excess Over-collateralized Amount
for such distribution date and (b) the Principal Distribution Amount for such
distribution date (without regard to clause (b)(10) of the definition of
Principal Distribution Amount).
Over-collateralized Amount means, with respect to any distribution
date, the excess, if any, of (a) the aggregate principal balances of the
mortgage loans as of the close of business on the last day of the preceding
calendar month over (b) the aggregate principal balance of the Class A Notes as
of such distribution date -- following the making of all distributions on such
distribution date, other than with respect to any Over-collateralization
Increase Amount for such distribution date.
Periodic Advances means advances made by the servicer on each
distribution date with respect to delinquent payments of interest on the
mortgage loans, at a rate equal to the interest rate on the related mortgage
note, less the servicing fee rate.
Preference Amount means any amount previously distributed to a
noteholder on the Class A Notes that is recoverable and sought to be recovered
as a voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.), as amended from time to time in accordance
with a final, nonappealable order of a court having competent jurisdiction.
S-77
Premium Amount means the premium payable to the note insurer on each
distribution date pursuant to the policy.
Prepayment Interest Shortfall means, with respect to any distribution
date, an amount equal to the excess, if any, of (a) thirty days' interest on the
outstanding principal balance of such mortgage loans at a per annum rate equal
to the related mortgage interest rate -- or at such lower rate as may be in
effect for such mortgage loan because of application of the Soldiers' and
Sailors' Civil Relief Act of 1940, any reduction as a result of a bankruptcy
proceeding and/or any reduction by a court of the monthly payment due on such
mortgage loan -- minus the rate at which the servicing fee is calculated, over
(b) the amount of interest actually remitted by the related mortgagor in
connection with such principal prepayment in full, less the servicing fee for
such mortgage loan in such month.
Principal Distribution Amount for any distribution date will be the
lesser of:
(a) the excess of (x) the sum, as of such distribution date, of (A) the
Available Amount and (B) any Insured Distribution over (y) the sum of the
Interest Distribution Amount, the indenture trustee's fees, the Premium Amount
and the Reimbursement Amount; and
(b) the sum, without duplication, of:
(1) all principal in respect of the mortgage loans actually
collected during the related due period plus;
(2) the principal balance of each mortgage loan that
either was repurchased by the seller or purchased by
the servicer on the related servicer remittance date,
to the extent such principal balance is actually
received by the indenture trustee;
(3) any substitution adjustments delivered by the seller
on the related servicer remittance date in connection
with a substitution of a mortgage loan, to the extent
such substitution adjustments are actually received
by the indenture trustee;
(4) the Net Liquidation Proceeds actually collected by
the servicer of all mortgage loans during the prior
calendar month -- to the extent such Net Liquidation
Proceeds relate to principal;
(5) the proceeds received by the indenture trustee upon the
exercise by the servicer of its option to repurchase the
mortgage loans on or after the Clean-up Call Date;
(6) the amount of any Over-collateralization Deficit for such
distribution date;
(7) the proceeds received by the indenture trustee on any
termination of the trust -- to the extent such proceeds
relate to principal;
S-78
(8) the amount of any Over-collateralization Increase Amount
for such distribution date, to the extent of any Excess
Interest available for such purpose; and
(9) if the note insurer shall so elect, an amount of
principal -- including Liquidated Loan Losses -- that
would have been payable pursuant to clauses (1)
through (8) above if sufficient funds were available
therefor;
minus
-----
(10) the amount of any Over-collateralization Reduction Amount
for such distribution date.
In no event will the Principal Distribution Amount with respect to any
distribution date be (x) less than zero or (y) greater than the then outstanding
aggregate principal balance of the Class A Notes.
Qualified Substitute Mortgage Loan means any mortgage loan or mortgage
loans substituted for a deleted mortgage loan and which, among other things,
o relates or relate to a detached one-family residence or to the
same type of residential dwelling or commercial property as the
deleted mortgage loan and, has or have the same or a better lien
priority as the deleted mortgage loan and has or have the same
occupancy status as the deleted mortgage loan or is or are
owner-occupied mortgaged property or properties,
o matures or mature no later than, and not more than one year
earlier than, the deleted mortgage loan,
o has or have a LTV or LTVs at the time of such substitution no
higher than the LTV of the deleted mortgage loan,
o has or have a CLTV or CLTVs at the time of such substitution no
higher than the CLTV of the deleted mortgage loan,
o has or have a principal balance or principal balances, after
application of all payments received on or prior to the date of
substitution, not substantially less and not more than the
principal balance of the deleted mortgage loan as of such date,
o has or have a mortgage interest rate of at least the same
interest rate as the deleted mortgage loan and
o complies or comply, as of the date of substitution, with each
representation and warranty set forth in the Unaffiliated
Seller's Agreement.
S-79
Reimbursement Amount means, with respect to any distribution date, the
amount of all Insured Distributions and other amounts due to the note insurer
pursuant to the Insurance and Reimbursement Agreement which have not been
previously paid, together with interest thereon at the rate specified in the
Insurance and Reimbursement Agreement.
Relief Act Shortfalls are interest shortfalls resulting from the
application of the Soldier's and Sailors' Civil Relief Act of 1940.
REO Proceeds are monies received in respect of any REO Property,
including, without limitation, proceeds from the rental of the related mortgaged
property.
REO Property means, any mortgaged property acquired by or on behalf of
the trust through foreclosure, or deed in lieu of foreclosure, following a
default on the related mortgage loan.
Required Distributions means, with respect to (1) any distribution date
occurring prior to the distribution date on May 15, 2032, the sum of (x) the
Interest Distribution Amount -- net of any Net Mortgage Loan Interest
Shortfalls-- and (y) the Over-collateralization Deficit, and (2) the final
scheduled distribution date on May 15, 2032, the sum of (x) the amount set forth
in clause (1)(x) above and (y) the aggregate outstanding principal balance, if
any, of the Notes, after giving effect to all other distributions of principal
on such Notes on that distribution date.
Specified Over-collateralized Amount with respect to any distribution
date will be the amount of over-collateralization which the note insurer
requires with respect to such distribution date and which amount may step up or
step down as determined in the Insurance and Reimbursement Agreement.
Unaffiliated Seller's Agreement means the Unaffiliated Seller's
Agreement, dated as of December 1, 2001, among and between the depositor, the
seller, and the originators.
S-80
[THIS PAGE INTENTIONALLY LEFT BLANK]
Report of Independent Auditors
U.S. Bank Trust National Association,
as Owner Trustee of
ABFS Mortgage Loan Trust 2001-4
We have audited the accompanying balance sheet of ABFS Mortgage Loan
Trust 2001-4, a Delaware business trust as of December 10, 2001. This balance
sheet is the responsibility of the trust. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of ABFS Mortgage Loan Trust
2001-4, at December 10, 2001, in conformity with generally accepted accounting
principles.
BDO Seidman LLP
December 10, 2001
Philadelphia, Pennsylvania
A-1
Index to Financial Statements
Page
----
Report of Independent Auditors.............................................A-1
Balance Sheet of the Trust as of December 10, 2001.........................A-2
Notes to Balance Sheet.....................................................A-4
A-2
ABFS Mortgage Loan Trust 2001-4
Balance Sheet
December 10, 2001
- --------------------------------------------------------------------------------
Assets
Cash................................................................$ 1,000
-------
Total assets...................................................$ 1,000
=======
Liabilities and Certificateholders' Equity
Liabilities......................................................$ 0
Certificateholders equity...........................................$ 1,000
-------
Total liabilities and certificateholders' equity...............$ 1,000
=======
See accompanying notes.
A-3
ABFS Mortgage Loan Trust 2001-4
Notes to Balance Sheet
December 10, 2001
1. Formation
---------
ABFS Mortgage Loan Trust 2001-4, a Delaware statutory business trust,
was formed in the state of Delaware on December 7, 2001, with U.S. Bank Trust
National Association, as its owner trustee.
The trust was formed to engage exclusively in the following business
and financial activities: to purchase or acquire from certain direct and
indirect subsidiaries of American Business Financial Services, Inc. certain
property relating to certain receivables consisting of business purpose loans
and consumer purpose home equity loans, and to pledge such receivables or
interests therein to JPMorgan Chase Bank, as indenture trustee.
2. Capital Contribution
--------------------
ABFS 2001-4, Inc. made an initial capital contribution of $1,000 to the
trust on December 10, 2001.
3. Registration Statement
----------------------
At December 10, 2001, the trust was in the process of preparing to
issue up to $322,320,000 of its Mortgage-Backed Notes, Series 2001-4.
A-4
PROSPECTUS
Mortgage-Backed/Asset-Backed Securities (Issuable in Series)
Bear Stearns Asset Backed Securities, Inc.
Depositor
The Securities
- --------------------------------------------------------------------------------
Consider carefully the risk factors beginning on page 4 of this prospectus.
The securities represent obligations of the trust only and do not represent an
interest in or obligation of the depositor, the seller, the master servicer or
any of their affiliates.
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus supplement.
- --------------------------------------------------------------------------------
Each issue of securities will have its own series designation and will evidence
either the ownership of assets in the related trust fund or debt obligations
secured by assets of the related trust fund.
o Each series of securities will consist of one or more classes of
mortgage-backed or asset-backed certificates or notes.
o Each class of securities will represent the entitlement to a specified
portion of interest payments and a specified portion of principal payments
on the trust assets.
o A series may include classes of securities that are senior in right of
payment to other classes. Classes of securities may be entitled to receive
distributions of principal, interest or both prior to other classes or
before or after specified events.
o No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been issued
and sold, there can be no assurance that a resale market for them will
develop.
Offers of the securities will be made through Bear, Stearns & Co. Inc. and the
other underwriters listed in the related prospectus supplement.
The Trust Fund and Its Assets
As specified in the related prospectus supplement, each trust fund will consist
primarily of assets from one of the following categories:
o mortgage loans secured by senior or junior liens on one- to four-family
residential properties;
o closed-end and/or revolving home equity loans secured by senior or junior
liens on one- to four-family residential or mixed-use properties;
o home improvement installment sales contracts and loan agreements that are
either unsecured or secured by senior or junior liens on one- to
four-family residential or mixed-use properties or by purchase money
security interests in the related home improvements;
o installment sales contracts and installment loan agreements secured by
senior or junior liens on manufactured homes or by mortgages on the related
real estate;
o mortgage-backed securities issued or guaranteed by Ginnie Mae, Freddie Mac
or Fannie Mae; and
o private label mortgage-backed or asset-backed securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
Bear, Stearns & Co. Inc.
December 3, 2001
Important Notice About Information in This Prospectus
and Each Accompanying Prospectus Supplement
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of which may
not apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
Although the accompanying prospectus supplement cannot contradict the
information contained in this prospectus, insofar as the prospectus supplement
contains specific information about a particular series of securities that
differs from the more general information contained in this prospectus, you
should rely on the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
Each prospectus supplement generally will include the following information with
respect to the related series of securities:
o the principal amount, interest rate and authorized denominations of
each class of securities;
o information concerning the mortgage loans, home equity loans, home
improvement contracts, manufactured housing contracts, mortgage backed
securities and/or private securities in the related trust fund;
o information concerning the seller or sellers of the mortgage loans,
home equity loans, home improvement contracts, manufactured housing
contracts, mortgage backed securities and/or private securities and
information concerning any servicer;
o the terms of any credit enhancement with respect to particular classes
of the securities;
o information concerning other trust fund assets, including any reserve
fund;
o the final scheduled distribution date for each class of securities;
o the method for calculating the amount of principal to be paid to each
class of securities, and the timing and order of priority of principal
payments;
o information about any REMIC or FASIT tax elections for some or all of
the trust fund assets; and
o particulars of the plan of distribution for the securities.
We include cross-references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The Table of Contents included in the accompanying
prospectus supplement lists the pages on which these captions are located.
There is also a Glossary of Terms beginning on page 125 where you will
find definitions of certain capitalized terms used in this prospectus.
If you require additional information, the mailing address of our
principal executive offices is Bear Stearns Asset Backed Securities, Inc., 245
Park Avenue, New York, New York 10167 and our telephone number is (212)
272-4095. For other means of acquiring additional information about us or a
series of securities, see "Incorporation of Certain Information by Reference"
beginning on page 122 of this prospectus.
Risk Factors
You should consider carefully the following information, together with
the information set forth under "Risk Factors" in the accompanying prospectus
supplement, since it identifies the principal risk factors associated with an
investment in the securities.
You may have difficulty selling your
securities or obtaining your desired
price.................................. No market will exist for the
securities before they are issued. In
addition, we cannot give you any
assurance that a resale market will
develop following the issuance and
sale of any series of the securities.
Even if a resale market does develop,
you may not be able to sell your
securities when you wish or at the
price you want.
Only the assets of the related trust
fund are available to pay your
securities ............................ The securities of each series will be
payable solely from the assets of the
related trust fund, including any
applicable credit enhancement, and
will not have a claim against the
assets of any other trust. In the
case of securities that are in the
form of notes, the related indenture
will require that noteholders proceed
only against the assets of the
related trust fund. We cannot give
you any assurance that the market
value of the assets in any trust fund
will be equal to or greater than the
total principal amount of the related
securities then outstanding, plus
accrued interest. Moreover, if the
assets of a trust fund are ever sold,
the sale proceeds will be applied
first to reimburse any related
trustee, servicer and credit
enhancement provider for their unpaid
fees and expenses before any
remaining amounts are distributed to
securityholders.
In addition, at the times specified
in the related prospectus supplement,
assets of the trust fund and the
related security accounts may be
released to the depositor, the
servicer, the credit enhancement
provider or other persons, if
o all payments then due on the
related securities have been
made, and
o any other payments specified in
the related prospectus
supplement have been made.
Once released, such assets will no
longer be available to make payments
to securityholders.
You will have no recourse against the
depositor or any other person if any
required distribution on the
securities is not made or for any
other default. The only obligations
of the depositor with respect to a
trust fund or the related securities
would result from a breach of the
representations and warranties that
the depositor may make concerning the
trust assets. However, because of the
depositor's very limited assets, even
if the depositor should be required
to repurchase a loan from a
particular trust fund because of the
breach of a representation or
warranty, its sole source of funds
for the repurchase would be:
o funds obtained from enforcing
any similar obligation of the
originator of the loan, or
o monies from any reserve fund
established to pay for loan
repurchases.
Credit enhancement may be
insufficient to provide against
particular risks....................... Although credit enhancement is
intended to reduce the effect of
delinquent payments or loan losses on
particular classes of securities, the
amount of any credit enhancement is
subject to the limits described in
the related prospectus supplement. In
addition, the amount of credit
enhancement may decline or be
depleted before the related
securities are paid in full. As a
result, securityholders may suffer
losses.
Principal payments on the
loans may adversely affect the
average life of, and rate of
return on, your securities............. You may be unable to reinvest the
principal payments on your securities
at a rate of return equal to the rate
on your securities. The timing of
principal payments on the securities
of a series will be affected by a
number of factors, including the
following:
o the extent of prepayments on
the underlying loans in the
trust fund or, if the trust
fund contains underlying
securities, on the loans
backing the underlying
securities;
o how payments of principal are
allocated among the classes of
securities of that series as
specified in the related
prospectus supplement;
o if any party has an option to
terminate the related trust
early, the effect of the
exercise of the option;
o the rate and timing of defaults
and losses on the assets in the
related trust fund;
o repurchases of assets in the
related trust fund as a result
of material breaches of
representations and warranties
made by the depositor or a
seller; and
o in the case of a trust fund
that contains revolving credit
line loans, any provisions for
non-amortization, early
amortization or scheduled
amortization periods described
in the related prospectus
supplement.
All the above factors may affect the
yield to maturity of the securities.
The interest accrual period
may reduce the effective yield
on your securities..................... Interest payable on the securities on
any given distribution date will
include all interest accrued during
the related interest accrual period.
Each prospectus supplement will
specify the interest accrual period
for the related securities. If
interest accrues during the calendar
month before the related distribution
date, your effective yield will be
less than it would be if the interest
accrual period ended the day before
the distribution date. As a result,
your effective yield at par may be
less than the indicated coupon rate.
Loans with balloon payments
may increase your risk of loss......... Certain underlying loans may not be
fully amortizing over their terms to
maturity and may require a
substantial principal payment (a
"balloon" payment) at their stated
maturity. Loans of this type involve
greater risk than fully amortizing
loans since the borrower generally
must be able to refinance the loan or
sell the related property prior to
the loan's maturity date. The
borrower's ability to do so will
depend on such factors as the level
of available mortgage rates at the
time of sale or refinancing, the
relative strength of the local
housing market, the borrower's equity
in the property, the borrower's
general financial condition and tax
laws.
Adjustable rate loans may be
underwritten to less stringent standards
than fixed rate loans.................... A trust fund may include adjustable
rate loans that were underwritten on
the assumption that the borrowers
would be able to make higher monthly
payments in a relatively short period
of time. In fact, however, the
borrowers' income may not be
sufficient to meet their loan
payments as payment amounts increase,
thus increasing the risk of default.
Junior lien loans generally are
riskier than senior lien loans......... If the mortgage or home equity loans
in a trust fund are primarily in a
junior lien position, any proceeds
from liquidations, insurance
recoveries or condemnations must be
used first to satisfy the claims of
the related senior lien loans (and
related foreclosure expenses) before
being available to satisfy the junior
lien loans. In addition, a junior
mortgage lender may only foreclose
subject to the related senior
mortgage. As a result, the junior
mortgage lender must either pay the
related senior mortgage lender in
full, at or before the foreclosure
sale, or agree to make the regular
payments on the senior mortgage. The
trust will not have a source of funds
to satisfy any senior mortgages or to
continue making payments on them. As
a result, the trust's ability, as a
practical matter, to foreclose on any
junior mortgage loan will be quite
limited.
A decline in property values
could reduce the amount and
delay the timing of recoveries
on defaulted mortgage loans............ The following factors, among others,
could adversely affect property
values in such a way that the
outstanding balance of the related
loans, together with any senior
financing on the same properties,
would equal or exceed those values:
o an overall decline in the
residential real estate markets
where the properties are
located;
o failure of borrowers to
maintain their properties
adequately; and
o natural disasters that may not
be covered by hazard insurance,
such as earthquakes and floods.
If property values decline, actual
rates of delinquencies, foreclosures
and losses on the underlying loans
could be higher than those currently
experienced by the mortgage lending
industry in general.
Some mortgaged properties
may not be owner occupied.............. The mortgaged properties in the trust
fund may not be owner occupied. Rates
of delinquencies, foreclosures and
losses on mortgage loans secured by
non-owner occupied properties may be
higher than those on mortgage loans
secured by the borrower's primary
residence.
Home improvement contracts
and other loans may not have
sufficient security.................... A trust fund may include home
improvement contracts that are not
secured by an interest in real estate
or otherwise. A trust fund may also
include mortgage or home equity loans
with original loan-to-value ratios
(or combined loan-to-value ratios in
the case of junior loans) greater
than 100%. In these cases, the trust
fund could be treated as a general
unsecured creditor for the unsecured
portion of these loans.
If a loan of this type goes into
default, the trust fund will have
recourse only against the borrower's
assets generally for the unsecured
portion of the loan, along with the
borrower's other general unsecured
creditors. In a bankruptcy
proceeding, the unsecured portion of
the loan may be discharged, even if
the value of the borrower's assets
available to the trust fund would be
insufficient to pay the remaining
amounts owing on the loan.
Home improvement contracts
will not be stamped.................... The depositor will ensure that a
UCC-1 financing statement is filed
that identifies as collateral the
home improvement contracts included
in a trust fund. However, unless the
related prospectus supplement
provides otherwise, the home
improvement contracts themselves will
not be stamped or marked to reflect
their assignment to the trust fund.
Thus, if as a result of negligence,
fraud or otherwise, a subsequent
purchaser were able to take physical
possession of the contracts without
notice of the assignment to the trust
fund, the interests of the related
securityholders in those contracts
could be defeated.
If amounts in any pre-funding
account are not used to
purchase trust assets, you will
receive a prepayment on the
related securities..................... The related prospectus supplement may
provide that the depositor or seller
will deposit a specified amount in a
pre-funding account on the date the
securities are issued. In this case,
the deposited funds may be used only
to acquire additional assets for the
trust during a specified period after
the initial issuance of the
securities. Any amounts remaining in
the account at the end of that period
will be distributed as a prepayment
of principal to the holders of the
related securities. The resulting
prepayment could adversely affect the
yield to maturity on those
securities.
Bankruptcy laws may result
in adverse claims against trust
fund assets............................ The federal bankruptcy code and state
debtor relief laws may adversely
affect the ability of the trust fund,
as a secured lender, to realize upon
its security. For example, in a
federal bankruptcy proceeding, a
lender may not foreclose on mortgaged
property without the bankruptcy
court's permission. Similarly, the
debtor may propose a rehabilitation
plan, in the case of mortgaged
property that is not his principal
residence, that would reduce the
amount of the lender's secured
indebtedness to the value of the
property as of the commencement of
the bankruptcy. As a result, the
lender would be treated as a general
unsecured creditor for the reduced
amount, the amount of the monthly
payments due on the loan could be
reduced, and the interest rate and
loan payment schedule could be
changed.
Any such actions could result in
delays in receiving payments on the
loans underlying the securities and
result in the reduction of total
payments.
Environmental risks may
adversely affect trust fund
assets................................. Federal, state and local laws and
regulations impose a wide range of
requirements on activities that may
affect the environment, health and
safety. In certain circumstances,
these laws and regulations impose
obligations on owners or operators of
residential properties such as those
that secure the loans. Failure to
comply with these laws and
regulations can result in fines and
penalties that could be assessed
against the trust fund as owner of
the related property.
In some states, a lien on the
property due to contamination has
priority over the lien of an existing
mortgage. Further, a mortgage lender
may be held liable as an "owner" or
"operator" for costs associated with
the release of petroleum from an
underground storage tank under
certain circumstances. If the trust
fund is considered the owner or
operator of a property, it will
suffer losses as a result of any
liability imposed for environmental
hazards on the property.
Consumer protection laws
may adversely affect trust
fund assets............................ The loans and contracts in each trust
fund also may be subject to federal
laws relating to loan origination and
underwriting. These laws
o require certain disclosures to
the borrowers regarding the
terms of the loans;
o prohibit discrimination on the
basis of age, race, color, sex,
religion, marital status,
national origin, receipt of
public assistance or the
exercise of any right under the
consumer credit protection act,
in the extension of credit;
o regulate the use and reporting
of information related to the
borrower's credit experience;
and
o require additional application
disclosures, limit changes that
may be made to the loan
documents without the
borrower's consent and restrict
a lender's ability to declare a
default or to suspend or reduce
a borrower's credit limit to
certain enumerated events.
Loans may also be subject to federal
laws that impose additional
disclosure requirements on creditors
with respect to non-purchase money
mortgage loans with high interest
rates or high up-front fees and
charges. These laws can impose
specific liabilities upon creditors
that fail to comply and may affect
the enforceability of the related
loans. In addition, the trust fund,
as assignee of the creditor, would
generally be subject to all claims
and defenses that the borrower could
assert against the creditor,
including the right to rescind the
loan.
Home improvement contracts may be
subject to federal laws that protect
the borrower from defective or
incomplete work by a contractor.
These laws permit the borrower to
withhold payment if the work does not
meet the quality and durability
standards agreed to between the
borrower and the contractor. These
laws have the effect of subjecting
the trust fund, as assignee of the
creditor, to all claims and defenses
which the borrower in a sale
transaction could assert against the
seller of defective goods.
If certain provisions of these
federal laws are violated, the
servicer may be unable to collect all
or part of the principal or interest
on the loans. The trust fund also
could be subject to damages and
administrative enforcement.
Subordinate securities are
subject to additional risk............. If you invest in any class of
subordinate securities, your rights
as an investor to receive payments
otherwise due you will be subordinate
to the rights of the servicer and the
holders of the related senior
securities. As a result, before
investing in any subordinate
securities, you must be prepared to
bear the risk that payments on your
securities may be delayed and that
you might not recover all of your
initial investment.
Any credit support provided
by financial instruments may
be insufficient to protect
against particular risks............... As described under "Credit
Enhancement--Financial Instruments"
in this prospectus, a trust fund may
include financial instruments to
protect against certain risks or to
provide certain cash flow
characteristics for particular
classes of the securities of a
series. If you invest in one of these
classes and the issuer of the
financial instruments fails to
perform its obligations, the yield to
maturity, market price and liquidity
of your securities could be
materially adversely affected. In
addition, if the issuer of the
related financial instruments
experiences a credit rating
downgrade, the market price and
liquidity of your securities could be
reduced. Finally, if the financial
instruments are intended to provide
an approximate or partial hedge for
certain risks or cashflow
characteristics, the yield to
maturity, market price and liquidity
of your securities could be adversely
affected to the extent that the
financial instrument does not provide
a perfect hedge.
REMIC residual securities are
subject to additional risk.............. If you invest in any class of
securities that represent the
"residual interest" in a real estate
mortgage investment conduit (REMIC),
you will be required to report as
ordinary income your pro rata share
of the REMIC's taxable income,
whether or not you actually received
any cash. Thus, as the holder of a
REMIC residual interest security, you
could have taxable income and tax
liabilities in a year that are in
excess of your ability to deduct
servicing fees and any other REMIC
expenses. In addition, because of
their special tax treatment, your
after-tax yield on a REMIC residual
interest security may be
significantly less than that of a
corporate bond with similar cash-flow
characteristics and pre-tax yield.
Transfers of REMIC residual interest
securities are also restricted.
FASIT ownership securities are subject
to additional risk....................... If you are a fully taxable domestic
corporation that invests in any class
of securities representing the
"ownership interest" in a financial
asset securitization investment trust
(FASIT), you will be required to
report as ordinary income your pro
rata share of the FASIT's taxable
income, whether or not you actually
received any cash. Thus, as the
holder of a FASIT ownership interest
security, you could have taxable
income and tax liabilities in a year
that are in excess of your ability to
deduct servicing fees and any other
FASIT expenses. In addition, because
of their special tax treatment, your
after-tax yield on a FASIT ownership
interest security may be
significantly less than that of a
corporate bond with similar cash-flow
characteristics and pre-tax yield.
Transfers of FASIT ownership interest
securities are also restricted.
Book-entry registration may limit your
ability to sell securities and delay
your receipt of payments................. Limit on Liquidity of Securities.
Securities issued in book-entry form
may have only limited liquidity in
the resale market, since investors
may be unwilling to purchase
securities for which they cannot
obtain physical instruments.
Limit on Ability to Transfer or
Pledge. Transactions in book-entry
securities can be effected only
through The Depository Trust Company,
its participating organizations, its
indirect participants and certain
banks. As a result, your ability to
transfer or pledge securities issued
in book-entry form may be limited.
Delays in Distributions. You may
experience some delay in the receipt
of distributions on book-entry
securities since the distributions
will be forwarded by the trustee to
DTC for DTC to credit to the accounts
of its participants. In turn, these
participants will credit the
distributions to your account either
directly or indirectly through
indirect participants.
Ratings of the securities do not address
all investment risks and must be viewed
with caution............................. Any class of securities issued under
this prospectus and the accompanying
prospectus supplement will be rated
in one of the four highest rating
categories of a nationally recognized
rating agency. A rating is based on
the adequacy of the value of the
trust fund assets and any credit
enhancement for that class and
reflects the rating agency's
assessment of the likelihood that
holders of the class of securities
will receive the payments to which
they are entitled. A rating is not an
assessment of the likelihood that
principal prepayments on the
underlying loans will be made, the
degree to which the rate of
prepayments might differ from that
originally anticipated or the
likelihood of an early termination of
the securities. You should not view a
rating as a recommendation to
purchase, hold or sell securities
because it does not address the
market price or suitability of the
securities for any particular
investor.
There is no assurance that any rating
will remain in effect for any given
period or that the rating agency will
not lower or withdraw the rating in
the future. The rating agency could
lower or withdraw its rating due to:
o any decrease in the adequacy of
the value of the trust fund
assets or any related credit
enhancement, or
o an adverse change in the
financial or other condition of
a credit enhancement provider.
Description of the Securities
General
Bear Stearns Asset Backed Securities, Inc., as depositor, will
establish a trust fund for each series of its securities. A particular series of
certificates will consist of mortgage-backed or asset-backed certificates or
notes or both certificates and notes.
Each series of certificates will be issued under a pooling and
servicing agreement or a trust agreement among the depositor, the trustee and,
if the trust fund includes loans, the related servicer. A form of pooling and
servicing agreement has been filed as an exhibit to the registration statement
of which this prospectus forms a part.
Each series of notes will be issued under an indenture between the
related trust fund and the trustee named in the prospectus supplement for that
series. A form of indenture has been filed as an exhibit to the registration
statement of which this prospectus forms a part. If the trust fund includes
loans, the trust fund and the servicer of the loans will also enter into a
servicing agreement.
Each seller named in the related prospectus supplement, from which the
depositor will have purchased assets to be included in the trust fund, may agree
to reimburse the depositor for certain fees and expenses that the depositor
incurs in connection with the offering of the securities.
The following summaries describe the material provisions which may
appear in each pooling and servicing agreement or trust agreement, in the case
of a series of certificates, and in each indenture and servicing agreement, in
the case of a series of notes. The prospectus supplement for each series of
securities will describe any provision of the pooling and servicing agreement or
trust agreement, in the case of a series of certificates, and of the indenture
and servicing agreement, in the case of a series of notes, which materially
differs from the description contained in this prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the prospectus supplement and the
governing agreements for that series.
Each series of securities will consist of one or more classes which may
be compound interest securities, variable interest securities, planned balance
(PAC) securities, zero coupon securities, principal only securities, interest
only securities or participating securities. A series may also include one or
more classes of subordinated securities. The securities of each series will be
issued only in fully registered form, without coupons, in the authorized
denominations for each class specified in the related prospectus supplement.
Upon satisfaction of any conditions applicable to a particular class as
described in the related prospectus supplement, the transfer of the securities
may be registered, and the securities may be exchanged, at the office of the
trustee without the payment of any service charge, other than any tax or
governmental charge payable in connection with the registration of transfer or
exchange. If specified in the related prospectus supplement, one or more classes
of a series may be available in book-entry form only.
Unless otherwise provided in the related prospectus supplement,
payments of principal of and interest on a series of securities will be made on
each distribution date specified in the prospectus supplement by check mailed to
holders of that series, registered as such at the close of business on the
record date specified in the prospectus supplement that is applicable to that
distribution date, at their addresses appearing on the security register.
However, payments may be made by wire transfer (at the expense of the holder
requesting payment by wire transfer) in circumstances described in the
prospectus supplement. However, final payments of principal in retirement of
each security will be made only upon presentation and surrender of the security
at the office of the related trustee. Notice of the final payment on a security
will be mailed to each holder before the distribution date on which the final
principal payment is expected to be made.
Payments of principal of and interest on the securities will be made by
the trustee, or a paying agent on behalf of the trustee, as specified in the
related prospectus supplement. Unless otherwise provided in the related
prospectus supplement, the following amounts will be deposited directly into the
collection account established for a particular series of securities with the
trustee (or with the servicer in the name of the trustee):
o all payments with respect to the primary assets for that series
(see, "--The Primary Assets and Their Valuation" below), together
with reinvestment income thereon;
o amounts withdrawn from any cash, letters of credit, short-term
investments or other instruments acceptable to the rating agencies
identified in the prospectus supplement as rating that series and
deposited in each reserve fund for the series established in the
name of the trustee; and
o amounts available pursuant to any other credit enhancement for the
series.
If provided in the related prospectus supplement, the deposits may be
net of certain amounts payable to the servicer and any other person specified in
the prospectus supplement. These amounts thereafter will be deposited into the
separate distribution account established for the series and will be available
to make payments on the related securities on the next distribution date. See
"The Trust Funds--Collection and Distribution Accounts" in this prospectus.
The Primary Assets and Their Valuation
The primary assets of each trust fund may include one or more pools of
the following:
o Residential Loans,
o Home Equity Loans,
o Home Improvement Contracts,
o Manufactured Housing Contracts,
o Agency Securities, and
o Private Label Securities.
When we use the term "loans" in this prospectus, we include Residential
Loans, Home Equity Loans, Home Improvement Contracts and Manufactured Housing
Contracts. The residential or mixed-use properties that secure the loans are
collectively referred to in this prospectus as the "mortgaged properties."
If specified in the related prospectus supplement for a series of
notes, each primary asset included in the related trust fund will be assigned an
initial Asset Value. Unless otherwise specified in the related prospectus
supplement, the initial Asset Value of the primary assets of the trust fund will
be at least equal to the principal amount of the related notes on the date of
issuance.
Payments of Interest
The securities of each class that by their terms are entitled to
receive interest will bear interest (calculated, unless otherwise specified in
the related prospectus supplement, on the basis of a 360-day year of twelve
30-day months) from the date and at the rate specified in the prospectus
supplement, or will be entitled to receive interest payment amounts calculated
in the method described in the prospectus supplement. Interest on the
interest-bearing securities of a series will be payable on the distribution date
specified in the related prospectus supplement. The rate of interest on
securities of a series may be variable or may change with changes in the annual
interest rates of the loans (or underlying loans) included in the related trust
fund and/or as prepayments occur with respect to the loans (or underlying
loans). Principal only securities may not be entitled to receive any interest
distributions or may be entitled to receive only nominal interest distributions.
Any interest on zero coupon securities that is not paid on the related
distribution date will accrue and be added to principal on that date.
Interest payable on the securities on a distribution date will include
all interest accrued during the period specified in the related prospectus
supplement. In the event interest accrues during the calendar month preceding a
distribution date, the effective yield to holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the securities were to
accrue through the day immediately preceding that distribution date.
Payments of Principal
On each distribution date for a series, principal payments will be made
to the holders of the securities on which principal is then payable, to the
extent set forth in the prospectus supplement. The payments will be made in a
total amount determined as specified in the prospectus supplement and will be
allocated among the respective classes of the series in the manner, at the times
and in the priority (which may include allocation by random lot) set forth in
the prospectus supplement.
Final Scheduled Distribution Date
The final scheduled distribution date with respect to each class of a
series of notes is the date no later than which the total principal balance of
the class will be fully paid, and the final scheduled distribution date with
respect to each class of a series of certificates is the date on which the
principal balance of the class is expected to be reduced to zero, in each case
calculated on the basis of the assumptions applicable to that series described
in the related prospectus supplement. The final scheduled distribution date for
each class of a series will be specified in the related prospectus supplement.
Since payments on the primary assets of each trust fund will be used to
make distributions that reduce the outstanding principal amount of the related
securities, it is likely that the actual final distribution date of any class
will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date. Furthermore, with respect to a series of
certificates, unless otherwise specified in the related prospectus supplement,
the actual final distribution date of any certificate may occur later than its
final scheduled distribution date as a result of delinquencies, defaults and
liquidations of the primary assets of the related trust fund. No assurance can
be given as to the actual prepayment experience with respect to any series. See
"--Weighted Average Lives of the Securities" below.
Special Redemption
If so specified in the prospectus supplement relating to a series of
securities having other than monthly distribution dates, one or more classes of
the securities may be subject to special redemption, in whole or in part, on the
special redemption date specified in the related prospectus supplement if, as a
consequence of prepayments on the loans (or underlying loans) or low yields then
available for reinvestment, the entity specified in the prospectus supplement
determines, based on assumptions set forth in the applicable agreement, that the
available interest amount that will have accrued on the securities through the
designated interest accrual date specified in the related prospectus supplement
is less than the amount of interest that will have accrued on the securities to
that date. In this event and as further described in the related prospectus
supplement, the trustee will redeem a principal amount of outstanding securities
of the series sufficient to cause the available interest amount to equal the
amount of interest that will have accrued through the designated interest
accrual date for the securities outstanding immediately after the redemption.
Optional Redemption, Purchase or Termination
The depositor or the servicer or any other entity that may be
designated in the related prospectus supplement will have the option, on any
distribution date, to purchase one or more classes of certificates of any series
or redeem, in whole or in part, one or more classes of notes of any series under
the circumstances, if any, specified in the related prospectus supplement.
Alternatively, if the prospectus supplement for a series of certificates so
provides, the depositor, the servicer or another entity designated in the
prospectus supplement will have the option to cause an early termination of the
related trust fund by repurchasing all of the primary assets from the trust fund
on or after a date specified in the prospectus supplement, or on or after such
time as the total outstanding principal amount of the certificates or primary
assets (as specified in the prospectus supplement) is equal to or less than the
amount or percentage specified in the prospectus supplement. Notice of the
redemption, purchase or termination must be given by the depositor or the
trustee prior to the related date. The redemption, purchase or repurchase price
will be set forth in the prospectus supplement. If specified in the prospectus
supplement, in the event that a REMIC election has been made, the trustee shall
receive a satisfactory opinion of counsel that the optional redemption, purchase
or termination will be conducted so as to constitute a "qualified liquidation"
under Section 860F of the Internal Revenue Code of 1986, as amended.
In addition, the prospectus supplement may provide other circumstances
under which holders of securities of a series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related primary assets.
Weighted Average Lives of the Securities
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
the security will be repaid to the investor. Unless otherwise specified in the
related prospectus supplement, the weighted average life of the securities of a
class will be influenced by the rate at which the amount financed under the
loans (or underlying loans relating to the Agency Securities or Private Label
Securities, as applicable), included in the trust fund for a series is paid,
whether in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to
a prepayment standard or model. The prospectus supplement for each series of
securities will describe the prepayment standard or model, if any, that is used
and may contain tables setting forth the projected weighted average life of each
class of securities of the series and the percentage of the original principal
amount of each class of securities of the series that would be outstanding on
specified distribution dates based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the loans (or underlying
loans relating to the Agency Securities or Private Label Securities, as
applicable) included in the related trust fund are made at rates corresponding
to various percentages of the prepayment standard or model specified in the
prospectus supplement.
There is, however, no assurance that prepayment of the loans (or
underlying loans relating to the Agency Securities or Private Label Securities,
as applicable) included in the related trust fund will conform to any level of
any prepayment standard or model specified in the related prospectus supplement.
The rate of principal prepayments on pools of loans may be influenced by a
variety of factors, including job-related factors such as transfers, layoffs or
promotions and personal factors such as divorce, disability or prolonged
illness. Economic conditions, either generally or within a particular geographic
area or industry, also may affect the rate of principal prepayments. Demographic
and social factors may influence the rate of principal prepayments in that some
borrowers have greater financial flexibility to move or refinance than do
others. The deductibility of mortgage interest payments, servicing decisions and
other factors also can affect the rate of principal prepayments. As a result,
there can be no assurance as to the rate or timing of principal prepayments of
the loans (or underlying loans) either from time to time or over the lives of
the loans (or underlying loans).
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
loans (or underlying loans) for a series, the loans are likely to prepay at
rates higher than if prevailing interest rates remain at or above the interest
rates borne by the loans. In this regard, it should be noted that the loans (or
underlying loans) for a series may have different interest rates. In addition,
the weighted average life of a class of securities may be affected by the
varying maturities of the loans (or underlying loans). If any loans (or
underlying loans) for a series have actual terms to stated maturity that are
less than those that were assumed in calculating the final scheduled
distribution date of the related securities, one or more classes of the series
may be fully paid prior to their respective final scheduled distribution date,
even in the absence of prepayments and a reinvestment return higher than the
Assumed Reinvestment Rate established by the rating agencies named in the
related prospectus supplement.
The Trust Funds
General
The notes of each series will be secured by the pledge of the assets of
the related trust fund, and the certificates of each series will represent
interests in the assets of the related trust fund. The trust fund of each series
will include assets purchased by the depositor from the seller composed of:
o the primary assets of the trust fund;
o amounts available from the reinvestment of payments on the primary
assets at any Assumed Reinvestment Rate that may be established by
the rating agencies specified in the related prospectus supplement;
o any credit enhancement in the form of an irrevocable letter of
credit, surety bond, insurance policy or other form of credit
support;
o REO property consisting of any mortgaged property or home
improvement that secured a loan but which is acquired by foreclosure
or deed in lieu of foreclosure or repossession; and
o the amount, if any, initially deposited into the collection account
or distribution account(s) for the series as specified in the
related prospectus supplement.
The securities will be non-recourse obligations of the related trust
fund. Unless the prospectus supplement indicates otherwise, the assets of the
trust fund specified in the related prospectus supplement will serve as
collateral only for that series of securities. Holders of a series of notes may
only proceed against the collateral securing that series in the case of a
default with respect to the notes and may not proceed against any assets of the
depositor or the related trust fund not pledged to secure the notes.
The primary assets for a series will be sold by the seller to the
depositor or purchased by the depositor in the open market or in privately
negotiated transactions (which may include transactions with affiliates) and
will be transferred by the depositor to the related trust fund. Loans relating
to a series will be serviced by the servicer (which may be the seller) that is
specified in the related prospectus supplement. The servicer will service the
loans pursuant to a pooling and servicing agreement with respect to a series of
certificates, or a servicing agreement between the trust fund and servicer with
respect to a series of notes.
If the prospectus supplement so provides, a trust fund relating to a
series of securities may be a business trust formed under the laws of the state
specified in the prospectus supplement pursuant to a trust agreement between the
depositor and the trustee.
Each trust fund, prior to the initial offering of the related series of
securities, will have no assets or liabilities. No trust fund is expected to
engage in any activities other than:
o to acquire, manage and hold the related primary assets and other
assets contemplated in this prospectus and in the related prospectus
supplement, and the proceeds thereof,
o to issue the related securities,
o to make payments and distributions on the securities, and
o to perform certain related activities.
No trust fund is expected to have any source of capital other than its assets
and any related credit enhancement.
Primary assets included in the trust fund for a series may consist of
any combination of loans, Agency Securities and Private Label Securities, as and
to the extent the related prospectus supplement specifies.
The Loans
General. Loans in each trust fund may consist of Residential Loans,
Home Equity Loans, Home Improvement Contracts or Manufactured Housing Contracts.
If specified in the related prospectus supplement, the loans in the related
trust fund may include cooperative apartment loans secured by security interests
in shares issued by private, non-profit, cooperative housing corporations and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in the cooperatives' buildings. As more fully
described in the related prospectus supplement, the loans may be either
"conventional" loans or loans that are insured or guaranteed by a governmental
agency like the FHA or VA. The loans will have been originated in accordance
with the underwriting criteria specified in the related prospectus supplement.
In general, the loans in a pool will have monthly payments due on the
first day of each month. However, as described in the related prospectus
supplement, the loans in a pool may have payments due more or less frequently
than monthly. In addition, payments may be due on any day during a month. The
payment terms of the loans to be included in a trust fund will be described in
the related prospectus supplement and may include any of the following features,
all as described in this prospectus or in the related prospectus supplement:
o Interest may be payable at
- a fixed rate,
- a rate that adjusts from time to time in relation to an
index that will be specified in the related prospectus
supplement,
- a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate,
- a rate that otherwise varies from time to time, or
- a rate that is convertible from an adjustable rate to a
fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of these limitations. As
specified in the related prospectus supplement, the loans may provide
for payments in level monthly installments, for balloon payments, or
for payments that are allocated to principal and interest according to
the "sum of the digits" or "Rule of 78s" methods. Accrued interest may
be deferred and added to the principal of a loan for the periods and
under the circumstances as may be specified in the related prospectus
supplement. Loans may provide for the payment of interest at a rate
lower than the specified loan rate for a period of time or for the life
of the loan, and the amount of any difference may be contributed from
funds supplied by the seller of the property or another source.
o Principal may be
- payable on a level debt service basis to fully amortize
the loan over its term,
- calculated on the basis of an assumed amortization
schedule that is significantly longer than the original
term to maturity or on an interest rate that is different
from the loan rate, or
- nonamortizing during all or a portion of the original
term.
Payment of all or a substantial portion of the principal may be due on
maturity in the form of a balloon payment. Principal may include
interest that has been deferred and added to the principal balance of
the loan.
o Monthly payments of principal and interest may
- be fixed for the life of the loan,
- increase over a specified period of time or
- change from period to period.
Loans may include limits on periodic increases or decreases in the
amount of monthly payments and may include maximum or minimum amounts
of monthly payments.
Prepayments of principal may be conditioned on payment of a prepayment
fee, which may be fixed for the life of the loan or may decline over time, and
may be prohibited for the life of the loan or for particular lockout periods.
Some loans may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection with any
subsequent prepayment. Other loans may permit prepayments without payment of a
fee unless the prepayment occurs during specified time periods. The loans may
include "due on sale" clauses which permit the mortgagee to demand payment of
the entire loan in connection with the sale or transfers of the related
property. Other loans may be assumable by persons meeting the then applicable
underwriting standards of the related seller.
A trust fund may contain buydown loans that include provisions for a
third party to subsidize partially the monthly payments of the borrowers on
those loans during the early years of those loans, the difference to be made up
from a buydown fund contributed by that third party at the time of origination
of the loan. A buydown fund will be in an amount equal either to the discounted
value or full aggregate amount of future payment subsidies. The underlying
assumption of buydown plans is that the income of the borrower will increase
during the buydown period as a result of normal increases in compensation and
inflation, so that the borrower will be able to meet the full loan payments at
the end of the buydown period. If assumption of increased income is not
fulfilled, the possibility of defaults on buydown loans is increased. The
related prospectus supplement will contain information with respect to any
buydown loan concerning limitations on the interest rate paid by the borrower
initially, on annual increases in the interest rate and on the length of the
buydown period.
When we use the term "mortgaged property" in this prospectus, we mean
the real property which secures repayment of the related loan. Home Improvement
Contracts and Manufactured Housing Contracts may, and the other loans will, be
secured by mortgages or deeds of trust or other similar security instruments
creating a lien on a mortgaged property. In the case of Home Equity Loans, the
related liens may be subordinated to one or more senior liens on the related
mortgaged properties as described in the prospectus supplement. As specified in
the related prospectus supplement, home improvement contracts and manufactured
housing contracts may be unsecured or secured by purchase money security
interests in the financed home improvements and the financed manufactured homes.
When we use the term "properties" in this prospectus supplement, we mean the
related mortgaged properties, home improvements and manufactured homes. The
properties relating to the loans will consist primarily of single-family
properties, meaning detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units in
planned unit developments and other dwelling units, or mixed-use properties. Any
mixed-use property will not exceed three stories and its primary use will be for
one- to four-family residential occupancy, with the remainder of its space for
retail, professional or other commercial uses. Any non-residential use will be
in compliance with local zoning laws and regulations. Properties may include
vacation and second homes, investment properties and leasehold interests. In the
case of leasehold interests, the term of the leasehold will exceed the scheduled
maturity of the related loan by a time period specified in the related
prospectus supplement. The properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory of
the United States.
Loans with specified loan-to-value ratios and/or principal balances may
be covered wholly or partially by primary mortgage guaranty insurance policies.
The existence, extent and duration of any coverage provided by primary mortgage
guaranty insurance policies will be described in the related prospectus
supplement.
Home Equity Loans. The primary assets for a series may consist, in
whole or in part, of, closed-end home equity loans, revolving credit line home
equity loans or certain balances forming a part of the revolving credit line
loans, secured by mortgages creating senior or junior liens primarily on one- to
four-family residential or mixed-use properties. The full principal amount of a
closed-end loan is advanced at origination of the loan and generally is
repayable in equal (or substantially equal) installments of an amount sufficient
to fully amortize the loan at its stated maturity. Unless otherwise described in
the related prospectus supplement, the original terms to stated maturity of
closed-end loans will not exceed 360 months. Principal amounts of a revolving
credit line loan may be drawn down (up to the maximum amount set forth in the
related prospectus supplement) or repaid from time to time, but may be subject
to a minimum periodic payment. Except to the extent provided in the related
prospectus supplement, the trust fund will not include any amounts borrowed
under a revolving credit line loan after the cut-off date designated in the
prospectus supplement. As more fully described in the related prospectus
supplement, interest on each revolving credit line loan, excluding introductory
rates offered from time to time during promotional periods, is computed and
payable monthly on the average daily principal balance of that loan. Under
certain circumstances, a borrower under either a revolving credit line loan or a
closed-end loan may choose an interest-only payment option. In this case only
the amount of interest that accrues on the loan during the billing cycle must be
paid. An interest-only payment option may be available for a specified period
before the borrower must begin making at least the minimum monthly payment of a
specified percentage of the average outstanding balance of the loan.
The rate of prepayment on Home Equity Loans cannot be predicted. Home
Equity Loans have been originated in significant volume only during the past few
years and the depositor is not aware of any publicly available studies or
statistics on the rate of their prepayment. The prepayment experience of the
related trust fund may be affected by a wide variety of factors, including
general economic conditions, prevailing interest rate levels, the availability
of alternative financing and homeowner mobility and the frequency and amount of
any future draws on any revolving credit line loans. Other factors that might be
expected to affect the prepayment rate of a pool of Home Equity Loans include
the amounts of, and interest rates on, the underlying first mortgage loans, and
the use of first mortgage loans as long-term financing for home purchase and
junior mortgage loans as shorter-term financing for a variety of purposes,
including home improvement, education expenses and purchases of consumer
durables such as automobiles. Accordingly, Home Equity Loans may experience a
higher rate of prepayment than traditional fixed-rate first mortgage loans. On
the other hand, because Home Equity Loans such as the revolving credit line
loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments to be lower than, or similar
to, those of traditional fully-amortizing first mortgage loans. Any future
limitations on the right of borrowers to deduct interest payments on Home Equity
Loans for federal income tax purposes may further increase the rate of
prepayments of the Home Equity Loans. Moreover, the enforcement of a
"due-on-sale" provision (as described below) will have the same effect as a
prepayment of the related Home Equity Loans. See "Material Legal Aspects of the
Loans--Due-on-Sale Clauses in Mortgage Loans" in this prospectus.
Collections on revolving credit line loans may vary for a number of
reasons, including those listed below.
o A borrower may make a payment during a month in an amount that is as
little as the minimum monthly payment for that month or, during the
interest-only period for certain revolving credit line loans (and,
in more limited circumstances, closed-end loans with respect to
which an interest-only payment option has been selected), the
interest, fees and charges for that month.
o A borrower may make a payment that is as much as the entire
principal balance plus accrued interest and related fees and charges
during a month.
o A borrower may fail to make the required periodic payment.
o Collections on the mortgage loans may vary due to seasonal
purchasing and the payment habits of borrowers.
Each single family property will be located on land owned in fee simple
by the borrower or on land leased by the borrower for a term at least ten years
(unless otherwise provided in the related prospectus supplement) greater than
the term of the related loan. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is built, with
the remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building. Unless otherwise specified in the related prospectus supplement,
mortgages on cooperative dwelling units consist of a lien on the shares issued
by the cooperative dwelling corporation and the proprietary lease or occupancy
agreement relating to the cooperative dwelling.
The aggregate principal balance of loans secured by single family
properties that are owner-occupied will be disclosed in the related prospectus
supplement. Unless otherwise specified in the prospectus supplement, the sole
basis for a representation that a given percentage of the loans are secured by
single family property that is owner-occupied will be either
o a representation by the borrower at origination of the loan either
that the underlying mortgaged property will be used by the borrower
for a period of at least six months every year or that the borrower
intends to use the mortgaged property as a primary residence, or
o a finding that the address of the underlying mortgaged property is
the borrower's mailing address as reflected in the servicer's
records.
To the extent specified in the related prospectus supplement, single family
properties may include non-owner occupied investment properties and vacation and
second homes.
Home Improvement Contracts. The primary assets for a series may
consist, in whole or in part, of home improvement installment sales contracts
and installment loan agreements originated by home improvement contractors in
the ordinary course of business. As specified in the related prospectus
supplement, the Home Improvement Contracts will be either unsecured or secured
by senior or junior mortgages primarily on single family properties, or by
purchase money security interests in the related home improvements. Unless
otherwise specified in the applicable prospectus supplement, the Home
Improvement Contracts will be fully amortizing and may have fixed interest rates
or adjustable interest rates and may provide for other payment characteristics
as described below and in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the
home improvements securing the Home Improvement Contracts include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
Manufactured Housing Contracts. The trust fund assets for a series may
consist, in whole or part, of conventional manufactured housing installment
sales contracts and installment loan agreements originated by a manufactured
housing dealer in the ordinary course of business. As specified in the related
prospectus supplement, the Manufactured Housing Contracts will be secured by
manufactured homes, located in any of the fifty states or the District of
Columbia or by mortgages on the real estate on which the manufactured homes are
located.
The manufactured homes securing the Manufactured Housing Contracts will
consist of manufactured homes within the meaning of 42 United States Code,
Section 5402(6), or manufactured homes meeting those other standards as shall be
described in the related prospectus supplement. Section 5402(6) 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 the 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 [this] chapter."
Manufactured homes, unlike mortgaged properties, generally depreciate
in value. Consequently, at any time after origination it is possible, especially
in the case of contracts with high loan-to-value ratios at origination, that the
market value of a manufactured home or home improvement may be lower than the
principal amount outstanding under the related contract.
Additional Information. The selection criteria applicable to the loans
will be specified in the related prospectus supplement. These include, but are
not limited to, the combined loan-to-value ratios or loan-to-value ratios, as
applicable, original terms to maturity and delinquency information.
The loans for a series of securities may include loans that do not
amortize their entire principal balance by their stated maturity in accordance
with their terms but require a balloon payment of the remaining principal
balance at maturity, as specified in the related prospectus supplement. As
further described in the related prospectus supplement, the loans for a series
of securities may include loans that do not have a specified stated maturity.
The loans will be either conventional contracts or contracts insured by
the Federal Housing Administration (FHA) or partially guaranteed by the Veterans
Administration (VA). Loans designated in the related prospectus supplement as
insured by the FHA will be insured under various FHA programs as authorized
under the United States Housing Act of 1937, as amended.. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Loans insured by the FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
loans relating to a series of securities may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time or origination
of such loan.
The insurance premiums for loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development (HUD) and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted loan to HUD. With respect to
a defaulted FHA-insured loan, the servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the servicer or HUD,
that default was caused by circumstances beyond the borrower's control, the
servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
borrower. Such plans may involve the reduction or suspension of regular mortgage
payments for a specified period, with such payments to be made upon or before
the maturity date of the mortgage, or the recasting of payments due under the
mortgage up to or beyond the maturity date. In addition, when a default caused
by such circumstances is accompanied by certain other criteria, HUD may provide
relief by making payments to the servicer in partial or full satisfaction of
amounts due under the loan (which payments are to be repaid by the borrower to
HUD) or by accepting assignment of the loan from the servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the loan and HUD must have rejected any request for relief from the
borrower before the servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The servicer of each FHA-insured loan will be obligated
to purchase any such debenture issued in satisfaction of a loan upon default for
an amount equal to the principal amount of the debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted loan adjusted to reimburse
the servicer for certain costs and expenses and to deduct certain amounts
received or retained by the servicer after default. When entitlement to
insurance benefits results from foreclosure (or other acquisition of possession)
and conveyance to HUD, the servicer is compensated for no more than two-thirds
of its foreclosure costs, and is compensated for interest accrued and unpaid
prior to the date of foreclosure but in general only to the extent it was
allowed pursuant to a forbearance plan approved by HUD. When entitlement to
insurance benefits results from assignment of the loan to HUD, the insurance
payment includes full compensation for interest accrued and unpaid to the
assignment date. The insurance payment itself, upon foreclosure of an
FHA-insured loan, bears interest from a date 30 days after the borrower's first
uncorrected failure to perform any obligation to make any payment due under the
loan and, upon assignment, from the date of assignment to the date of payment of
the claim, in each case at the same interest rate as the applicable HUD
debenture interest rate as described above.
Loans designated in the related prospectus supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended. The Serviceman's Readjustment Act permits
a veteran (or in certain instances, the spouse of a veteran) to obtain a
mortgage loan guaranty by the VA covering mortgage financing of the purchase of
a one- to four-family dwelling unit at interest rates permitted by the VA. The
program has no mortgage loan limits, requires no down payment from the purchaser
and permits the guarantee of mortgage loans of up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
increase in the amount of indebtedness, but in no event will the amount payable
on the guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to its guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA-guaranteed loan, the servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guaranteed amount is submitted to the VA after liquidation of the related
mortgaged property.
The amount payable under a VA guaranty will be the percentage of the
VA-insured loan originally guaranteed by the VA applied to the indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the mortgaged property. The amount payable under the guaranty may
in no event exceed the amount of the original guaranty.
The prospectus supplement for each series will provide information with
respect to the loans that are primary assets of the related trust fund as of the
cut-off date, including, among other things, and to the extent relevant:
o the aggregate unpaid principal balance of the loans;
o the range and weighted average interest rates on the loans and, in
the case of adjustable rate loans, the range and weighted average of
the current interest rates and the lifetime interest rate caps, if
any;
o the range and average principal balance of the loans;
o the weighted average original and remaining terms to stated maturity
of the loans and the range of original and remaining terms to stated
maturity, if applicable;
o the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios for the loans, as applicable;
o the percentage (by principal balance as of the cut-off date) of
loans that accrue interest at adjustable or fixed interest rates;
o any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the loans;
o the percentage (by principal balance as of the cut-off date) of
loans that are secured by mortgaged properties or home improvements
or that are unsecured;
o the geographic distribution of any mortgaged properties securing the
loans;
o for loans that are secured by single family properties, the
percentage (by principal balance as of the cut-off date) secured by
shares relating to cooperative dwelling units, condominium units,
investment property and vacation or second homes;
o the lien priority of the loans;
o the delinquency status and year of origination of the loans;
o whether the loans are closed-end loans and/or revolving credit line
loans; and
o in the case of revolving credit line loans, the general payments and
credit line terms of those loans and other pertinent features.
The prospectus supplement will also specify any other limitations on
the types or characteristics of the loans in the trust fund for the related
series of securities.
If information of the nature described above respecting the loans is
not known to the depositor at the time the securities are initially offered,
more general or approximate information of the nature described above will be
provided in the prospectus supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related series of securities and to be filed with the SEC
within 15 days after the initial issuance of the securities.
Private Label Securities
General. Primary assets for a series may consist, in whole or in part,
of Private Label Securities or PLS (i.e., private mortgage-backed asset-backed
securities) that include:
o pass-through certificates representing beneficial interests in
underlying loans of a type that would otherwise be eligible to be
loans held directly by the trust fund, or
o collateralized obligations secured by underlying loans of a type
that would otherwise be eligible to be loans held directly by the
trust fund.
The Private Label Securities will previously have been
o offered and distributed to the public pursuant to an effective
registration statement, or
o purchased in a transaction not involving any public offering from a
person that is not an affiliate of the Private Label Securities at
the time of sale (nor its affiliate at any time during the three
preceding months) and a period of two years has elapsed since the
date the Private Label Securities were acquired from the issuer or
its affiliate, whichever is later.
Although individual underlying loans may be insured or guaranteed by
the United States or one of its agencies or instrumentalities, they need not be,
and the Private Label Securities themselves may be, but need not be, insured or
guaranteed.
The Private Label Securities will have been issued pursuant to a
pooling and servicing agreement, a trust agreement or similar agreement. The
seller/servicer of the underlying loans will have entered into a PLS agreement
with the PLS trustee. The PLS trustee, its agent or a custodian will take
possession of the underlying loans. The underlying loans will be serviced by the
PLS servicer directly or by one or more sub-servicers subject to the supervision
of the PLS servicer.
The issuer Private Label Securities will be
o a financial institution or other entity engaged generally in the
business of lending,
o a public agency or instrumentality of a state, local or federal
government, or
o a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to
such trusts, and selling beneficial interests in trusts.
If specified in the prospectus supplement, the PLS issuer may be an affiliate of
the depositor. The obligations of the PLS issuer generally will be limited to
certain representations and warranties that it makes with respect to the assets
it conveys to the related trust. Unless otherwise specified in the related
prospectus supplement, the PLS issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Label Securities issued
under the PLS agreement.
Distributions of principal and interest will be made on the Private
Label Securities on the dates specified in the related prospectus supplement.
The Private Label Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Label Securities by the PLS trustee or
the PLS servicer. The PLS issuer or the PLS servicer may have the right to
repurchase the underlying loans after a certain date or under other
circumstances specified in the related prospectus supplement.
The loans underlying the Private Label Securities may be fixed rate,
level payment, fully amortizing loans or adjustable rate loans or loans having
balloon or other irregular payment features. The underlying loans will be
secured by mortgages on mortgaged properties.
Credit Support Relating to Private Label Securities. Credit support in
the form of reserve funds, subordination of other private securities issued
under the PLS agreement, guarantees, cash collateral accounts, security policies
or other types of credit support may be provided with respect to the underlying
loans or with respect to the Private Label Securities themselves. The type,
characteristics and amount of credit support will be a function of the
characteristics of the underlying loans and other factors and will be based on
the requirements of the nationally recognized statistical rating organization
that rated the Private Label Securities.
Additional Information. If the primary assets of a trust fund include
Private Label Securities, the related prospectus supplement will specify the
items listed below, to the extent relevant and to the extent information is
reasonably available to the depositor and the depositor reasonably believes the
information to be reliable:
o the total approximate principal amount and type of the Private Label
Securities to be included in the trust fund,
o the maximum original term to stated maturity of the Private Label
Securities,
o the weighted average term to stated maturity of the Private Label
Securities,
o the pass-through or certificate rate or range of rates of the
Private Label Securities,
o the PLS issuer, the PLS servicer (if other than the PLS issuer) and
the PLS trustee,
o certain characteristics of any credit support such as reserve funds,
security policies or guarantees relating to the underlying loans or
to the Private Label Securities themselves;
o the terms on which underlying loans may, or are required to, be
purchased prior to their stated maturity or the stated maturity of
the Private Label Securities, and
o the terms on which underlying loans may be substituted for those
originally underlying the Private Label Securities.
In addition, the related prospectus supplement will provide information about
the loans underlying the Private Label Securities, including
o the payment features of the underlying loans (i.e., whether
closed-end loans or revolving credit line loans, whether fixed rate
or adjustable rate, whether level payment or balloon payment loans),
o the approximate aggregate principal balance, if known, of the
underlying loans insured guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to the
underlying loans,
o the minimum and maximum stated maturities of the underlying loans at
origination,
o the lien priority of the underlying loans, and
o the delinquency status and year of origination of the underlying
loans.
The above disclosure may be on an approximate basis and will be as of
the date specified in the related prospectus supplement. If information of the
nature described above for the Private Label Securities is not known to the
depositor at the time the securities are initially offered, more general or
approximate information of a similar nature will be provided in the prospectus
supplement and the additional information, if available, will be set forth in a
Current Report on Form 8-K to be available to investors on the date of issuance
of the related series of securities and to be filed with the SEC within 15 days
of the initial issuance of the securities.
Agency Securities
Ginnie Mae. The Government National Mortgage Association (Ginnie Mae)
is a wholly-owned corporate instrumentality of HUD. Section 306(g) of Title II
of the National Housing Act of 1934, as amended, authorizes Ginnie Mae to, among
other things, guarantee the timely payment of principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured by
the FHA under the National Housing Act of 1934 or Title V of the National
Housing Act of 1949, or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38 of the United
States Code.
Section 306 (g) of the National Housing Act of 1934 provides that "the
full faith and credit of the United States is pledged to the payment of all
amounts which may be required to be paid under any guarantee under this
subsection." In order to meet its obligations under any guarantee under Section
306 (g) of the National Housing Act, Ginnie Mae may, under Section 306(d) of the
National Housing Act, borrow from the United States Treasury in an amount which
is at any time sufficient to enable Ginnie Mae, with no limitations as to
amount, to perform its obligations under its guarantee.
Ginnie Mae Certificates. Each Ginnie Mae certificate held in a trust
fund for a series of securities will be a "fully modified pass-through"
mortgaged-backed certificate issued and serviced by a mortgage banking company
or other financial concern approved by Ginnie Mae or approved by Fannie Mae as a
seller-servicer of FHA loans and/or VA loans. Each Ginnie Mae certificate may be
a GNMA I certificate or a GNMA II certificate. The mortgage loans underlying the
Ginnie Mae certificates will consist of FHA loans and/or VA loans. Each mortgage
loan of this type is secured by a one- to four-family residential property or a
manufactured home. Ginnie Mae will approve the issuance of each Ginnie Mae
certificate in accordance with a guaranty agreement between Ginnie Mae and the
issuer and servicer of the Ginnie Mae certificate. Pursuant to its guaranty
agreement, a Ginnie Mae servicer will be required to advance its own funds in
order to make timely payments of all amounts due on each of the related Ginnie
Mae certificates, even if the payments received by the Ginnie Mae servicer on
the FHA loans or VA loans underlying each of those Ginnie Mae certificates are
less than the amounts due on those Ginnie Mae certificates.
The full and timely payment of principal of and interest on each Ginnie
Mae certificate will be guaranteed by Ginnie Mae, which obligation is backed by
the full faith and credit of the United States. Each Ginnie Mae certificate will
have an original maturity of not more than 40 years (but may have original
maturities of substantially less than 40 years). Each Ginnie Mae certificate
will provide for the payment by or on behalf of the Ginnie Mae servicer to the
registered holder of the Ginnie Mae certificate of scheduled monthly payments of
principal and interest equal to the registered holder's proportionate interest
in the aggregate amount of the monthly principal and interest payment on each
FHA loan or VA loan underlying the Ginnie Mae certificate, less the applicable
servicing and guarantee fee which together equal the difference between the
interest on the FHA loans or VA loans and the pass-through rate on the Ginnie
Mae certificate. In addition, each payment will include proportionate
pass-through payments of any prepayments of principal on the FHA loans or VA
loans underlying the Ginnie Mae certificate and liquidation proceeds in the
event of a foreclosure or other disposition of any the related FHA loans or VA
loans.
If a Ginnie Mae servicer is unable to make the payments on a Ginnie Mae
certificate as it becomes due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payment. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of a Ginnie Mae certificate. In
the event no payment is made by a Ginnie Mae servicer and the Ginnie Mae
servicer fails to notify and request Ginnie Mae to make the payment, the holder
of the related Ginnie Mae certificate will have recourse only against Ginnie Mae
to obtain the payment. The trustee or its nominee, as registered holder of the
Ginnie Mae certificates held in a trust fund, will have the right to proceed
directly against Ginnie Mae under the terms of the guaranty agreements relating
to the Ginnie Mae certificates for any amounts that are not paid when due.
Except for pools of mortgage loans secured by manufactured homes, all
mortgage loans underlying a particular Ginnie Mae certificate must have the same
interest rate over the term of the loan. The interest rate on a GNMA I
certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying the GNMA I certificate, less one-half
percentage point per year of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II certificate may have
annual interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying the GNMA II certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each Ginnie Mae certificate
will be comprised of interest due as specified on a Ginnie Mae certificate plus
the scheduled principal payments on the FHA loans or VA loans underlying the
Ginnie Mae certificate due on the first day of the month in which the scheduled
monthly installments on the Ginnie Mae certificate is due. Regular monthly
installments on each Ginnie Mae certificate, are required to be paid to the
trustee identified in the related prospectus supplement as registered holder by
the 15th day of each month in the case of a GNMA I certificate, and are required
to be mailed to the trustee by the 20th day of each month in the case of a GNMA
II certificate. Any principal prepayments on any FHA loans or VA loans
underlying a Ginnie Mae certificate held in a trust fund or any other early
recovery of principal on a loan will be passed through to the trustee identified
in the related prospectus supplement as the registered holder of the Ginnie Mae
certificate.
Ginnie Mae certificates may be backed by graduated payment mortgage
loans or by "buydown" mortgage loans for which funds will have been provided,
and deposited into escrow accounts, for application to the payment of a portion
of the borrowers' monthly payments during the early years of those mortgage
loans. Payments due the registered holders of Ginnie Mae certificates backed by
pools containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae certificates and will include amounts to
be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of the mortgage loans, will be less than the amount
of stated interest on the mortgage loans. The interest not so paid will be added
to the principal of the graduated payment mortgage loans and, together with
interest on that interest, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae issuer/servicer will be the same irrespective of
whether the Ginnie Mae certificates are backed by graduated payment mortgage
loans or "buydown" mortgage loans. No statistics comparable to the FHA's
prepayment experience on level payment, non-buydown loans are available in
inspect of graduated payment or buydown mortgages. Ginnie Mae certificates
related to a series of certificates may be held in book-entry form.
Fannie Mae. The Federal National Mortgage Association (Fannie Mae) is a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act. Fannie Mae was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders. Fannie Mae acquires funds to purchase
mortgage loans from many capital market investors that may not ordinarily invest
in mortgages. In so doing, it expands the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas.
Fannie Mae Certificates. Fannie Mae certificates are either guaranteed
mortgage pass-through certificates or stripped mortgage-backed securities. The
following discussion of Fannie Mae certificates applies equally to both types of
Fannie Mae certificates, except as otherwise indicated. Each Fannie Mae
certificate to be included in the trust fund for a series of securities will
represent a fractional undivided interest in a pool of mortgage loans formed by
Fannie Mae. Each pool formed by Fannie Mae will consist of mortgage loans of one
of the following types:
o fixed-rate level installment conventional mortgage loans,
o fixed-rate level installment mortgage loans that are insured by FHA
or partially guaranteed by the VA,
o adjustable rate conventional mortgage loans, or
o adjustable rate mortgage loans that are insured by the FHA or
partially guaranteed by the VA.
Each mortgage loan must meet the applicable standards set forth under the Fannie
Mae purchase program and will be secured by a first lien on a one- to
four-family residential property.
Each Fannie Mae certificate will be issued pursuant to a trust
indenture. Original maturities of substantially all of the conventional, level
payment mortgage loans underlying a Fannie Mae certificate are expected to be
between either eight to 15 years or 20 to 40 years. The original maturities of
substantially all of the fixed rate level payment FHA loans or VA loans are
expected to be 30 years.
Mortgage loans underlying a Fannie Mae certificate may have annual
interest rates that vary by as much as two percentage points from one another.
The rate of interest payable on a Fannie Mae guaranteed mortgage-backed
certificate and the series pass-through rate payable with respect to a Fannie
Mae stripped mortgage-backed security is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and Fannie Mae's guaranty fee.
Under a regular servicing option pursuant to which the mortgagee or other
servicer assumes the entire risk of foreclosure losses, the annual interest
rates on the mortgage loans underlying a Fannie Mae certificate will be between
50 basis points and 250 basis points greater than the annual pass-through rate,
in the case of a Fannie Mae guaranteed mortgage-backed certificate, or the
series pass-through rate in the case of a Fannie Mae stripped mortgage-backed
security. Under a special servicing option pursuant to which Fannie Mae assumes
the entire risk for foreclosure losses, the annual interest rates on the
mortgage loans underlying a Fannie Mae certificate will generally be between 55
basis points and 255 basis points greater than the annual pass-through rate, in
the case of a Fannie Mae guaranteed mortgage-backed certificate, or the series
pass-through rate in the case of a Fannie Mae stripped mortgage-backed security.
Fannie Mae guarantees to each registered holder of a Fannie Mae
certificate that it will distribute on a timely basis amounts representing the
holder's proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by the Fannie Mae certificate on the
underlying mortgage loans, whether or not received, and the holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not the principal amount is
actually recovered. The obligations of Fannie Mae under its guarantees are
obligations solely of Fannie Mae and are not backed by, or entitled to, the full
faith and credit of the United States. If Fannie Mae were unable to satisfy its
obligations, distributions to holders of Fannie Mae certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of Fannie Mae certificates would
be affected by delinquent payments and defaults on those mortgage loans.
Fannie Mae stripped mortgage-backed securities are issued in series of
two or more classes, with each class representing a specified undivided
fractional interest in principal distributions and interest distributions,
adjusted to the series pass-through rate, on the underlying pool of mortgage
loans. The fractional interests of each class in principal and interest
distributions are not identical, but the classes in the aggregate represent 100%
of the principal distributions and interest distributions, adjusted to the
series pass-through rate, on the respective pool. Because of the difference
between the fractional interests in principal and interest of each class, the
effective rate of interest on the principal of each class of Fannie Mae stripped
mortgage-backed securities may be significantly higher or lower than the series
pass-through rate and/or the weighted average interest rate of the underlying
mortgage loans.
Unless otherwise specified by Fannie Mae, Fannie Mae certificates
evidencing interests in pools of mortgages formed on or after May 1, 1985 will
be available in book-entry form only. Distributions of principal and interest on
each Fannie Mae certificate will be made by Fannie Mae on the 25th day of each
month to the persons in whose name the Fannie Mae certificate is entered in the
books of the Federal Reserve Banks, or registered on the Fannie Mae certificate
register in the case of fully registered Fannie Mae certificates as of the close
of business on the last day of the preceding month. With respect to Fannie Mae
certificates issued in book-entry form, distributions on the Fannie Mae
certificates will be made by wire, and with respect to fully registered Fannie
Mae certificates, distributions on the Fannie Mae certificates will be made by
check.
Freddie Mac. The Federal Home Loan Mortgage Corporation (Freddie Mac)
is a shareholder-owned, United States government-sponsored enterprise created
pursuant to the Federal Home loan Mortgage Corporation Act, Title III of the
Emergency Home Finance Act of 1970, as amended. The common stock of Freddie Mac
is owned by the Federal Home loan Banks. Freddie Mac was established primarily
for the purpose of increasing the availability of mortgage credit for the
financing of urgently needed housing. It seeks to provide an enhanced degree of
liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional mortgages. The principal
activity of Freddie Mac currently consists of the purchase of first lien
conventional mortgage loans FHA loans, VA loans or participation interests in
those mortgage loans and the sale of the loans or participations so purchased in
the form of mortgage securities, primarily Freddie Mac certificates. Freddie Mac
is confined to purchasing, so far as practicable, mortgage loans that it deems
to be of the quality, type and class which meet generally the purchase standards
imposed by private institutional mortgage investors.
Freddie Mac Certificates. Each Freddie Mac certificate included in a
trust fund for a series will represent an undivided interest in a pool of
mortgage loans that may consist of first lien conventional loans, FHA loans or
VA loans. Freddie Mac certificates are sold under the terms of a mortgage
participation certificate agreement. A Freddie Mac certificate may be issued
under either Freddie Mac's Cash Program or Guarantor Program. Typically,
mortgage loans underlying the Freddie Mac certificates held by a trust fund will
consist of mortgage loans with original terms to maturity of from ten to 40
years. Each of those mortgage loans must meet the applicable standards set forth
in the law governing Freddie Mac. A Freddie Mac certificate group may include
whole loans, participation interests in whole loans and undivided interests in
whole loans and/or participations comprising another Freddie Mac certificate
group. Under the guarantor program, any Freddie Mac certificate group may
include only whole loans or participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans in the Freddie Mac certificate group represented by a Freddie Mac
certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac certificate ultimate receipt by a holder of
all principal on the underlying mortgage loans, without any offset or deduction,
to the extent of that holder's pro rata share. However, Freddie Mac does not
guarantee, except if and to the extent specified in the prospectus supplement
for a series, the timely payment of scheduled principal. Under Freddie Mac's
Gold PC Program, Freddie Mac guarantees the timely payment of principal based on
the difference between the pool factor published in the month preceding the
month of distribution and the pool factor published in the related month of
distribution. Pursuant to its guarantees, Freddie Mac indemnifies holders of
Freddie Mac certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. Freddie Mac may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than (x) 30
days following foreclosure sale, (y) 30 days following payment of the claim by
any mortgage insurer, or (z) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans which it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
standards which require that the demand be made within any specified period.
Freddie Mac certificates are not guaranteed by the United States or by
any Federal Home loan Bank and do not constitute debts or obligations of the
United States or any Federal Home loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed by,
nor entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy its obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
Registered holders of Freddie Mac certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial prepayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or by the party that sold
the related mortgage loans to Freddie Mac. Freddie Mac is required to remit each
registered Freddie Mac certificateholder's pro rata share of principal payments
on the underlying mortgage loans, interest at the Freddie Mac pass-through rate
and any other sums like prepayment fees, within 60 days of the date on which
those payments are deemed to have been received by Freddie Mac.
Under Freddie Mac's Cash Program, with respect to pools formed prior to
June 1, 1987, there is no limitation on be amount by which interest rates on the
mortgage loans underlying a Freddie Mac certificate may exceed the pass-through
rate on the Freddie Mac certificate. With respect to Freddie Mac certificates
issued on or after June 1, 1987, the maximum interest rate on the mortgage loans
underlying the Freddie Mac certificates may exceed the pass-through rate of the
Freddie Mac certificates by 50 to 100 basis points. Under that program, Freddie
Mac purchases group of whole mortgage loans from sellers at specified
percentages of their unpaid principal balances, adjusted for accrued or prepaid
interest, which when applied to the interest rate of the mortgage loans and
participations purchased, results in the yield expressed as a percentage
required by Freddie Mac. The required yield, which includes a minimum servicing
fee retained by the servicer, is calculated using the outstanding principal
balance. The range of interest rates on the mortgage loans and participations in
a Freddie Mac certificate group under the Cash Program will vary since mortgage
loans and participations are purchased and assigned to a Freddie Mac certificate
group based upon their yield to Freddie Mac rather than on the interest rate on
the underlying mortgage loans.
Under Freddie Mac's Guarantor Program, the pass-through rate on a
Freddie Mac certificate is established based upon the lowest interest rate on
the underlying mortgage loans, minus a minimum servicing fee and the amount of
Freddie Mac's management and guaranty income as agreed upon between the seller
and Freddie Mac. For Freddie Mac certificate group formed under the Guarantor
Program with certificate numbers beginning with 18-012, the range between the
lowest and the highest annual interest rates on the mortgage loans in a Freddie
Mac certificate group may not exceed two percentage points.
Freddie Mac certificates duly presented for registration of ownership
on or before the last business day of a month are registered effective as of the
first day of the month. The first remittance to a registered holder of a Freddie
Mac certificate will be distributed so as to be received normally by the 15th
day of the second month following the month in which the purchaser became a
registered holder of the Freddie Mac certificates. Subsequent remittances will
be distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to Freddie Mac certificates sold by Freddie Mac
on or after January 2, 1985, and makes payments of principal and interest each
month to the registered holders of Freddie Mac certificates in accordance with
the holders' instructions.
Stripped Mortgage-Backed Securities. Agency Securities may consist of
one or more stripped mortgage-backed securities, each as described in this
prospectus and in the related prospectus supplement. Each Agency Security of
this type will represent an undivided interest in all or part of either the
principal distributions or the interest distributions, or in some specified
portion of the principal and interest distributions, on particular Freddie Mac,
Fannie Mae, Ginnie Mae or other government agency or government-sponsored agency
certificates. The underlying securities will be held under a trust agreement by
Freddie Mac, Fannie Mae, Ginnie Mae or another government agency or
government-sponsored agency, each as trustee, or by another trustee named in the
related prospectus supplement. Freddie Mac, Fannie Mae, Ginnie Mae or another
government agency or government-sponsored agency will guarantee each stripped
agency security to the same extent as the applicable entity guarantees the
underlying securities backing the stripped Agency Security, unless otherwise
specified in the related prospectus supplement.
Other Agency Securities. If specified in the related prospectus
supplement, a trust fund may include other mortgage pass-through certificates
issued or guaranteed by Ginnie Mae, Fannie Mae, Freddie Mac or other government
agencies or government-sponsored agencies. The characteristics of any other
mortgage pass-through certificates issued or guaranteed by Ginnie Mae, Fannie
Mae, Freddie Mac or other government agencies or government-sponsored agencies
will be described in that prospectus supplement. If so specified, a combination
of different types of Agency Securities may be held in a trust fund.
Collection and Distribution Accounts
A separate collection account will be established by the trustee, or by
the servicer in the name of the trustee, for each series of securities for
receipt of
o the amount of any cash specified in the related prospectus
supplement to be initially deposited by the depositor in the
collection account,
o all amounts received with respect to the primary assets of the
related trust fund, and
o unless otherwise specified in the related prospectus supplement,
income earned on the foregoing amounts.
As provided in the related prospectus supplement, certain amounts on deposit in
the collection account and certain amounts available under any credit
enhancement for the securities of that series will be deposited into the
applicable distribution account for distribution to the holders of the related
securities. The trustee will establish a separate distribution account for each
series of securities. Unless otherwise specified in the related prospectus
supplement, the trustee will invest the funds in the collection account and the
distribution account in eligible investments including, among other investments,
obligations of the United States and certain of its agencies, federal funds,
certificates of deposit, commercial paper, demand and time deposits and banker's
acceptances, certain repurchase agreements of United States government
securities and certain guaranteed investment contracts, in each case acceptable
to the rating agencies named in the prospectus supplement. With certain
exceptions, all such eligible investments must mature, in the case of funds in
the collection account, not later than the day preceding the date when the funds
are due to be deposited into the distribution account or otherwise distributed
and, in the case of funds in the distribution account, not later than the day
preceding the next distribution date for the related series of securities.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any deposit agreement or minimum principal payment
agreement that may be specified in the related prospectus supplement.
If specified in the related prospectus supplement, a trust fund will
include one or more pre-funding accounts that are segregated trust accounts
established and maintained with the trustee for the related series. If specified
in the prospectus supplement, a portion of the proceeds of the sale of the
securities equal to the pre-funded amount will be deposited into the pre-funding
account on the closing date and may be used to purchase additional primary
assets during the pre-funding period specified in the prospectus supplement. In
no case will the pre-funded amount exceed 50% of the total principal amount of
the related securities, and in no case will the pre-funding period exceed one
year. The primary assets to be purchased generally will be selected on the basis
of the same criteria as those used to select the initial primary assets of the
trust fund, and the same representations and warranties will be made with
respect to them. If any pre-funded amount remains on deposit in the pre-funding
account at the end of the pre-funding period, the remaining amount will be
applied in the manner specified in the related prospectus supplement to prepay
the notes and/or the certificates of that series.
If a pre-funding account is established, one or more capitalized
interest accounts that are segregated trust accounts may be established and
maintained with the trustee for the related series. On the closing date for the
series, a portion of the proceeds of the sale of the related securities will be
deposited into the capitalized interest account and used to fund the excess, if
any, of
o the sum of
o the amount of interest accrued on the securities of the
series, and
o if specified in the related prospectus supplement, certain
fees or expenses during the pre-funding period,
over
o the amount of interest available from the primary assets in the
trust fund.
Any amounts on deposit in the capitalized interest account at the end
of the pre-funding period that are not necessary for these purposes will be
distributed to the person specified in the related prospectus supplement.
Credit Enhancement
If so provided in the prospectus supplement relating to a series of
securities, simultaneously with the depositor's assignment of the primary assets
to the trustee, the depositor will obtain from an institution or by other means
acceptable to the rating agencies named in the prospectus supplement one or more
types of credit enhancement in favor of the trustee on behalf of the holders of
the related series or designated classes of the series. The credit enhancement
will support the payment of principal of and interest on the securities, and may
be applied for certain other purposes to the extent and under the conditions set
forth in the prospectus supplement. Credit enhancement for a series may include
one or more of the forms described below or any other form as may be specified
in the related prospectus supplement. If so specified in the related prospectus
supplement, the credit enhancement may be structured so as to protect against
losses relating to more than one trust fund.
Subordinated Securities
If specified in the related prospectus supplement, credit enhancement
for a series may consist of one or more classes of subordinated securities. The
rights of the holders of subordinated securities to receive distributions on any
distribution date will be subordinate in right and priority to the rights of
holders of senior securities of the same series, but only to the extent
described in the related prospectus supplement.
Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on the securities or on specified
classes will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Those instruments may cover, with
respect to one or more classes of securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. In addition, if specified in the
related prospectus supplement, a trust fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties for the purpose
of:
o maintaining timely payments or providing additional protection
against losses on the trust fund assets;
o paying administrative expenses; or
o establishing a minimum reinvestment rate on the payments made in
respect of those assets or principal payment rate on those assets.
Arrangements may include agreements under which securityholders are entitled to
receive amounts deposited in various accounts held by the trustee upon the terms
specified in the related prospectus supplement. A copy of any arrangement
instrument for a series will be filed with the SEC as an exhibit to a Current
Report on Form 8-K to be filed with the SEC following issuance of the securities
of the related series.
Over-Collateralization
If so provided in the prospectus supplement for a series of securities,
a portion of the interest payment on each loan included in the trust fund may be
applied as an additional distribution in respect of principal to reduce the
principal balance of a class or classes of securities and, thus, accelerate the
rate of payment of principal on that class or those classes of securities.
Other Insurance Policies
If specified in the related prospectus supplement, credit enhancement
for a series may consist of pool insurance policies, special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the primary
assets, as described below and in the related prospectus supplement.
Pool Insurance Policy. If so specified in the related prospectus
supplement, the depositor will obtain a pool insurance policy for the loans in
the related trust fund. The pool insurance policy will cover any loss (subject
to the limitations described in the prospectus supplement) by reason of default,
but will not cover the portion of the principal balance of any loan that is
required to be covered by any primary mortgage insurance policy. The amount and
terms of any pool insurance coverage will be set forth in the related prospectus
supplement.
Special Hazard Insurance Policy. Although the terms of such policies
vary to some degree, a special hazard insurance policy typically provides that,
where there has been damage to property securing a defaulted or foreclosed loan
(title to which has been acquired by the insured) and to the extent the damage
is not covered by a standard hazard insurance policy (or any flood insurance
policy, if applicable) required to be maintained with respect to the property,
or in connection with partial loss resulting from the application of the
coinsurance clause in a standard hazard insurance policy, the special hazard
insurer will pay the lesser of
o the cost of repair or replacement of the property, and
o upon transfer of the property to the special hazard insurer, the
unpaid principal balance of the loan at the time of acquisition of
the property by foreclosure or deed in lieu of foreclosure, plus
accrued interest to the date of claim settlement and certain
expenses incurred by the servicer with respect to the property.
If the unpaid principal balance of the loan plus accrued interest and
certain expenses is paid by the special hazard insurer, the amount of further
coverage under the special hazard insurance policy will be reduced by that
amount less any net proceeds from the sale of the related property. Any amount
paid as the cost of repair of the property will reduce coverage by that amount.
Special hazard insurance policies typically do not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the mortgaged property is in a federally designated flood area),
chemical contamination and certain other risks.
Restoration of the property with the proceeds described in the first
bullet of the second previous paragraph is expected to satisfy the condition
under any pool insurance policy that the property be restored before a claim
under the pool insurance policy may be validly presented with respect to the
defaulted loan secured by the property. The payment described in the second
bullet of the second previous paragraph will render unnecessary presentation of
a claim in respect of the loan under any pool insurance policy. Therefore, so
long as a pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related loan plus accrued interest and certain expenses will not affect the
total amount in respect of insurance proceeds paid to holders of the securities,
but will affect the relative amounts of coverage remaining under the special
hazard insurance policy and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the property securing the related
loan at an amount less than the then-outstanding principal balance of the loan.
The amount of the secured debt could be reduced to that value, and the holder of
the loan thus would become an unsecured creditor to the extent the principal
balance of the loan exceeds the value assigned to the property by the bankruptcy
court. In addition, certain other modifications of the terms of a loan can
result from a bankruptcy proceeding. See "Material Legal Aspects of the Loans"
in this prospectus. If the related prospectus supplement so provides, the
depositor or other entity specified in the prospectus supplement will obtain a
bankruptcy bond or similar insurance contract covering losses resulting from
proceedings with respect to borrowers under the Federal Bankruptcy Code. The
bankruptcy bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal of and interest on a loan or
a reduction by the court of the principal amount of a loan and will cover
certain unpaid interest on the amount of any principal reduction from the date
of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the prospectus supplement for all loans in the trust fund for the
related series. The amount will be reduced by payments made under the bankruptcy
bond in respect of the loans, unless otherwise specified in the related
prospectus supplement, and will not be restored.
Reserve Funds
If the prospectus supplement relating to a series of securities so
specifies, the depositor will deposit into one or more reserve funds cash, a
letter or letters of credit, cash collateral accounts, eligible investments, or
other instruments meeting the criteria of the rating agencies in the amount
specified in the prospectus supplement. Each reserve fund will be established by
the trustee as part of the trust fund for that series or for the benefit of the
credit enhancement provider for that series. In the alternative or in addition
to the initial deposit by the depositor, a reserve fund for a series may be
funded over time through application of all or a portion of the excess cash flow
from the primary assets for the series, to the extent described in the related
prospectus supplement. If applicable, the initial amount of the reserve fund and
the reserve fund maintenance requirements for a series of securities will be
described in the related prospectus supplement.
Amounts withdrawn from any reserve fund will be applied by the trustee
to make payments on the securities of the related series, to pay expenses, to
reimburse any credit enhancement provider for the series or for any other
purpose, in the manner and to the extent specified in the related prospectus
supplement.
Amounts deposited into a reserve fund will be invested by the trustee
in eligible investments maturing no later than the day specified in the related
prospectus supplement.
Cross-Collateralization
If specified in the related prospectus supplement, the beneficial
ownership of separate groups of assets included in a trust fund may be evidenced
by separate classes of the related series of securities. In that case, credit
support may be provided by a cross-collateralization feature which requires that
distributions be made with respect to securities evidencing a beneficial
ownership interest in, or secured by, one or more asset groups within the same
trust fund prior to distributions to subordinated securities evidencing a
beneficial ownership interest in, or secured by, one or more other asset groups
within that trust fund. Cross-collateralization may be provided by
o the allocation of a portion of excess amounts generated by one or
more asset groups within the same trust fund to one or more other
asset groups within the same trust fund, or
o the allocation of losses with respect to one or more asset groups to
one or more other asset groups within the same trust fund.
Excess amounts will be applied and/or losses will be allocated to the class or
classes of subordinated securities of the related series then outstanding having
the lowest rating assigned by any rating agency or the lowest payment priority,
in each case to the extent and in the manner more specifically described in the
related prospectus supplement. The prospectus supplement for a series which
includes a cross-collateralization feature will describe the manner and
conditions for applying the cross-collateralization feature.
If specified in the related prospectus supplement, the coverage
provided by one or more forms of credit support described in this prospectus may
apply concurrently to two or more related trust funds. If applicable, the
related prospectus supplement will identify the trust funds to which credit
support relates and the manner of determining the amount of coverage the credit
support provides to the identified trust funds.
Minimum Principal Payment Agreement
If provided in the prospectus supplement relating to a series of
securities, the depositor will enter into a minimum principal payment agreement
with an entity meeting the criteria of the rating agencies named in the
prospectus supplement under which the entity will provide certain payments on
the securities of the series in the event that aggregate scheduled principal
payments and/or prepayments on the primary assets for the series are not
sufficient to make payments on the securities of the series as provided in the
prospectus supplement.
Deposit Agreement
If specified in a prospectus supplement, the depositor and the trustee
for a series of securities will enter into a deposit agreement with the entity
specified in the prospectus supplement on or before the sale of the related
series of securities. The deposit agreement is intended to accumulate available
cash for investment so that the cash, together with income thereon, can be
applied to future distributions on one or more classes of securities. The
related prospectus supplement will describe the terms of any deposit agreement.
Financial Instruments
If provided in the related prospectus supplement, the trust fund may
include one or more financial instruments that are intended to meet the
following goals:
o to convert the payments on some or all of the loans and Private
Label Securities from fixed to floating payments, or from floating
to fixed, or from floating based on a particular index to floating
based on another index;
o to provide payments if any index rises above or falls below
specified levels; or
o to provide protection against interest rate changes, certain types
of losses or other payment shortfalls to one or more classes of the
related series.
If a trust fund includes financial instruments of this type, the instruments may
be structured to be exempt from the registration requirements of the Securities
Act of 1933, as amended.
The related prospectus supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
Servicing of Loans
General
Under the pooling and servicing agreement or the servicing agreement
for a series of securities, the servicer will provide customary servicing
functions with respect to the loans comprising the primary assets of the related
trust fund.
Collection Procedures; Escrow Accounts
The servicer will make reasonable efforts to collect all payments
required to be made under the loans and will, consistent with the terms of the
related governing agreement for a series and any applicable credit enhancement,
follow such collection procedures as it follows with respect to comparable loans
held in its own portfolio. Consistent with the above, the servicer has the
discretion to
o waive any assumption fee, late payment charge, or other charge in
connection with a loan, and
o to the extent provided in the related agreement, arrange with a
borrower a schedule for the liquidation of delinquencies by
extending the due dates for scheduled payments on the loan.
If the related prospectus supplement so provides, the servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
with respect to loans in which borrower payments for taxes, assessments,
mortgage and hazard insurance policy premiums and other comparable items will be
deposited. In the case of loans that do not require such payments under the
related loan documents, the servicer will not be required to establish any
escrow or impound account for those loans. The servicer will make withdrawals
from the escrow accounts to effect timely payment of taxes, assessments and
mortgage and hazard insurance, to refund to borrowers amounts determined to be
overages, to pay interest to borrowers on balances in the escrow accounts to the
extent required by law, to repair or otherwise protect the related property and
to clear and terminate the escrow accounts. The servicer will be responsible for
the administration of the escrow accounts and generally will make advances to
the escrow accounts when a deficiency exists.
Deposits to and Withdrawals from the Collection Account
Unless the related prospectus supplement specifies otherwise, the
trustee or the servicer will establish a separate collection account in the name
of the trustee. Unless the related prospectus supplement provides otherwise, the
collection account will be
o an account maintained at a depository institution, the long-term
unsecured debt obligations of which at the time of any deposit are
rated by each rating agency named in the prospectus supplement at
levels satisfactory to the rating agency; or
o an account the deposits in which are insured to the maximum extent
available by the Federal Deposit Insurance Corporation or an account
secured in a manner meeting requirements established by each rating
agency named in the prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the
funds held in the collection account may be invested in eligible investments. If
so specified in the related prospectus supplement, the servicer will be entitled
to receive as additional compensation any interest or other income earned on
funds in the collection account.
Unless otherwise specified in the related prospectus supplement, the
servicer, the depositor, the trustee or the seller, as appropriate, will deposit
into the collection account for each series, on the business day following the
closing date, all scheduled payments of principal and interest on the primary
assets due after the related cut-off date but received by the servicer on or
before the closing date, and thereafter, within two business days after the date
of receipt thereof, the following payments and collections received or made by
the servicer (other than, unless otherwise provided in the related prospectus
supplement, in respect of principal of and interest on the related primary
assets due on or before the cut-off date):
o all payments in respect of principal, including prepayments, on the
primary assets;
o all payments in respect of interest on the primary assets after
deducting, at the discretion of the servicer (but only to the extent
of the amount permitted to be withdrawn or withheld from the
collection account in accordance with the related agreement),
related servicing fees payable to the servicer;
o all Liquidation Proceeds after deducting, at the discretion of the
servicer (but only to the extent of the amount permitted to be
withdrawn from the collection account in accordance with the related
agreement), the servicing fee, if any, in respect of the related
primary asset;
o all Insurance Proceeds;
o all amounts required to be deposited into the collection account
from any reserve fund for the series pursuant to the related
agreement;
o all advances of cash made by the servicer in respect of delinquent
scheduled payments on a loan and for any other purpose as required
pursuant to the related agreement; and
o all repurchase prices of any primary assets repurchased by the
depositor, the servicer or the seller pursuant to the related
agreement.
Unless otherwise specified in the related prospectus supplement, the
servicer is permitted, from time to time, to make withdrawals from the
collection account for each series for the following purposes:
o to reimburse itself for advances that it made in connection with
that series under the related agreement; provided that the
servicer's right to reimburse itself is limited to amounts received
on or in respect of particular loans (including, for this purpose,
Liquidation Proceeds and proceeds of insurance policies covering the
related loans and Mortgaged Properties ("Insurance Proceeds")) that
represent late recoveries of scheduled payments with respect to
which the Advance was made;
o to the extent provided in the related agreement, to reimburse itself
for any advances that it made in connection with the series which
the servicer determines in good faith to be nonrecoverable from
amounts representing late recoveries of scheduled payments
respecting which the advance was made or from Liquidation Proceeds
or Insurance Proceeds;
o to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection
with the restoration of damaged property and, in the event deposited
into the collection account and not previously withheld, and to the
extent that Liquidation Proceeds after such reimbursement exceed the
principal balance of the related loan, together with accrued and
unpaid interest thereon to the due date for the loan next succeeding
the date of its receipt of the Liquidation Proceeds, to pay to
itself out of the excess the amount of any unpaid servicing fee and
any assumption fees, late payment charges, or other charges on the
related loan;
o in the event the servicer has elected not to pay itself the
servicing fee out of the interest component of any scheduled
payment, late payment or other recovery with respect to a particular
loan prior to the deposit of the scheduled payment, late payment or
recovery into the collection account, to pay to itself the servicing
fee, as adjusted pursuant to the related agreement, from any
scheduled payment, late payment or other recovery to the extent
permitted by the related agreement;
o to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related agreement;
o to pay to the applicable person with respect to each primary asset
or related real property that has been repurchased or removed from
the trust fund by the depositor, the servicer or the seller pursuant
to the related agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
o to make payments to the trustee of the series for deposit into the
related distribution account or for remittance to the holders of the
series in the amounts and in the manner provided for in the related
agreement; and
o to clear and terminate the collection account pursuant to the
related agreement.
In addition, if the servicer deposits into the collection account for a
series any amount not required to be deposited therein, the servicer may, at any
time, withdraw the amount from the collection account.
Advances and Limitations on Advances
The related prospectus supplement will describe the circumstances, if
any, under which the servicer will make advances with respect to delinquent
payments on loans. If specified in the related prospectus supplement, the
servicer will be obligated to make advances. Its obligation to make advances may
be limited in amount, or may not be activated until a certain portion of a
specified reserve fund is depleted. Advances are intended to provide liquidity
and, except to the extent specified in the related prospectus supplement, not to
guarantee or insure against losses. Accordingly, any funds advanced are
recoverable by the servicer out of amounts received on particular loans that
represent late recoveries of scheduled payments, Insurance Proceeds or
Liquidation Proceeds respecting which an advance was made. If an advance is made
and subsequently determined to be nonrecoverable from late collections,
Insurance Proceeds or Liquidation Proceeds from the related loan, the servicer
may be entitled to reimbursement from other funds in the collection account or
distribution account(s), as the case may be, or from a specified reserve fund,
as applicable, to the extent specified in the related prospectus supplement.
Maintenance of Insurance Policies and Other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. Except as otherwise
specified in the related prospectus supplement, the servicer will be required to
maintain (or to cause the borrower under each loan to maintain) a standard
hazard insurance policy providing the standard form of fire insurance coverage
with extended coverage for certain other hazards as is customary in the state in
which the related property is located. The standard hazard insurance policies
will provide for coverage at least equal to the applicable state standard form
of fire insurance policy with extended coverage for property of the type
securing the related loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to, or destruction of, the related
property caused by fire, lightning, explosion, smoke, windstorm, hail, riot,
strike and civil commotion, subject to the conditions and exclusions in each
policy. Because the standard hazard insurance policies relating to the loans
will be underwritten by different hazard insurers and will cover properties
located in various states, the policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of credit enhancement will adversely affect distributions to
holders. When a property securing a loan is located in a flood area identified
by HUD pursuant to the Flood Disaster Protection Act of 1973, as amended, the
servicer will be required to cause flood insurance to be maintained with respect
to the property, to the extent available.
The standard hazard insurance policies covering properties typically
will contain a "coinsurance" clause, which in effect will require that the
insured at all times carry hazard insurance of a specified percentage (generally
80% to 90%) of the full replacement value of the property, including any
improvements on the property, in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, the
coinsurance clause will provide that the hazard insurer's liability in the event
of partial loss will not exceed the greater of
o the actual cash value (i.e., replacement cost less physical
depreciation) of the property, including the improvements, if any,
damaged or destroyed, and
o such proportion of the loss, without deduction for depreciation, as
the amount of insurance carried bears to the specified percentage of
the full replacement cost of the property and improvements.
Since the amount of hazard insurance to be maintained on the improvements
securing the loans declines as their principal balances decrease, and since the
value of the properties will fluctuate over time, the effect of this requirement
in the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damage to the affected property.
Unless otherwise specified in the related prospectus supplement,
coverage will be in an amount at least equal to the greater of
o the amount necessary to avoid the enforcement of any co-insurance
clause contained in the policy, and
o the outstanding principal balance of the related loan.
Unless otherwise specified in the related prospectus supplement, the servicer
will also maintain on REO property a standard hazard insurance policy in an
amount that is at least equal to the maximum insurable value of the REO
property. No earthquake or other additional insurance will be required of any
borrower or will be maintained on REO property other than pursuant to such
applicable laws and regulations as shall at any time be in force and shall
require the additional insurance.
Any amounts collected by the servicer under insurance policies (other
than amounts to be applied to the restoration or repair of the property,
released to the borrower in accordance with normal servicing procedures or used
to reimburse the servicer for amounts to which it is entitled to reimbursement)
will be deposited into the collection account. In the event that the servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the loans, written by an insurer then acceptable to each rating agency named in
the prospectus supplement, it will conclusively be deemed to have satisfied its
obligations to cause to be maintained a standard hazard insurance policy for
each loan or related REO property. This blanket policy may contain a deductible
clause, in which case the servicer will be required, in the event that there has
been a loss that would have been covered by the policy absent the deductible
clause, to deposit into the collection account the amount not otherwise payable
under the blanket policy because of the application of the deductible clause.
Realization upon Defaulted Loans
The servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the properties
securing the related loans that come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In this connection, the servicer will follow such practices and
procedures as it deems necessary or advisable and as are normal and usual in its
servicing activities with respect to comparable loans that it services. However,
the servicer will not be required to expend its own funds in connection with any
foreclosure or towards the restoration of the property unless it determines that
o the restoration or foreclosure will increase the Liquidation
Proceeds of the related loan available to the holders after
reimbursement to itself for its expenses, and
o its expenses will be recoverable either through Liquidation Proceeds
or Insurance Proceeds.
However, in the case of a trust fund for which a REMIC election has been made,
the servicer will be required to liquidate any REO property by the end of the
third calendar year after the trust fund acquires beneficial ownership of the
REO property. While the holder of an REO property can often maximize its
recovery by providing financing to a new purchaser, the trust fund will have no
ability to do so and neither the servicer nor the depositor will be required to
do so.
The servicer may arrange with the borrower on a defaulted loan a change
in the terms of the loan to the extent provided in the related prospectus
supplement. This type of modification may only be entered into if it meets the
underwriting policies and procedures employed by the servicer in servicing
receivables for its own account and meets the other conditions set forth in the
related prospectus supplement.
Enforcement of Due-on-Sale Clauses
Unless otherwise specified in the related prospectus supplement for a
series, when any property is about to be conveyed by the borrower, the servicer
will, to the extent it has knowledge of the prospective conveyance and prior to
the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the related loan under any applicable "due-on-sale"
clause, unless it reasonably believes that the clause is not enforceable under
applicable law or if enforcement of the clause would result in loss of coverage
under any primary mortgage insurance policy. In that event, the servicer is
authorized to accept from or enter into an assumption agreement with the person
to whom the property has been or is about to be conveyed. Under the assumption,
the transferee of the property becomes liable under the loan and the original
borrower is released from liability and the transferee is substituted as the
borrower and becomes liable under the loan. Any fee collected in connection with
an assumption will be retained by the servicer as additional servicing
compensation. The terms of a loan may not be changed in connection with an
assumption.
Servicing Compensation and Payment of Expenses
Except as otherwise provided in the related prospectus supplement, the
servicer will be entitled to a periodic servicing fee in an amount to be
determined as specified in the related prospectus supplement. The servicing fee
may be fixed or variable, as specified in the related prospectus supplement. In
addition, unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to additional servicing compensation in the form of
assumption fees, late payment charges and similar items, and excess proceeds
following disposition of property in connection with defaulted loans.
Unless otherwise specified in the related prospectus supplement, the
servicer will pay certain expenses incurred in connection with the servicing of
the loans, including, without limitation, the payment of the fees and expenses
of each trustee and independent accountants, payment of security policy and
insurance policy premiums, if applicable, and the cost of any credit
enhancement, and payment of expenses incurred in preparation of reports to
holders.
When a borrower makes a principal prepayment in full between due dates
on the related loan, the borrower generally will be required to pay interest on
the amount prepaid only to the date of prepayment. If and to the extent provided
in the related prospectus supplement, in order that one or more classes of the
securities of a series will not be adversely affected by any resulting shortfall
in interest, the amount of the servicing fee may be reduced to the extent
necessary to include in the servicer's remittance to the applicable trustee for
deposit into the related distribution account an amount equal to one month's
interest on the related loan (less the servicing fee). If the total amount of
these shortfalls in a month exceeds the servicing fee for that month, a
shortfall to holders may occur.
Unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to reimbursement for certain expenses that it incurs
in connection with the liquidation of defaulted loans. The related holders will
suffer no loss by reason of the servicer's expenses to the extent the expenses
are covered under related insurance policies or from excess Liquidation
Proceeds. If claims are either not made or paid under the applicable insurance
policies or if coverage under the policies has been exhausted, the related
holders will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the servicer's expenses, are less than the principal balance of
and unpaid interest on the related loan that would be distributable to holders.
In addition, the servicer will be entitled to reimbursement of its expenses in
connection with the restoration of REO property This right of reimbursement is
prior to the rights of the holders to receive any related Insurance Proceeds,
Liquidation Proceeds or amounts derived from other credit enhancement. The
servicer generally is also entitled to reimbursement from the collection account
for advances.
Unless otherwise specified in the related prospectus supplement, the
rights of the servicer to receive funds from the collection account for a
series, whether as the servicing fee or other compensation, or for the
reimbursement of advances, expenses or otherwise, are not subordinate to the
rights of holders of securities of the series.
Evidence as to Compliance
If so specified in the related prospectus supplement, the applicable
governing agreement will provide that, each year, a firm of independent public
accountants will furnish a statement to the trustee to the effect that the firm
has examined certain documents and records relating to the servicing of the
loans by the servicer and that, on the basis of the examination, the firm is of
the opinion that the servicing has been conducted in compliance with the
agreement, except for such exceptions as the firm believes to be immaterial and
any other exceptions set forth in the statement.
If so specified in the related prospectus supplement, the applicable
agreement will also provide for delivery to the trustee of an annual statement
signed by an officer of the servicer to the effect that the servicer has
fulfilled its obligations under the agreement throughout the preceding calendar
year.
Certain Matters Regarding the Servicer
The servicer for each series will be identified in the related
prospectus supplement. The servicer may be an affiliate of the depositor and may
have other business relationships with the depositor and its affiliates.
If an event of default occurs under either a servicing agreement or a
pooling and servicing agreement, the servicer may be replaced by the trustee or
a successor servicer. Unless otherwise specified in the related prospectus
supplement, the events of default and the rights of a trustee upon a default
under the agreement for the related series will be substantially similar to
those described under "The Agreements--Events of Default; Rights upon Event of
Default--Pooling and Servicing Agreement; Servicing Agreement" in this
prospectus.
Unless otherwise specified in the prospectus supplement, the servicer
does not have the right to assign its rights and delegate its duties and
obligations under the related agreement unless the successor servicer accepting
such assignment or delegation
o services similar loans in the ordinary course of its business;
o is reasonably satisfactory to the trustee;
o has a net worth of not less than the amount specified in the
prospectus supplement;
o would not cause the rating of the related securities by a rating
agency named in the prospectus supplement, as such rating is in
effect immediately prior to the assignment, sale or transfer, to be
qualified, downgraded or withdrawn as a result of the assignment,
sale or transfer; and
o executes and delivers to the trustee an agreement, in form and
substance reasonably satisfactory to the trustee, that contains an
assumption by the successor servicer of the due and punctual
performance and observance of each covenant and condition required
to be performed or observed by the servicer under the agreement from
and after the date of the agreement.
No assignment will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the related
agreement. To the extent that the servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, the subsidiary or affiliate need not
satisfy the criteria set forth above. In this instance, however, the assigning
servicer will remain liable for the servicing obligations under the agreement.
Any entity into which the servicer is merged or consolidated or any successor
corporation resulting from any merger, conversion or consolidation will succeed
to the servicer's obligations under the agreement provided that the successor or
surviving entity meets the requirements for a successor servicer set forth
above.
Except to the extent otherwise provided, each agreement will provide
that neither the servicer nor any director, officer, employee or agent of the
servicer will be under any liability to the related trust fund, the depositor or
the holders for any action taken or for failing to take any action in good faith
pursuant to the related agreement, or for errors in judgment. However, neither
the servicer nor any such person will be protected against any breach of
warranty or representations made under the agreement, or the failure to perform
its obligations in compliance with any standard of care set forth in the
agreement, or liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of their duties or by
reason of reckless disregard of their obligations and duties under the
agreement. Each agreement will further provide that the servicer and any
director, officer, employee or agent of the servicer is entitled to
indemnification from the related trust fund and will be held harmless against
any loss, liability or expense incurred in connection with any legal action
relating to the agreement or the securities, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence in
the performance of duties under the agreement or by reason of reckless disregard
of those obligations and duties. In addition, the agreement will provide that
the servicer is not under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its servicing responsibilities under the
agreement that, in its opinion, may involve it in any expense or liability. The
servicer may, in its discretion, undertake any such action that it may deem
necessary or desirable with respect to the agreement and the rights and duties
of the parties thereto and the interests of the holders thereunder. In that
event, the legal expenses and costs of the action and any resulting liability
may be expenses, costs, and liabilities of the trust fund and the servicer may
be entitled to be reimbursed therefor out of the collection account.
The Agreements
The following summaries describe the material provisions of the pooling
and servicing agreement or trust agreement, in the case of a series of
certificates, and the indenture and servicing agreement, in the case of a series
of notes. The summaries do not purport to be complete and are subject to, and
qualified in their entirety by reference to, the provisions of the agreements
applicable to the particular series of securities. Where particular provisions
or terms used in the agreements are referred to, the provisions or terms are as
specified in the agreements.
Assignment of Primary Assets
General. At the time of issuance of the securities of a series, the
depositor will transfer, convey and assign to the related trust fund all right,
title and interest of the depositor in the primary assets and other property to
be transferred to the trust fund. This assignment will include all principal and
interest due on or with respect to the primary assets after the cut-off date
(except for any retained interests). The trustee will, concurrently with the
assignment, execute and deliver the securities.
Assignment of Mortgage Loans. Unless otherwise specified in the related
prospectus supplement, the depositor will deliver to the trustee (or, if
specified in the prospectus supplement, a custodian on behalf of the trustee),
as to each Residential Loan and Home Equity Loan, the related note endorsed
without recourse to the order of the trustee or in blank, the original mortgage,
deed of trust or other security instrument with evidence of recording indicated
thereon (except for any mortgage not returned from the public recording office,
in which case a copy of the mortgage will be delivered, together with a
certificate that the original of the mortgage was delivered to such recording
office), and an assignment of the mortgage in recordable form. The trustee or,
if so specified in the related prospectus supplement, the custodian will hold
these documents in trust for the benefit of the holders.
If so specified in the related prospectus supplement, at the time of
issuance of the securities, the depositor will cause assignments to the trustee
of the mortgages relating to the loans to be recorded in the appropriate public
office for real property records, except in states where, in the opinion of
counsel acceptable to the trustee, recording is not required to protect the
trustee's interest in the related loans. If specified in the prospectus
supplement, the depositor will cause the assignments to be recorded within the
time after issuance of the securities as is specified in the related prospectus
supplement. In this event, the prospectus supplement will specify whether the
agreement requires the depositor to repurchase from the trustee any loan the
related mortgage of which is not recorded within that time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the prospectus supplement, the
enforcement of the repurchase obligation would constitute the sole remedy
available to the holders or the trustee for the failure of a mortgage to be
recorded.
Assignment of Home Improvement Contracts. Unless otherwise specified in
the related prospectus supplement, the depositor will deliver to the trustee or
the custodian each original Home Improvement Contract and copies of related
documents and instruments and, except in the case of unsecured Home Improvement
Contracts, the security interest in the related home improvements. In order to
give notice of the right, title and interest of holders to the Home Improvement
Contracts, the depositor will cause a UCC-1 financing statement to be executed
by the depositor or the seller identifying the trustee as the secured party and
identifying all Home Improvement Contracts as collateral. Unless otherwise
specified in the related prospectus supplement, the Home Improvement Contracts
will not be stamped or otherwise marked to reflect their assignment to the trust
fund. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Home Improvement
Contracts without notice of the assignment, the interest of holders in the Home
Improvement Contracts could be defeated. See "Material Legal Aspects of the
Loans--The Home Improvement Contracts" in this prospectus.
Assignment of Manufactured Housing Contracts. If specified in the
related prospectus supplement, the depositor or the seller will deliver to the
trustee the original contract as to each Manufactured Housing Contract and
copies of documents and instruments related to each contract and, other than in
the case of unsecured contracts, the security interest in the property securing
that contract. In order to give notice of the right, title and interest of
securityholders to the contracts, if specified in the related prospectus
supplement, the depositor or the seller will cause a UCC-1 financing statement
to be executed by the depositor or the seller identifying the trustee as the
secured party and identifying all contracts as collateral. If so specified in
the related prospectus supplement, the contracts will not be stamped or
otherwise marked to reflect their assignment to the trustee. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of the assignment, the
interest of securityholders in the contracts could be defeated. See "Material
Legal Aspects of the Loans -- The Contracts."
Loan Schedule. Each loan will be identified in a schedule appearing as
an exhibit to the related and will specify with respect to each loan:
o the original principal amount,
o its unpaid principal balance as of the cut-off date,
o the current interest rate,
o the current scheduled payment of principal and interest,
o the maturity date, if any, of the related note, and
o if the loan is an adjustable rate loan, the lifetime rate cap, if
any, and the current index.
Assignment of Agency and Private Label Securities. The depositor will
cause the Agency and Private Label Securities to be registered in the name of
the trustee (or its nominee or correspondent). The trustee (or its nominee or
correspondent) will take possession of any certificated Agency or Private Label
Securities. Unless otherwise specified in the related prospectus supplement, the
trustee will not be in possession of, or be assignee of record of, any loans
underlying the Agency or Private Label Securities. See "The Trust Funds--Private
Label Securities" in this prospectus. Each Agency and Private Label Security
will be identified in a schedule appearing as an exhibit to the related
agreement, which will specify the original principal amount, principal balance
as of the cut-off date, annual pass-through rate or interest rate and maturity
date for each Agency and Private Label Security conveyed to the related trust
fund. In the agreement, the depositor will represent and warrant to the trustee
that:
o the information contained in the Agency or Private Label Securities
schedule is true and correct in all material respects,
o immediately prior to the conveyance of the Agency or Private Label
Securities, the depositor had good title and was the sole owner of
the Agency or Private Label Securities (subject to any retained
interest),
o there has been no other sale of the Agency or Private Label
Securities, and
o there is no existing lien, charge, security interest or other
encumbrance on the Agency or Private Label Securities (other than
any retained interest).
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related prospectus supplement, if any document in the
file relating to the primary assets delivered by the depositor to the trustee
(or custodian) is found by the trustee, within 90 days of the execution of the
related agreement (or promptly after the trustee's receipt of any document
permitted to be delivered after the closing date), to be defective in any
material respect and the depositor or seller does not cure such defect within 90
days (or within any other period specified in the related prospectus supplement)
the depositor or seller will, not later than 90 days (or within such any period
specified in the related prospectus supplement), after the trustee's notice to
the depositor or the seller, as the case may be, of the defect, repurchase from
the trustee the related primary asset or any property acquired in respect of the
asset. Unless otherwise specified in the related prospectus supplement, the
repurchase shall be effected at a price equal to the sum of:
o the lesser of
o the principal balance of the primary asset, and
o the trust fund's federal income tax basis in the
primary asset;
plus
o accrued and unpaid interest to the date of the next scheduled
payment on the primary asset at the rate set forth in the related
agreement.
However, the purchase price shall not be limited to the trust fund's federal
income tax basis in the asset, if the repurchase at a price equal to the
principal balance of the repurchased primary asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related prospectus supplement, the depositor or
seller, as the case may be, may, rather than repurchase the primary asset as
described above, remove the non-conforming primary asset from the trust fund and
substitute in its place one or more other qualifying substitute primary assets.
If no REMIC election is made with respect to the trust fund, the substitution
must be effected within 120 days of the date of initial issuance of the
securities. If a REMIC election is made with respect to the trust fund the
trustee must have received after a specified time period a satisfactory opinion
of counsel that the substitution will not cause the trust fund to lose its
status as a REMIC or otherwise subject the trust fund to a prohibited
transaction tax.
Unless otherwise specified in the related prospectus supplement, any
qualifying substitute primary asset will, on the date of substitution, meet the
following criteria:
o it has a principal balance, after deduction of all scheduled
payments due in the month of substitution, not in excess of the
principal balance of the deleted primary asset (the amount of any
shortfall to be deposited to the collection account in the month of
substitution for distribution to holders),
o it has an interest rate not less than (and not more than 2% greater
than) the interest rate of the deleted primary asset,
o it has a remaining term-to-stated maturity not greater than (and not
more than two years less than) that of the deleted primary asset;
and
o it complies with all of the representations and warranties set forth
in the applicable agreement as of the date of substitution.
Unless otherwise provided in the related prospectus supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the holders or the trustee for a material defect in the
documentation for a primary asset.
The depositor or another entity will make representations and
warranties with respect to primary assets for each series. If the depositor or
the other entity cannot cure a breach of any such representations and warranties
in all material respects within the time period specified in the related
prospectus supplement after notification by the trustee of such breach, and if
the breach is of a nature that materially and adversely affects the value of the
primary asset, the depositor or the other entity will be obligated to repurchase
the affected primary asset or, if provided in the prospectus supplement, provide
a qualifying substitute primary asset, subject to the same conditions and
limitations on purchases and substitutions as described above.
The depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or seller of the non-conforming primary
assets. See "Risk Factors--Only the assets of the related trust fund are
available to pay your certificates" in this prospectus.
No holder of securities of a series, solely by virtue of the holder's
status as a holder, will have any right under the applicable agreement to
institute any proceeding with respect to agreement, unless holder previously has
given to the trustee for the series written notice of default and unless the
holders of securities evidencing not less than 51% of the aggregate voting
rights of the securities of the series have made written request upon the
trustee to institute the proceeding in its own name as trustee thereunder and
have offered to the trustee reasonable indemnity, and the trustee for 60 days
has neglected or refused to institute the proceeding.
Reports to Holders
The applicable trustee or other entity specified in the related
prospectus supplement will prepare and forward to each holder on each
distribution date, or as soon thereafter as is practicable, a statement setting
forth, to the extent applicable to any series, among other things:
o the amount of principal distributed to holders of the related
securities and the outstanding principal balance of the securities
following the distribution;
o the amount of interest distributed to holders of the related
securities and the current interest on the securities;
o the amount of any overdue accrued interest included in such
distribution, any remaining overdue accrued interest with respect to
the securities, or any current shortfall in amounts to be
distributed as accrued interest to holders of the securities;
o the amount of any overdue payments of scheduled principal included
in the distribution, any remaining overdue principal amounts with
respect to the securities, any current shortfall in receipt of
scheduled principal payments on the related primary assets, or any
realized losses or Liquidation Proceeds to be allocated as
reductions in the outstanding principal balances of the securities;
o the amount received under any related credit enhancement, and the
remaining amount available under the credit enhancement;
o the amount of any delinquencies with respect to payments on the
related primary assets;
o the book value of any REO property acquired by the related trust
fund; and
o other information specified in the related agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the applicable trustee, unless otherwise specified in the related
prospectus supplement, will furnish to each holder of record at any time during
the calendar year:
o the total of the amounts reported pursuant to clauses under the
first and second bullets above and under the last clause of the
fourth bullet above for the calendar year, and
o the information specified in the related agreement to enable holders
to prepare their tax returns including, without limitation, the
amount of any original issue discount accrued on the securities.
Information in the distribution date statements and annual statements
provided to the holders will not have been examined and reported upon by an
independent public accountant. However, the servicer will provide to the trustee
a report by independent public accountants with respect to its servicing of the
loans. See "Servicing of Loans--Evidence as to Compliance" in this prospectus.
If so specified in the prospectus supplement, the related series of
securities (or one or more classes of the series) will be issued in book-entry
form. In that event, owners of beneficial interests in those securities will not
be considered holders and will not receive such reports directly from the
trustee. The trustee will forward reports only to the entity or its nominee that
is the registered holder of the global certificate that evidences the book-entry
securities. Beneficial owners will receive reports from the participants and
indirect participants of the applicable book-entry system in accordance with the
policies and procedures of the participants and indirect participants.
Events of Default; Rights upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related prospectus supplement, "events of default" under the
pooling and servicing agreement for each series of certificates include:
o any failure by the servicer to deposit amounts in the collection
account and distribution account(s) to enable the trustee to
distribute to holders of securities of the series any required
payment, provided that this failure continues unremedied for the
number of days specified in the related prospectus supplement after
the giving of written notice to the servicer by the trustee, or to
the servicer and the trustee by holders having not less than 25% of
the total voting rights of the series;
o any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
agreement provided that this failure continues unremedied for the
number of days specified in the related prospectus supplement after
the giving of written to the servicer by the trustee, or to the
servicer and the trustee by the holders having not less than 25% of
the total voting rights of the of the series; and
o certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by
the servicer indicating its insolvency, reorganization or inability
to pay its obligations.
So long as an event of default remains unremedied under the applicable
agreement for a series of securities relating to the servicing of loans, unless
otherwise specified in the related prospectus supplement, the trustee or holders
of securities of the series having not less than 51% of the total voting rights
of the series may terminate all of the rights and obligations of the servicer as
servicer under the applicable agreement (other than its right to recovery of
other expenses and amounts advanced pursuant to the terms of the agreement,
which rights the servicer will retain under all circumstances), whereupon the
trustee will succeed to all the responsibilities, duties and liabilities of the
servicer under the agreement and will be entitled to reasonable servicing
compensation not to exceed the applicable servicing fee, together with other
servicing compensation in the form of assumption fees, late payment charges or
otherwise as provided in the agreement.
In the event that the trustee is unwilling or unable so to act, it may
select (or petition a court of competent jurisdiction to appoint) a finance
institution, bank or loan servicing institution with a net worth specified in
the related prospectus supplement to act as successor servicer under the
provisions of the agreement. The successor servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the servicing fee
as set forth in the related prospectus supplement, together with other servicing
compensation in the form of assumption fees, late payment charges or otherwise,
as provided in the agreement.
During the continuance of any event of default of a servicer under an
agreement for a series of securities, the trustee will have the right to take
action to enforce its rights and remedies and to protect and enforce the rights
and remedies of the holders of securities of the series, and, unless otherwise
specified in the related prospectus supplement, holders of securities having not
less than 51% of the total voting rights of the series may direct the time,
method and place of conducting any proceeding for any remedy available to the
trustee or exercising any trust or power conferred upon the trustee. However,
the trustee will not be under any obligation to pursue any such remedy or to
exercise any of such trusts or powers unless the holders have offered the
trustee reasonable security or indemnity against the cost, expenses and
liabilities that may be incurred by the trustee as a result. The trustee may
decline to follow any such direction if it determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the non-assenting holders.
Indenture. Unless otherwise specified in the related prospectus
supplement, "events of default" under the indenture for each series of notes
include:
o a default for thirty (30) days or more in the payment of any
principal of or interest on any note of the series;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture, provided that the failure continues for a
period of sixty (60) days after notice is given in accordance with
the procedures described in the related prospectus supplement;
o any representation or warranty made by the depositor or the trust
fund in the indenture or in any certificate or other writing
delivered pursuant to it or in connection with it with respect to or
affecting such series having been incorrect in a material respect as
of the time made, provided that the breach is not cured within sixty
(60) days after notice is given in accordance with the procedures
described in the related prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the depositor or the trust fund; and
o any other event of default specified with respect to notes of that
series.
If an event of default with respect to the then-outstanding notes of
any series occurs and is continuing, either the indenture trustee or the holders
of a majority of the total amount of those notes may declare the principal
amount of all the notes of the series (or, if the notes of that series are zero
coupon securities, such portion of the principal amount as may be specified in
the related prospectus supplement) to be due and payable immediately. Under
certain circumstances of this type the declaration may be rescinded and annulled
by the holders of a majority of the total amount of those notes.
If, following an event of default with respect to any series of notes,
the related notes have been declared to be due and payable, the indenture
trustee may, in its discretion, and notwithstanding such acceleration, elect to
maintain possession of the collateral securing the notes and to continue to
apply distributions on the collateral as if there had been no declaration of
acceleration, provided that the collateral continues to provide sufficient funds
for the payment of principal of and interest on the notes as they would have
become due if there had not been a declaration. In addition, the indenture
trustee may not sell or otherwise liquidate the collateral securing the notes of
a series following an event of default (other than a default in the payment of
any principal of or interest on any note of the series for thirty (30) days or
more), unless:
o the holders of 100% of the total amount of the then-outstanding notes
of the series consent to the sale; or
o the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest due and unpaid on the
outstanding notes of the series at the date of sale; or
o the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes as
such payments would have become due if the notes had not been
declared due and payable, and the indenture trustee obtains the
consent of the holders of 66 2/3% of the total amount of the
then-outstanding notes of the series.
In the event that the indenture trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days or
more in the payment of principal of or interest on the notes of a series, the
indenture provides that the indenture trustee will have a prior lien on the
proceeds of any liquidation for its unpaid fees and expenses. As a result, upon
the occurrence of an event of default of this type, the amount available for
distribution to the noteholders may be less than would otherwise be the case.
However, the indenture trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the indenture for the benefit of the noteholders
after the occurrence of the event of default.
Unless otherwise specified in the related prospectus supplement, in the
event that the principal of the notes of a series is declared due and payable as
described above, holders of the notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
of those notes less the amount of the discount that remains unamortized.
Subject to the provisions of the indenture relating to the duties of
the indenture trustee, in case an event of default shall occur and be continuing
with respect to a series of notes, the indenture trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request or direction of any of the holders of notes of the series, unless the
holders offer security or indemnity satisfactory to the indenture trustee
against the costs, expenses and liabilities it might incur in complying with
their request or direction. Subject to the provisions for indemnification and
certain limitations contained in the indenture, the holders of a majority of
amount of the then-outstanding notes of the series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the indenture trustee or exercising any trust or power conferred on
the indenture trustee with respect to those notes, and the holders of a majority
of the amount of the amount of the then- outstanding notes of the series may, in
certain cases, waive any default with respect to the notes, except a default in
the payment of principal or interest or a default in respect of a covenant or
provision of the indenture that cannot be modified without the waiver or consent
of all affected holders of the outstanding notes.
The Trustees
The identity of the commercial bank, savings and loan association or
trust company named as the trustee or indenture trustee, as the case may be, for
each series of securities will be set forth in the related prospectus
supplement. Entities serving as trustee may have normal banking relationships
with the depositor or the servicer. In addition, for the purpose of meeting the
legal requirements of certain local jurisdictions, each trustee will have the
power to appoint co-trustees or separate trustees. In the event of an
appointment, all rights, powers, duties and obligations conferred or imposed
upon the trustee by the related agreement will be conferred or imposed upon that
trustee and each separate trustee or co-trustee jointly, or, in any jurisdiction
in which the trustee shall be incompetent or unqualified to perform certain
acts, singly upon the separate trustee or co-trustee who will exercise and
perform such rights, powers, duties and obligations solely at the direction of
the trustee. The trustee may also appoint agents to perform any of its
responsibilities, which agents will have any or all of the rights, powers,
duties and obligations of the trustee conferred on them by their appointment;
provided, however, that the trustee will continue to be responsible for its
duties and obligations under the agreement.
Duties of Trustees
No trustee will make any representations as to the validity or
sufficiency of the related agreement, the securities or of any primary asset or
related documents. If no event of default (as defined in the related agreement)
has occurred, the applicable trustee will be required to perform only those
duties specifically required of it under the agreement. Upon receipt of the
various certificates, statements, reports or other instruments required to be
furnished to it, the trustee will be required to examine them to determine
whether they are in the form required by the related agreement. However, the
trustee will not be responsible for the accuracy or content of any documents
furnished to it by the holders or the servicer under the agreement.
Each trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that no trustee will be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the related
holders in an event of default. No trustee will be required to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties under the related agreement, or in the exercise of any of its
rights or powers, if it has reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
Resignation of Trustees
Each trustee may, upon written notice to the depositor, resign at any
time, in which event the depositor will be obligated to use its best efforts to
appoint a successor trustee. If no successor trustee has been appointed and has
accepted such appointment within 30 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for appointment of a successor trustee. Each trustee may also be
removed at any time
o if the trustee ceases to be eligible to continue as such under the
related agreement, or
o if the trustee becomes insolvent, or
o the holders of securities having more than over 50% of the total
voting rights of the securities in the trust fund give written
notice to the trustee and to the depositor.
Any resignation or removal of a trustee and appointment of a successor trustee
will not become effective until the successor trustee accepts its appointment.
Amendment of Agreement
Unless otherwise specified in the prospectus supplement, the Agreement
for each series of securities may be amended by the depositor, the servicer
(with respect to a series relating to loans), and the trustee, without notice to
or consent of the holders, for the following purposes:
o to cure any ambiguity,
o to correct any defective provisions or to correct or supplement any
provision in the agreement,
o to add to the duties of the depositor, the applicable trustee or the
servicer,
o to add any other provisions with respect to matters or questions
arising under the agreement or related credit enhancement,
o to add or amend any provisions of the agreement as required by any
rating agency named in the prospectus supplement in order to
maintain or improve the rating of the securities (it being
understood that none of the depositor, the seller, the servicer or
any trustee is obligated to maintain or improve the rating), or
o to comply with any requirements imposed by the Code.
In no event, however, shall any amendment (other than an amendment to comply
with Code requirements) adversely affect in any material respect the interests
of any holders of the series, as evidenced by an opinion of counsel delivered to
the trustee. Unless otherwise specified in the prospectus supplement, an
amendment shall be deemed not to adversely affect in any material respect the
interests of any holder if the trustee receives written confirmation from each
rating agency named in the prospectus supplement that the amendment will not
cause the rating agency to reduce its then-current rating.
Unless otherwise specified in the prospectus supplement, each agreement
for a series may also be amended by the applicable trustee, the servicer, if
applicable, and the depositor with the consent of the holders possessing not
less than 66 2/3% of the total outstanding principal amount of the securities of
the series (or, if only certain classes are affected by the amendment, 66 2/3%
of the total outstanding principal amount of each affected class), for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the agreement, or modifying in any manner the rights of
holders of the series. In no event, however, shall any amendment
o reduce the amount or delay the timing of payments on any security
without the consent of the holder of the security, or
o reduce the percentage of the total outstanding principal amount of
securities of each class, the holders of which are required to
consent to any such amendment, without the consent of the holders of
100% of the total outstanding principal amount of each affected
class.
Voting Rights
The prospectus supplement will set forth the method of determining
allocation of voting rights with respect to the related series of securities.
List of Holders
Upon written request of three or more holders of record of a series for
purposes of communicating with other holders with respect to their rights under
the agreement (which request is accompanied by a copy of the communication such
holders propose to transmit), the trustee will afford them access during
business hours to the most recent list of holders of that series held by the
trustee.
No agreement will provide for the holding of any annual or other
meeting of holders.
Book-Entry Securities
If specified in the related prospectus supplement for a series of
securities, the securities (or one or more of the securities) may be issued in
book-entry form. In that event, beneficial owners of those securities will not
be considered "Holders" under the agreements and may exercise the rights of
holders only indirectly through the participants in the applicable book-entry
system.
REMIC Administrator
For any series with respect to which a REMIC election is made,
preparation of certain reports and certain other administrative duties with
respect to the trust fund may be performed by a REMIC administrator, which may
be an affiliate of the depositor.
Termination
Pooling and Servicing Agreement; Trust Agreement. The obligations
created by the pooling and servicing agreement or trust agreement for a series
will terminate upon the distribution to holders of all amounts distributable to
them under the agreement in the circumstances described in the related
prospectus supplement. See "Description of the Securities--Optional Redemption,
Purchase or Termination" in this prospectus.
Indenture. The indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the notes of that series or, with certain limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
notes of the series.
In addition to such discharge with certain limitations, if so specified
with respect to the notes of any series, the indenture will provide that the
related trust fund will be discharged from any and all obligations in respect of
the notes of that series (except for certain obligations relating to temporary
notes and exchange of notes, registration of the transfer or exchange of those
notes, replacing stolen, lost or mutilated notes, maintaining paying agencies
and holding monies for payment in trust) upon the deposit with the indenture
trustee, in trust, of money and/or direct obligations of or obligations
guaranteed by the United States of America that, through the payment of interest
and principal in accordance with their terms, will provide money in an amount
sufficient to pay the principal of and each installment of interest on the notes
on the final scheduled distribution date for the notes and any installment of
interest on the notes in accordance with the terms of the indenture and the
notes. In the event of any such defeasance and discharge of notes of a series,
holders of notes of that series would be able to look only to such money and/or
direct obligations for payment of principal of and interest on, if any, their
notes until maturity.
Material Legal Aspects of the Loans
The following discussion contains general summaries of material legal
matters mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that are general in nature. Because the
legal matters are determined primarily by applicable state law and because state
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 properties securing the loans may be situated.
Mortgages
The Residential Loans and Home Equity Loans for a series will, and the
Home Improvement Contracts for a series may, be secured by mortgages or deeds of
trust or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to a mortgage loan is located. We refer to
Residential Loans, Home Equity Loans and Home Improvement Contracts that are
secured by mortgages as "mortgage loans." The filing of a mortgage, deed of
trust or deed to secure debt creates a lien or title interest upon the real
property covered by that instrument and represents the security for the
repayment of an obligation that is customarily evidenced by a promissory note.
It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers and may also be subject to
other liens pursuant to the laws of the jurisdiction in which the mortgaged
property is located. Priority with respect to the instruments depends on their
terms, the knowledge of the parties to the mortgage and generally on the order
of recording with the applicable state, county or municipal office. There are
two parties to a mortgage: the mortgagor, who is the borrower/property owner or
the land trustee (as described below), and the mortgagee, who is the lender.
Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or
bond and the mortgage. In the case of a land trust, there are three parties
because title to the property is held by a land trustee under a land trust
agreement of which the borrower/property owner is the beneficiary; at
origination of a mortgage loan, the borrower executes a separate undertaking to
make payments on the mortgage note. A deed of trust transaction normally has
three parties: the trustor, who is the borrower/property owner; the beneficiary,
who is the lender; and the trustee, a third-party grantee. Under a deed of
trust, the trustor grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust generally is accomplished by a
nonjudicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property upon any default by the borrower
under the terms of the note or deed of trust. In certain states, foreclosure
also may be accomplished by judicial action in the manner provided for
foreclosure of mortgages. In some states, the trustee must record a notice of
default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholders. If
the deed of trust is not reinstated within any applicable cure period, a notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest of record in the property. The trustor, borrower
or any person having a junior encumbrance on the real estate may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligation. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorney's fees, which may be recovered by a lender.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised its rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances, a court
of equity may relieve the mortgagor from an entirely technical default where the
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, and sometimes
requires up to several years to complete. Moreover, a non-collusive, regularly
conducted foreclosure sale may be challenged as a fraudulent conveyance,
regardless of the parties' intent, if a court determines that the sale was for
less than fair consideration and the sale occurred while the mortgagor was
insolvent and within one year (or within the state statute of limitations if the
trustee in bankruptcy elects to proceed under state fraudulent conveyance law)
of the filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust,
a public sale is conducted by the referee or other designated officer or by the
trustee. However, because of the difficulty potential third party purchasers at
the sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount that may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished. The lender may purchase the property
for a lesser amount in order to preserve its right against the borrower to seek
a deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
Environmental Risks
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the loans. The failure to comply with these laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs.
Liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of hazardous substances, and could
exceed the value of the property and the aggregate assets of the owner or
operator. In addition, persons who transport or dispose of hazardous substances,
or arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are releases
or threatened releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against the property. Under CERCLA, the
clean-up lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by the current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act (SWDA) provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the management"
of the facility in question or is found not to have held its interest primarily
to protect a security interest, the lender may forfeit its secured creditor
exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
(EPA) in April 1992 attempted to clarify the activities in which lenders could
engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The rule was
struck down in 1994 by the United States Court of Appeals for the District of
Columbia Circuit in Kelley ex rel State of Michigan v. Environmental Protection
Agency, 15 F.3d 1100 (D.C. Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied
sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of SWDA. That regulation has not been struck down.
On September 30, 1996, Congress enacted the Asset Conservation, Limited
Liability and Deposit Insurance Protection Act (ACA) which amended both CERCLA
and SWDA to provide additional clarification regarding the scope of the lender
liability exemptions under the two statutes. Among other things, ACA specifies
the circumstances under which a lender will be protected by the CERCLA and SWDA
exemptions, both while the borrower is still in possession of the secured
property and following foreclosure on the secured property.
Generally, ACA states that a lender who holds indicia of ownership
primarily to protect a security interest in a facility will be considered to
participate in management only if, while the borrower is still in possession of
the facility encumbered by the security interest, the lender
o exercises decision-making control over environmental compliance
related to the facility such that the lender has undertaken
responsibility for hazardous substance handling or disposal
practices related to the facility or
o exercises control at a level comparable to that of a manager of the
facility such that the lender has assumed or manifested
responsibility for (a) overall management of the facility
encompassing daily decision-making with respect to environmental
compliance or (b) overall or substantially all of the operational
functions (as distinguished from financial or administrative
functions) of the facility other than the function of environmental
compliance.
ACA also specifies certain activities that are not considered to be
"participation in management," including monitoring or enforcing the terms of
the extension of credit or security interest, inspecting the facility, and
requiring a lawful means of addressing the release or threatened release of a
hazardous substance.
ACA also specifies that a lender who did not participate in management
of a facility prior to foreclosure will not be considered an "owner or
operator," even if the lender forecloses on the facility and after foreclosure
sells or liquidates the facility, maintains business activities, winds up
operations, undertakes an appropriate response action, or takes any other
measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at the
earliest practicable, commercially reasonable time, on commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements.
ACA specifically addresses the potential liability of lenders who hold
mortgages or similar conventional security interests in real property, such as
the trust fund does in connection with the mortgage loans and the Home
Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, these persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with environmental cleanup and related actions may be substantial. Moreover,
some state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing a
release or threatened release at a property pledged as collateral for one of the
loans would be imposed on the related trust fund, and thus occasion a loss to
the holders, therefore depends on the specific factual and legal circumstances
at issue.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the trustor or mortgagor and foreclosed junior lienors are given
a statutory period in which to redeem the property from the foreclosure sale.
The right of redemption should be distinguished from the equity of redemption,
which is a non-statutory right that must be exercised prior to the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The exercise
of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
Junior Mortgages; Rights of Senior Mortgages
The mortgage loans comprising or underlying the primary assets included
in the trust fund for a series will be secured by mortgages or deeds of trust,
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the related trust fund (and
therefore of the security holders), as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee under the senior mortgage, including the
prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the mortgage loan to be
sold upon default of the mortgagor, thereby extinguishing the junior mortgagee's
lien unless the junior mortgagee asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full and, in
some states, may cure the default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage, in such order as the mortgagee may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property that appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting the security. However, in some
of these states, the lender, following judgment on the personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, when applicable, is that lenders will usually proceed first against
the security rather than bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of the public sale.
The purpose of these statutes is generally to prevent a beneficiary or a
mortgagee from obtaining a large deficiency judgment against the former borrower
as a result of low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the Federal Bankruptcy Code, the
Soldiers' and Sailors' Relief Act of 1940 and state laws affording relief to
debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to Federal Bankruptcy Code, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Moreover, a court
with federal bankruptcy jurisdiction may permit a debtor through a
rehabilitation plan under chapter 13 of the Federal Bankruptcy Code to cure a
monetary default with respect to a loan on his residence by paying arrearages
within a reasonable time period and reinstating the original loan payment
schedule even though the lender accelerated the loan and the lender has taken
all steps to realize upon its security (provided no sale of the property has yet
occurred) prior to the filing of the debtor's chapter 13 petition. Some courts
with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a loan
default by permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan may be modified if the borrower has filed a
petition under chapter 13. These courts have suggested that such modifications
may include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a chapter 11 case under the Federal Bankruptcy Code, the lender is
precluded from foreclosing without authorization from the bankruptcy court. The
lender's lien may be transferred to other collateral and/or be limited in amount
to the value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Federal Bankruptcy Code provides priority to certain tax liens over
the lender's security. This may delay or interfere with the enforcement of
rights in respect of a defaulted mortgage loan. In addition, substantive
requirements are imposed upon lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. The laws include the federal Truth in Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act and related statutes and regulations. These
federal laws impose specific statutory liabilities upon lenders that originate
loans and that fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the loans.
Due-on-Sale Clauses in Mortgage Loans
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 preempts state constitutional, statutory and case law that prohibits
the enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain exceptions. As a
result, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain Act,
which ended in all cases not later than October 15, 1982, and (ii) originated by
lenders other than national banks, federal savings institutions and federal
credit unions. Freddie Mac has taken the position in its published mortgage
servicing standards that, out of a total of eleven "window period states," five
states (Arizona, Michigan, Minnesota, New Mexico and Utah) have enacted statutes
extending, on various terms and for varying periods, the prohibition on
enforcement of due-on-sale clauses with respect to certain categories of window
period loans. Also, the Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
In addition, under the Federal Bankruptcy Code, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from bankruptcy
proceedings.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his default
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full
or in part without penalty. The regulations of the Office of Thrift Supervision
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that state usury limitations shall not apply to
certain types of residential first mortgage loans originated by certain lenders
after March 31, 1980. Similar federal statutes were in effect with respect to
mortgage loans made during the first three months of 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by
adopting a state law before April 1, 1983 or by certifying that the voters of
such state have voted in favor of any provision, constitutional or otherwise,
which expressly rejects an application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V is not rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
The Home Improvement Contracts and the Manufactured Housing Contracts
General
The Home Improvement Contracts and Manufactured Housing Contracts,
other than those that are unsecured or secured by mortgages on real estate,
generally are "chattel paper" or constitute "purchase money security interests,"
each as defined in the Uniform Commercial Code (UCC) in effect in the applicable
jurisdiction. Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under the
related agreement, the depositor will transfer physical possession of the
contracts to the trustee or a custodian or may retain possession of the
contracts as custodian for the trustee. In addition, the depositor will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the trustee's ownership of the contracts. Unless otherwise
specified in the related prospectus supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the depositor to
the trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of such assignment, the trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements
A Home Improvement Contract that is secured by the related home
improvements grants to the originator of the contract a purchase money security
interest in the related home improvements to secure all or part of the purchase
price of the home improvements and related services. A financing statement
generally is not required to be filed to perfect a purchase money security
interest in consumer goods. Purchase money security interests of this type are
assignable. In general, a purchase money security interest grants to the holder
a security interest that has priority over a conflicting security interest in
the same collateral and the proceeds of the collateral. However, to the extent
that the collateral subject to a purchase money security interest becomes a
fixture, in order for the related purchase money security interest to take
priority over a conflicting interest in the fixture, the holder's interest in
the home improvement must generally be perfected by a timely fixture filing. In
general, under the UCC, a security interest does not exist under the UCC in
ordinary building material incorporated into an improvement on land. Home
Improvement Contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose their characterization,
upon incorporation of the materials into the related property, will not be
secured by a purchase money security interest in the home improvement being
financed.
Enforcement of Security Interest in Home Improvements
So long as the home improvement has not become subject to real estate
law, a creditor can repossess a home improvement securing a Home Improvement
Contract by voluntary surrender, by "self-help" repossession that is "peaceful"
(i.e., without breach of the peace) or, in the absence of voluntary surrender
and the ability to repossess without breach of the peace, by judicial process.
The holder of a Home Improvement Contract must give the debtor a number of days'
notice, which varies from ten to 30 days depending on the state, prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting the sale. The
law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit that the debtor may redeem it at or before resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower will have no assets from which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Security Interests in the Manufactured Homes
The manufactured homes securing the Manufactured Housing Contracts may
be located in all 50 states and the District of Columbia. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
The security interests of the trustee in the manufactured homes will not be
noted on the certificates of title or by delivery of the required documents and
payment of fees to the applicable state motor vehicle authorities unless the
related prospectus supplement so requires. With respect to each transaction, a
decision will be made as to whether or not the security interests of the trustee
in the manufactured homes will be noted on the certificates of title and the
required documents and fees will be delivered to the applicable state motor
vehicle authorities based upon, among other things, the practices and procedures
of the related originator and servicer and after consultation with the
applicable rating agency or rating agencies. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. As manufactured homes have
become large and often have been attached to their sites without any apparent
intention to move them, courts in many states have held that manufactured homes,
under particular circumstances, may become governed by real estate title and
recording laws. As a result, a security interest in a manufactured home could be
rendered subordinate to the interests of other parties claiming an interest in
the manufactured home under applicable state real estate law. In order to
perfect a security interest in a manufactured home under real estate laws, the
secured party must file either a "fixture filing" under the provisions of the
UCC or a real estate mortgage under the real estate laws of the state where the
home is located. These filings must be made in the real estate records office of
the county where the manufactured home is located. If so specified in the
related prospectus supplement, the Manufactured Housing Contracts may contain
provisions prohibiting the borrower from permanently attaching the manufactured
home to its site. So long as the borrower does not violate this agreement, a
security interest in the manufactured home will be governed by the certificate
of title laws or the UCC, and the notation of the security interest on the
certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the manufactured
home. If, however, a manufactured home is permanently attached to its site, the
related lender may be required to perfect a security interest in the
manufactured home under applicable real estate laws.
In the event that the owner of a manufactured home moves it to a state
other than the state in which the manufactured home initially is registered,
under the laws of most states the perfected security interest in the
manufactured home would continue for four months after relocation and, after
expiration of the four months, only if and after the owner re-registers the
manufactured home in the new state. If the owner were to relocate a manufactured
home to another state and not re-register a security interest in that state, the
security interest in the manufactured home would cease to be perfected. A
majority of states generally require surrender of a certificate of title to
re-register a manufactured home. Accordingly, the secured party must surrender
possession if it holds the certificate of title to the manufactured home or, in
the case of manufactured homes registered in states which provide for notation
of lien on the certificate of title, notice of surrender would be given to the
secured party noted on the certificate of title. In states which do not require
a certificate of title for registration of a manufactured home, re-registration
could defeat perfection.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest in the manufactured home.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract that is the seller of goods that gave rise to the transaction
(and certain related lenders and assignees) to transfer the contract free of
notice of claims by the related debtor. The effect of this rule is to subject
the assignee of the contract to all claims and defenses the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the obligor also may be able to assert the rule
to set off remaining amounts due as a defense against a claim brought by the
trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that, subject to the following conditions, state
usury limitations shall not apply to any contract that is secured by a first
lien on certain kinds of consumer goods. The Home Improvement Contracts or
Manufactured Housing Contracts would be covered if they satisfy certain
conditions, among other things, governing the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Installment Sales Contracts
The loans may also consist of installment sales contracts. Under an
installment sales contract the seller/lender retains legal title to the property
and enters into an agreement with the purchaser/borrower for the payment of the
purchase price, plus interest, over the term of the contract. Only after full
performance by the purchaser/borrower of the contract is the seller/lender
obligated to convey title to the property to the borrower. As with mortgage or
deed of trust financing, during the effective period of the installment sales
contract, the borrower is generally responsible for maintaining the property in
good condition and for paying real estate taxes, assessments and hazard
insurance policy premiums associated with the property.
The method of enforcing the rights of the seller/lender under an
installment sales contract varies on a state-by-state basis depending upon the
extent to which state courts are willing, or able pursuant to state statute, to
enforce the contract strictly according to the terms. The terms of installment
sales contracts generally provide that upon a default by the borrower, the
borrower loses his right to occupy the property, the entire indebtedness is
accelerated, and the borrower's equitable interest in the property is forfeited.
The seller/lender in such a situation does not have to foreclose in order to
obtain title to the property, although in some cases a quiet title action is in
order if the borrower has filed the installment sales contract in local land
records and an ejectment action may be necessary to recover possession. In a few
states, particularly in cases of borrower default during the early years of an
installment sales contract, the courts will permit ejectment of the buyer and a
forfeiture of his interest in the property. However, most state legislatures
have enacted provisions by analogy to mortgage law protecting borrowers under
installment sales contracts from the harsh consequences of forfeiture. Under
these statutes, a judicial or nonjudicial foreclosure may be required, the
lender may be required to give notice of default and the borrower may be granted
some grace period during which the installment sales contract may be reinstated
upon full payment of the default amount and the borrower may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
installment sales contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an installment sales
contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of
all branches of the military on active duty, including draftees and reservists
in military service,
o are entitled to have their interest rates reduced and capped at 6%
per year, on obligations (including loans) incurred prior to the
commencement of military service for the duration of military
service, and
o may be entitled to a stay of proceedings on any kind of foreclosure
or repossession action in the case of defaults on such obligations
entered into prior to military service for the duration of military
service, and
o may have the maturity of their obligations incurred prior to
military service extended, the payments lowered and the payment
schedule readjusted for a period of time after the completion of
military service.
However, these benefits are subject to challenge by creditors and if, in the
opinion of the court, the ability of a person to comply with his obligations is
not materially impaired by military service, the court may apply equitable
principles accordingly.
If a borrower's obligation to repay amounts otherwise due on a loan included in
a trust fund for a series is relieved pursuant to the Relief Act, none of the
trust fund, the servicer, the depositor or the trustee will be required to
advance such amounts, and any related loss may reduce the amounts available to
be paid to the holders of the related securities. Unless otherwise specified in
the related prospectus supplement, any shortfalls in interest collections on
loans (or underlying loans), included in a trust fund for a series resulting
from application of the Relief Act will be allocated to each class of securities
of the series that is entitled to receive interest in respect of the loans (or
underlying loans) in proportion to the interest that each class of securities
would have otherwise been entitled to receive in respect of the loans (or
underlying loans) had the interest shortfall not occurred.
The Depositor
The depositor, Bear Stearns Asset Backed Securities, Inc., was
incorporated in the state of Delaware in June 1995, and is a wholly-owned
subsidiary of The Bear Stearns Companies Inc. The depositor's principal
executive offices are located at 245 Park Avenue, New York, New York 10167. Its
telephone number is (212) 272-4095.
The depositor will not engage in any activities other than to
authorize, issue, sell, deliver, purchase and invest in (and enter into
agreements in connection with), and/or to engage in the establishment of one or
more trusts, which will issue and sell, bonds, notes, debt or equity securities,
obligations and other securities and instruments. The depositor securities must
be collateralized or otherwise secured or backed by, or otherwise represent an
interest in, among other things, receivables or pass-through certificates or
participations or certificates of participation or beneficial ownership in one
or more pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by senior or junior mortgages on real estate or
manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness. The depositor
may purchase, acquire, own, hold, transfer, convey, service, sell, pledge,
assign, finance and otherwise deal with such receivables, pass-through
certificates, or participations or certificates of participation or beneficial
ownership. Article Third of the depositor's Certificate of Incorporation limits
the depositor's activities to the above activities and certain related
activities, such as credit enhancement with respect to depositor securities, and
to any activities incidental to and necessary or convenient for the
accomplishment of those purposes.
Use of Proceeds
The depositor will apply all or substantially all of the net proceeds
from the sale of each of the related trust fund series of securities for one or
more of the following purposes:
o to purchase the primary assets of the related trust fund,
o to repay indebtedness incurred to obtain funds to acquire the
primary assets of the related trust fund,
o to establish any reserve funds described in the related prospectus
supplement, and
o to pay costs of structuring and issuing the securities, including
the costs of obtaining any credit enhancement.
If specified in the related prospectus supplement, the purchase of the
primary assets for a series may be effected by delivering the securities to the
seller in exchange for the primary assets.
Material Federal Income Tax Considerations
General
The following summary of the material federal income tax consequences
of the purchase, ownership, and disposition of the securities is based on the
opinion of Sidley Austin Brown & Wood LLP, Morgan, Lewis & Bockius LLP or other
tax counsel designated in the prospectus supplement, as special counsel to the
depositor. This summary is based upon the provisions of the Internal Revenue
Code, the regulations promulgated thereunder, including, where applicable,
proposed regulations, and the judicial and administrative rulings and decisions
now in effect, all of which are subject to change or possible differing
interpretations. The statutory provisions, regulations, and interpretations on
which this interpretation is based are subject to change either prospectively or
retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
securities as "capital assets" (generally, property held for investment) within
the meaning of section 1221 of the Code. Prospective investors may wish to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the securities.
The federal income tax consequences to security holders will vary
depending on whether
o the securities of a series are classified as indebtedness;
o an election is made to treat the trust fund relating to a particular
series of securities as a real estate mortgage investment conduit or
REMIC under the Code;
o the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series;
o an election is made to treat the trust fund relating to a particular
series of certificates as a partnership; or
o an election is made to treat the trust fund relating to a particular
series of securities as a financial asset securitization investment
trust or FASIT under the Code.
The prospectus supplement for each series of securities will specify how the
securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to the series.
Taxation of Debt Securities
Status as Real Property Loans. Except to the extent otherwise provided
in the related prospectus supplement, if the securities are regular interests in
a REMIC or represent interests in a grantor trust, in the opinion of tax
counsel:
o securities held by a domestic building and loan association will
constitute "loans... secured by an interest in real property" within
the meaning of section 7701(a)(19)(C)(v) of the Code; and
o securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of section 856(c)(4)(A) of
the Code and interest on securities will be considered "interest on
obligations secured by mortgages on real property or on interests in
real property" within the meaning of section 856(c)(3)(B) of the
Code.
Interest and Acquisition Discount. In the opinion of tax counsel,
securities that are REMIC regular interests are generally taxable to holders in
the same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the securities that are REMIC regular interests will be taxable as
ordinary income and taken into account using the accrual method of accounting,
regardless of the holder's normal accounting method. Interest (other than
original issue discount) on securities (other than securities that are REMIC
regular interests) which are characterized as indebtedness for federal income
tax purposes will be includible in income by holders thereof in accordance with
their usual methods of accounting. When we refer to "debt securities" in this
section, we mean securities characterized as debt for federal income tax
purposes and securities that are REMIC regular interests.
In the opinion of tax counsel, "compound interest securities" (i.e.,
debt securities that permit all interest to accrue for more than one year before
payments of interest are scheduled to begin) will, and certain of the other debt
securities issued at a discount may, be issued with "original issue discount" or
OID. The following discussion is based in part on the OID Regulations. A holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. In the
opinion of tax counsel, a holder of a debt security must include OID in gross
income as ordinary interest income as it accrues under a method taking into
account an economic accrual of the discount. In general, OID must be included in
income in advance of the receipt of the cash representing that income. The
amount of OID on a debt security will be considered to be zero if it is less
than a de minimis amount determined under the Code.
The issue price of a debt security is the first price at which a
substantial amount of debt securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of debt securities is sold for cash on
or prior to the closing date, the issue price for that class will be treated as
the fair market value of that class on the closing date. The issue price of a
debt security also includes the amount paid by an initial debt security holder
for accrued interest that relates to a period prior to the issue date of the
debt security. The stated redemption price at maturity of a debt security
includes the original principal amount of the debt security, but generally will
not include distributions of interest if the distributions constitute "qualified
stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below), provided that the interest payments are unconditionally payable at
intervals of one year or less during the entire term of the debt security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Debt securities may provide for default remedies in the
event of late payment or nonpayment of interest. Although the matter is not free
from doubt, the trustee intends to treat interest on such debt securities as
unconditionally payable and as constituting qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where debt securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Interest
is payable at a single fixed rate only if the rate appropriately takes into
account the length of the interval between payments. Distributions of interest
on debt securities with respect to which deferred interest will accrue, will not
constitute qualified stated interest payments, in which case the stated
redemption price at maturity of such debt securities includes all distributions
of interest as well as principal thereon. Where the interval between the issue
date and the first distribution date on a debt security is longer than the
interval between subsequent distribution dates, the greater of (i) the interest
foregone and (ii) the excess of the stated principal amount over the issue price
will be included in the stated redemption price at maturity and tested under the
de minimis rule described below. Where the interval between the issue date and
the first distribution date on a debt security is shorter than the interval
between subsequent distribution dates, all of the additional interest will be
included in the stated redemption price at maturity and tested under the de
minimis rule described below. In the case of a debt security with a long first
period that has non-de minimis OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the debt security will
generally have OID. Holders of debt securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a debt security.
Under the de minimis rule, OID on a debt security will be considered to
be zero if the OID is less than 0.25% of the stated redemption price at maturity
of the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the debt security and the
denominator of which is the stated redemption price at maturity of the debt
security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the debt security
is held as a capital asset. However, holders may elect to accrue all de minimis
OID as well as market discount under a constant yield method. See "--Election to
Treat All Interest as Original Issue Discount" below.
Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is generally treated as payable at a
qualified variable rate and not as contingent interest if
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
o interest is based on a "qualified floating rate," an "objective
rate," or a combination of "qualified floating rates" that do not
operate in a manner that significantly accelerates or defers
interest payments on the debt security.
In the case of compound interest securities, certain interest weighted
securities, and certain of the other debt securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption price
at maturity.
The Internal Revenue Service issued contingent payment regulations
governing the calculation of OID on instruments having contingent interest
payments. These contingent payment regulations represent the only guidance
regarding the views of the IRS with respect to contingent interest instruments
and specifically do not apply for purposes of calculating OID on debt
instruments subject to section 1272(a)(6) of the Code, such as the debt
securities. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, trustee intends to base its computation on
section 1272(a)(6) of the Code and the OID Regulations as described in this
prospectus. However, because no regulatory guidance currently exists under
section 1272(a)(6) of the Code, there can be no assurance that such methodology
represents the correct manner of calculating OID.
The holder of a debt security issued with OID must include in gross
income, for all days during its taxable year on which it holds the debt
security, the sum of the "daily portions" of OID. The amount of OID includible
in income by a holder will be computed by allocating to each day during an
accrual period a pro rata portion of the original issue discount that accrued
during the accrual period. In the case of a debt security that is not a REMIC
regular interest security and the principal payments on which are not subject to
acceleration resulting from prepayments on the loans, the amount of OID
includible in income of a holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the debt security and the adjusted issue price of the
debt security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of the debt security's issue price plus prior
accruals of OID, reduced by the total payments made with respect to the debt
security in all prior periods, other than qualified stated interest payments.
Certain classes of the debt securities may be "pay-through securities,"
which are debt instruments that are subject to acceleration due to prepayments
on other debt obligations securing those instruments. The amount of OID to be
included in the income of a holder of a pay-through security is computed by
taking into account the prepayment rate assumed in pricing the debt instrument.
The amount of OID that will accrue during an accrual period on a pay-through
security is the excess, if any, of the
o sum of
(a) the present value of all payments remaining to be made
on the pay-through security as of the close of the
accrual period and
(b) the payments during the accrual period of amounts
included in the stated redemption price of the
pay-through security,
over
o the adjusted issue price of the pay-through security at the
beginning of the accrual period.
The present value of the remaining payments is to be determined on the basis of
three factors:
o the original yield to maturity of the pay-through security
(determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the accrual period),
o events that have occurred before the end of the accrual period and
o the assumption that the remaining payments will be made in
accordance with the original prepayment assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a holder of a pay-through security to take into account
prepayments with respect to the loans at a rate that exceeds the prepayment
assumption, and to decrease (but not below zero for any period) the portions of
OID required to be included in income by a holder of a pay-through security to
take into account prepayments with respect to the loans at a rate that is slower
than the prepayment assumption. Although OID will be reported to holders of
pay-through securities based on the prepayment assumption, no representation is
made to holders that loans will be prepaid at that rate or at any other rate.
The depositor may adjust the accrual of OID on a class of securities
that are REMIC regular interests in a manner that it believes to be appropriate,
to take account of realized losses on the loans, although the OID Regulations do
not provide for such adjustments. If the IRS were to require that OID be accrued
without such adjustments, the rate of accrual of OID for a class of securities
that are REMIC regular interests could increase.
Certain classes of securities may represent more than one class of
REMIC regular interests. Unless otherwise provided in the related prospectus
supplement, the applicable trustee intends, based on the OID Regulations, to
calculate OID on such securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a debt security will also be required to include
OID in gross income, but a holder who purchases the debt security for an amount
that exceeds its adjusted issue price will be entitled (as will an initial
holder who pays more than a debt security's issue price) to offset such OID by
comparable economic accruals of portions of the excess.
Effects of Defaults and Delinquencies. In the opinion of tax counsel,
holders will be required to report income with respect to the related securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of a security in any period could significantly exceed the amount of cash
distributed to the holder in that period. The holder will eventually be allowed
a loss (or will be allowed to report a lesser amount of income) to the extent
that the aggregate amount of distributions on the securities is reduced as a
result of a loan default. However, the timing and character of losses or
reductions in income are uncertain and, accordingly, holders of securities
should consult their own tax advisors on this point.
Interest Weighted Securities. An "interest weighted security" is a
security that is a REMIC regular interest or a "stripped" security (as discussed
under "--Tax Status as a Grantor Trust; General" below) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC or on loans underlying pass-through
securities. It is not clear how income should be accrued with respect to
interest weighted securities. The trustee intends to take the position that all
of the income derived from an interest weighted security should be treated as
OID and that the amount and rate of accrual of such OID should be calculated by
treating the interest weighted security as a compound interest security.
However, in the case of interest weighted securities that are entitled to some
payments of principal and are REMIC regular interests, the IRS could assert that
income derived from the interest weighted security should be calculated as if
the security were a security purchased at a premium equal to the excess of the
price paid by the holder for the security over its stated principal amount, if
any. Under this approach, a holder would be entitled to amortize such premium
only if it has in effect an election under section 171 of the Code with respect
to all taxable debt instruments held by such holder, as described below.
Alternatively, the IRS could assert that an interest weighted security should be
taxable under the rules governing bonds issued with contingent payments. This
treatment may be more likely in the case of interest weighted securities that
are stripped securities as described below. See "--Tax Status as a Grantor
Trust--Discount or Premium on Pass-Through Securities" below.
Variable Rate Debt Securities. In the opinion of tax counsel, in the
case of debt securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that the yield
to maturity of the debt securities and, in the case of pay-through securities,
the present value of all payments remaining to be made on the debt securities,
should be calculated as if the interest index remained at its value as of the
issue date of the securities. Because the proper method of adjusting accruals of
OID on a variable rate debt security is uncertain, holders of variable rate debt
securities should consult their own tax advisers regarding the appropriate
treatment of such securities for federal income tax purposes.
Market Discount. In the opinion of tax counsel, a purchaser of a
security may be subject to the market discount rules of sections 1276 through
1278 of the Code. A holder that acquires a debt security with more than a
prescribed de minimis amount of "market discount" (generally, the excess of the
principal amount of the debt security over the purchaser's purchase price) will
be required to include accrued market discount in income as ordinary income in
each month, but limited to an amount not exceeding the principal payments on the
debt security received in that month and, if the securities are sold, the gain
realized. This market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, market discount
would in general accrue either
o on the basis of a constant yield (in the case of a pay-through
security, taking into account a prepayment assumption) or
o in the ratio of (a) in the case of securities (or, in the case of a
pass-through security, as set forth below, the loans underlying the
security) not originally issued with OID, stated interest payable in
the relevant period to total stated interest remaining to be paid at
the beginning of the period or (b) in the case of securities (or, in
the case of a pass-through security, as described below, the loans
underlying the security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the debt security (or, in the case of a pass-through security, the
loans), the excess of interest paid or accrued to purchase or carry the security
(or, in the case of a pass-through security, as described below, the underlying
loans) with market discount over interest received on the security is allowed as
a current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the security (or, in the case of a
pass-through security, an underlying loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. In the opinion of tax counsel, a holder who purchases a debt
security (other than an interest weighted security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the security at a premium, which it may
elect to amortize as an offset to interest income on the security (and not as a
separate deduction item) on a constant yield method. Although no regulations
addressing the computation of premium accrual on comparable securities have been
issued, the legislative history of The Tax Reform Act of 1986 indicates that
premium is to be accrued in the same manner as market discount. Accordingly, it
appears that the accrual of premium on a class of pay-through securities will be
calculated using the prepayment assumption used in pricing the class. If a
holder makes an election to amortize premium on a debt security, the election
will apply to all taxable debt instruments (including all REMIC regular
interests and all pass-through certificates representing ownership interests in
a trust holding debt obligations) held by the holder at the beginning of the
taxable year in which the election is made, and to all taxable debt instruments
acquired thereafter by the holder, and will be irrevocable without the consent
of the IRS. Purchasers who pay a premium for the securities should consult their
tax advisers regarding the election to amortize premium and the method to be
employed.
On December 30, 1997, the IRS issued final amortizable bond premium
regulations dealing with amortizable bond premium. The regulations specifically
do not apply to prepayable debt instruments subject to section 1272(a)(6) of the
Code. Absent further guidance from the IRS, the trustee intends to account for
amortizable bond premium in the manner described above. Prospective purchasers
of the debt securities should consult their tax advisors regarding the possible
application of the amortizable bond premium regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit the holder of a debt security to elect to accrue all
interest, discount (including de minimis market discount or OID) and premium as
interest, based on a constant yield method for debt securities acquired on or
after April 4, 1994. If such an election were to be made with respect to a debt
security with market discount, the holder of the debt security would be deemed
to have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such holder of
the debt security acquires during the year of the election or thereafter.
Similarly, the holder of a debt security that makes this election for a debt
security that is acquired at a premium will be deemed to have made an election
to amortize bond premium with respect to all debt instruments having amortizable
bond premium that the holder owns or acquires. The election to accrue interest,
discount and premium on a constant yield method with respect to a debt security
is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of tax counsel, if a REMIC election is made
with respect to a series of securities, then the arrangement by which the
securities of that series are issued will be treated as a REMIC as long as all
of the provisions of the applicable governing agreement are complied with and
the statutory and regulatory requirements are satisfied. Securities will be
designated as "regular interests" or "residual interests" in a REMIC, as
specified in the related prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement, if
a REMIC election is made with respect to a series of securities, in the opinion
of tax counsel:
o securities held by a domestic building and loan association will
constitute "a regular or a residual interest in a REMIC" within the
meaning of Section 7701(a)(19)(C)(xi) of the Code (assuming that at
least 95% of the REMIC's assets consist of cash, government
securities, "loans secured by an interest in real property," and
other types of assets described in Code Section 7701(a)(19)(C)); and
o securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code, and income with respect to the securities will be
considered "interest on obligations secured by mortgages on real
property or on interests in real property" within the meaning of
Section 856(c)(3)(B) of the Code (assuming, for both purposes, that
at least 95% of the REMIC's assets are qualifying assets).
If less than 95% of the REMIC's assets consist of assets described in the
immediately preceding bullets, then a security will qualify for the tax
treatment described in the previous sentence in the proportion that such REMIC's
assets are qualifying assets.
REMIC Expenses; Single Class REMICs
As a general rule, in the opinion of tax counsel, all of the expenses
of a REMIC will be taken into account by holders of the residual interest
securities. In the case of a "single class REMIC," however, the expenses will be
allocated under Treasury regulations among the holders of the REMIC regular
interest securities and the holders of the REMIC residual interest securities on
a daily basis in proportion to the relative amounts of income accruing to each
holder on that day. In the case of a holder of a REMIC regular interest security
who is an individual or a "pass-through interest holder" (including certain
pass-through entities but not including real estate investment trusts), the
expenses will be deductible only to the extent that the expenses, plus other
"miscellaneous itemized deductions" of the holder, exceed 2% of the holder's
adjusted gross income. In addition, for taxable years beginning after December
31, 1990, the amount of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable amount
(which amount will be adjusted for inflation for taxable years beginning after
1990) will be reduced by the lesser of
o 3% of the excess of adjusted gross income over the applicable
amount, or
o 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
This reduction is scheduled to be phased-out over a five-year period beginning
in 2006. The reduction or disallowance of this deduction may have a significant
impact on the yield of the REMIC regular interest security to the holder. In
general terms, a single class REMIC is one that either
o would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal
income tax purposes), or
o is similar to such a trust and is structured with the principal
purpose of avoiding the single class REMIC rules.
Unless otherwise specified in the related prospectus supplement, the expenses of
the REMIC will be allocated to holders of the related REMIC residual interest
securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of tax counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of the REMIC residual interests. As described above,
the REMIC regular interests are generally taxable as debt of the REMIC.
Qualification as a REMIC requires ongoing compliance with certain conditions.
Although a REMIC is not generally subject to federal income tax, the Code
provides that failure to comply with one or more of the ongoing requirements of
the Code for REMIC status during any taxable year, including the implementation
of restrictions on the purchase and transfer of the residual interests in a
REMIC as described below under "--Taxation of Owners of Residual Interest
Securities", would cause the trust not to be treated as a REMIC for that year
and thereafter. In this event, the entity may be taxable as a separate
corporation and the related certificates may not be accorded the status or given
the tax treatment described below.
Calculation of REMIC Income. In the opinion of tax counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between
o the gross income produced by the REMIC's assets, including stated
interest and any OID or market discount on loans and other assets,
and
o deductions, including stated interest and original issue discount
accrued on the REMIC regular interest securities, amortization of
any premium with respect to loans, and servicing fees and other
expenses of the REMIC.
A holder of a REMIC residual interest security that is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts) will be unable to deduct servicing fees
payable on the loans or other administrative expenses of the REMIC for a given
taxable year, to the extent that these expenses, when aggregated with the
holder's other miscellaneous itemized deductions for that year, do not exceed 2%
of the holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the
startup day (generally, the day that the interests are issued). That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of pay-through securities
accrue OID (i.e., under the constant yield method taking into account the
prepayment assumption). The REMIC will deduct OID on the regular interest
securities in the same manner that the holders of the regular interest
securities include such discount in income, but without regard to the de minimis
rules. See "--Taxation of Debt Securities" above. However, a REMIC that acquires
loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the prepayment assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before that date, it is possible that the
premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited transaction."
For this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include:
o subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
o subject to a limited exception, the sale or other disposition of a
cash flow investment;
o the receipt of any income from assets not permitted to be held by
the REMIC pursuant to the Code; or
o the receipt of any fees or other compensation for services rendered
by the REMIC.
It is anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition, subject
to a number of exceptions, a tax is imposed at the rate of 100% on amounts
contributed to a REMIC after the close of the three-month period beginning on
the startup day. The holders of REMIC residual interest securities will
generally be responsible for the payment of any taxes imposed on the REMIC.
However, to the extent not paid by the holders of the REMIC residual interest
securities or otherwise, taxes will be paid out of the trust fund and will be
allocated pro rata to all outstanding classes of securities of the REMIC.
Taxation of Holders of Residual Interest Securities
In the opinion of tax counsel, the holder of a certificate representing
a REMIC residual interest will take into account the "daily portion" of the
taxable income or net loss of the REMIC for each day during the taxable year on
which the holder held the residual interest security. The daily portion is
determined by allocating to each day in any calendar quarter its ratable portion
of the taxable income or net loss of the REMIC for that quarter, and by
allocating that amount among the holders (on that day) of the residual interest
securities in proportion to their respective holdings on that day.
In the opinion of tax counsel, the holder of a residual interest
security must report its proportionate share of the taxable income of the REMIC
whether or not it receives cash distributions from the REMIC attributable to
income or loss. The reporting of taxable income without corresponding
distributions could occur, for example, if the loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC regular interests
securities issued without any discount or at an insubstantial discount. (If this
occurs, it is likely that cash distributions will exceed taxable income in later
years.) The taxable income of a REMIC may also be greater in earlier years as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on the REMIC regular interest securities, will typically
increase over time as lower yielding securities are paid, whereas interest
income with respect to loans will generally remain constant over time as a
percentage of loan principal.
In any event, because the holder of a REMIC residual interest security
is taxed on the net income of the REMIC, the taxable income derived from the
residual interest security in a given taxable year will not be equal to the
taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pretax yield. Therefore,
the after-tax yield on a residual interest security may be less than that of a
corporate bond or stripped instrument.
Limitation on Losses. In the opinion of tax counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to the
holder's adjusted basis at the end of the calendar quarter in which the loss
arises. A holder's basis in a REMIC residual interest security will initially
equal the holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the holder, and decreased (but
not below zero) by the amount of distributions made and the amount of the
REMIC's net loss allocated to the holder. Any disallowed loss may be carried
forward indefinitely, but may be used only to offset income generated by the
same REMIC. The ability of holders of residual interest securities to deduct net
losses may be subject to additional limitations under the Code. Holders should
consult their tax advisers with respect to such additional limitations.
Distributions. In the opinion of tax counsel, distributions on a REMIC
residual interest security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a holder of the residual interest security. If the amount of the payment
exceeds the holder's adjusted basis in the residual interest security, however,
the holder will recognize gain (treated as gain from the sale of the residual
interest security) to the extent of the excess.
Sale or Exchange. In the opinion of tax counsel, the holder of a
residual interest security will recognize gain or loss on the sale or exchange
of the residual interest security equal to the difference, if any, between the
amount realized and the holder's adjusted basis in the residual interest
security at the time of sale or exchange. A holder's adjusted basis in a
residual interest security generally equals the cost of the residual interest
security increased by the taxable income of the REMIC that was included in the
income of the holder and decreased by distributions received thereon by the
holder and amounts of the REMIC net loss allocated to the holder. Except to the
extent provided in regulations which have not yet been issued, any loss upon
disposition of a residual interest security will be disallowed if the selling
holder acquires any residual interest in a REMIC or similar mortgage pool within
six months before or after disposition. In that event, the loss will be used to
increase the residual interest security holder's adjusted basis in the newly
acquired asset.
Excess Inclusions. In the opinion of tax counsel, the portion of the
REMIC taxable income of a holder of a residual interest security consisting of
"excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on the holder's federal income tax return.
Further, if the holder of a residual interest security is an organization
subject to the tax on unrelated business income imposed by Section 511 of the
Code, the holder's excess inclusion income will be treated as unrelated business
taxable income of the holder. In addition, under Treasury regulations yet to be
issued, if a real estate investment trust, a regulated investment company, a
common trust fund, or certain cooperatives were to own a residual interest
security, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a residual interest security is owned by a foreign person, excess
inclusion income is subject to tax at a rate of 30%, which may not be reduced by
treaty, is not eligible for treatment as "portfolio interest" and is subject to
certain additional limitations. See "--Tax Treatment of Foreign Investors"
below. The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 thrift institutions to use net operating losses and
other allowable deductions to offset their excess inclusion income from residual
interest securities that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
1995, except with respect to residual interest securities continuously held by a
thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect of excess inclusions on the alternative
minimum taxable income of a residual holder.
o First, alternative minimum taxable income for the residual holder is
determined without regard to the special rule that taxable income
cannot be less than excess inclusions.
o Second, the residual holder's alternative minimum taxable income for
a tax year cannot be less than excess inclusions for the year.
o Third, the amount of any alternative minimum tax net operating loss
deductions must be computed without regard to any excess inclusions.
These rules are effective for tax years beginning after December 31, 1986,
unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of
o REMIC taxable income for the quarterly period allocable to a
residual interest security,
over
o the daily accruals for such quarterly period of (i) 120% of the long
term applicable federal rate on the startup day multiplied by (ii)
the adjusted issue price of the residual interest security at the
beginning of the quarterly period.
The adjusted issue price of a residual interest security at the beginning of
each calendar quarter will equal its issue price (calculated in a manner
analogous to the determination of the issue price of a regular interest
security), increased by the aggregate of the daily accruals for prior calendar
quarters, and decreased (but not below zero) by the amount of loss allocated to
a holder and the amount of distributions made on the residual interest security
before the beginning of the quarter. The long-term federal rate, which is
announced monthly by the Treasury Department, is an interest rate that is based
on the average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, transfers of residual interest securities
may be disregarded in certain circumstances. See "--Restrictions on Ownership
and Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any "disqualified
organization" including the United States, any State or political subdivision
thereof, any foreign government, any international organization, or any agency
or instrumentality of any of the foregoing, a rural electric or telephone
cooperative described in Section 1381(a)(2)(C) of the Code, or any entity exempt
from the tax imposed by sections 1 through 1399 of the Code, if the entity is
not subject to tax on its unrelated business income. Accordingly, the applicable
pooling and servicing agreement will prohibit disqualified organizations from
owning a residual interest security. In addition, no transfer of a residual
interest security will be permitted unless the proposed transferee shall have
furnished to the trustee an affidavit representing and warranting that it is
neither a disqualified organization nor an agent or nominee acting on behalf of
a disqualified organization.
If a residual interest security is transferred to a disqualified
organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of the residual
interest security at the time of the transfer. In addition, if a disqualified
organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
residual interest security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a residual interest security is a
"noneconomic residual interest" as described below, the transfer of a residual
interest security to a U.S. Person will be disregarded for all federal tax
purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. Such a purpose exists if the transferor, at the
time of the transfer, either knew or should have known that the transferee would
be unwilling or unable to pay taxes due on its share of the taxable income of
the REMIC (i.e., the transferor had "improper knowledge"). However, a safe
harbor exists under which a transferor is presumed to lack such knowledge
provided that the following two conditions are met:
o the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and found
that the transferee had historically paid its debts as they became
due and found no significant evidence to indicate that the
transferee will not continue to pay its debts as they become due;
and
o the transferee represents to the transferor that it understands
that, as the holder of the noneconomic residual interest, it may
incur tax liabilities in excess of any cash flows generated by the
interest and that it intends to pay taxes associated with holding
the residual interest as they become due.
A residual interest security is a "noneconomic residual interest"
unless, at the time of the transfer:
o the present value of the expected future distributions on the
residual interest security at least equals the product of the
present value of the anticipated excess inclusions and the highest
rate of tax for the year in which the transfer occurs; and
o the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which the taxes
accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes.
If a transfer of a residual interest security is disregarded, the
transferor would be liable for any federal income tax imposed upon taxable
income derived by the transferee from the REMIC. A similar type of limitation
exists with respect to certain transfers of residual interests by foreign
persons to U.S. Persons. See "--Tax Treatment of Foreign Investors" below.
New proposed Treasury regulations issued on February 4, 2000 would add
a third condition to the safe harbor under which transfers of noneconomic
residual interests would not be disregarded for federal income tax purposes.
Under the new proposed regulations, a transfer of a noneconomic residual
interest will qualify under this safe harbor only if the present value of the
anticipated tax liabilities associated with holding the residual interest does
not exceed the present value of the sum of:
o any consideration given to the transferee to acquire the interest;
o future distributions on the interest; and
o any anticipated tax savings associated with holding the interest as
the REMIC generates losses. For purposes of this calculation, the
present value generally is calculated using a discount rate equal to
the applicable federal rate. The new proposed regulations have a
proposed effective date of February 4, 2000.
A recently issued revenue procedure provides that, during the period in
which the IRS and Treasury consider comments on the new proposed regulations, a
transferor will be presumed to lack improper knowledge if:
o both conditions specified in the fourth preceding paragraph are met,
are satisfied; and
o either (x) the safe harbor specified in the immediately preceding
paragraph is satisfied or (y) the following three conditions are
satisfied:
o for financial reporting purposes, the transferee's gross
assets exceed $100 million and its net assets exceed $10
million for the current year and prior two fiscal years,
excluding certain related party obligations;
o the transferee is an eligible corporation (i.e., a U.S. branch
of a domestic C corporation (other than a tax-exempt
corporation, a RIC, a REIT, a REMIC or cooperative)) that will
not be subject to net tax by a foreign country or U.S.
possession in respect of the residual interest security and
agrees in writing that any subsequent transfer of the residual
interest will be to an eligible corporation and will satisfy
the requirements for the transferor of such subsequent
transfer to be presumed to lack improper knowledge; and
o the facts and circumstances known to the transferor, including
any payment actually made to the transferee, must not
reasonably indicate that the taxes associated with the
residual interest will not be paid. Prospective investors
should consult their own tax advisors as to the applicability
and effect of the new proposed regulations and the Revenue
Procedure.
Mark-to-Market Rules. Prospective purchasers of a REMIC residual
interest security should be aware that the IRS recently issued final
mark-to-market regulations which provide that a REMIC residual interest security
acquired after January 3, 1995 cannot be marked-to-market. Prospective
purchasers of a REMIC residual interest security should consult their tax
advisors regarding the possible application of the mark-to-market regulations.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
Tax Status as a Grantor Trust
General. As further specified in the related prospectus supplement, if
a REMIC election is not made and the trust fund is not structured as a
partnership, then, in the opinion of tax counsel, the trust fund relating to a
series of securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation. We refer to the securities of a series of
this type as "pass-through securities". In some series there will be no
separation of the principal and interest payments on the loans. In these
circumstances, a holder will be considered to have purchased a pro rata
undivided interest in each of the loans. In the case of "stripped securities",
sale of the securities will produce a separation in the ownership of all or a
portion of the principal payments from all or a portion of the interest payments
on the loans.
In the opinion of tax counsel, each holder must report on its federal
income tax return its share of the gross income derived from the loans (not
reduced by the amount payable as trust expense fees to the applicable trustee
and the servicer and similar fees), at the same time and in the same manner as
the items would have been reported under the holder's tax accounting method had
it held its interest in the loans directly, received directly its share of the
amounts received with respect to the loans, and paid directly its share of the
trust expense fees. In the case of pass-through securities other than stripped
securities, income will consist of a pro rata share of all of the income derived
from all of the loans and, in the case of stripped securities, income will
consist of a pro rata share of the income derived from each stripped bond or
stripped coupon in which the holder owns an interest. The holder of a security
will generally be entitled to deduct trust expense fees under section 162 or
section 212 of the Code to the extent that such fees represent "reasonable"
compensation for the services rendered by the applicable trustee and the
servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, trust expense fees (to
the extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing the holder's regular tax liability
only to the extent that the fees, when added to other miscellaneous itemized
deductions, exceed 2% of adjusted gross income and may not be deductible to any
extent in computing the holder's alternative minimum tax liability. In addition,
for taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation in taxable years beginning after 1990) will be reduced by
the lesser of:
o 3% of the excess of adjusted gross income over the applicable
amount, or
o 80% of the amount of itemized deductions otherwise allowable for
that taxable year.
This reduction is scheduled to be phased-out over a five-year period
beginning in 2006.
Discount or Premium on Pass-Through Securities. In the opinion of tax
counsel, the holder's purchase price of a pass-through security is to be
allocated among the loans in proportion to their fair market values, determined
as of the time of purchase of the securities. In the typical case, the trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
loan as having a fair market value proportional to the share of the aggregate
principal balances of all of the loans that it represents, since the securities,
unless otherwise specified in the related prospectus supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a pass-through security allocated to a
loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the loan allocable to the security, the interest in the
loan allocable to the pass-through security will be deemed to have been acquired
at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a loan with OID in excess of a
prescribed de minimis amount or a stripped security, a holder of the security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a loan could arise, for example, by virtue of the financing
of points by the originator of the loan, or by virtue of the charging of points
by the originator of the loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a loan
will be includible in income, generally in the manner described above, except
that in the case of pass-through securities, market discount is calculated with
respect to the loans underlying the security, rather than with respect to the
security itself. A holder that acquires an interest in a loan originated after
July 18, 1984 with more than a de minimis amount of market discount (generally,
the excess of the principal amount of the loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "--Taxation of Debt Securities --Market
Discount" and "--Premium" above.
In the case of market discount on a pass-through security attributable
to loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of the discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time the principal payment
is made. This treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A stripped security may represent a right to
receive only a portion of the interest payments on the loans, a right to receive
only principal payments on the loans, or a right to receive certain payments of
both interest and principal. Ratio stripped securities may represent a right to
receive differing percentages of both the interest and principal on each loan.
Pursuant to section 1286 of the Code, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from ownership
of the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. Section 1286 of the Code applies the
OID rules to stripped bonds and stripped coupons. For purposes of computing OID,
a stripped bond or a stripped coupon is treated as a debt instrument issued on
the date that such stripped interest is purchased with an issue price equal to
its purchase price or, if more than one stripped interest is purchased, the
ratable share of the purchase price allocable to the stripped interest.
Servicing fees in excess of reasonable servicing fees will be treated
under the stripped bond rules. If the excess servicing fee is less than 100
basis points (i.e., 1% interest on the loan's principal balance) or the
securities are initially sold with a de minimis discount (assuming no prepayment
assumption is required), any non-de minimis discount arising from a subsequent
transfer of the securities should be treated as market discount. The IRS appears
to require that reasonable servicing fees be calculated on a loan by loan basis,
which could result in some loans being treated as having more than 100 basis
points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and OID rules are to apply to stripped
securities and other pass-through securities. Under the cash flow bond method
described above for pay-through securities, a prepayment assumption is used and
periodic recalculations are made that take into account with respect to each
accrual period the effect of prepayments during such period. However, the Tax
Reform Act of 1986 does not, absent Treasury regulations, appear specifically to
cover instruments such as stripped securities, which technically represent
ownership interests in the underlying loans, rather than being debt instruments
"secured by" those loans. Nevertheless, it is believed that the cash flow bond
method is a reasonable method of reporting income for such securities, and it is
expected that OID will be reported on that basis unless otherwise specified in
the related prospectus supplement. In applying the calculation to pass-through
securities, the trustee will treat all payments to be received by a holder with
respect to the underlying loans as payments on a single installment obligation.
The IRS could, however, assert that OID must be calculated separately for each
loan underlying a security.
Under certain circumstances, if the loans prepay at a rate faster than
the prepayment assumption, the use of the cash flow bond method may accelerate
the holder's recognition of income. If, however, the loans prepay at a rate
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate the holder's recognition of income.
In the case of a stripped security that is an interest weighted
security, the applicable trustee intends, absent contrary authority, to report
income to holders as OID, in the manner described above for interest weighted
securities.
Possible Alternative Characterizations. The characterizations of the
stripped securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that:
o in certain series, each non-interest weighted security is composed
of an unstripped undivided ownership interest in loans and an
installment obligation consisting of stripped principal payments;
o the non-interest weighted securities are subject to the contingent
payment provisions of the regulations; or
o each interest weighted stripped security is composed of an
unstripped undivided ownership interest in loans and an installment
obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the stripped
securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of stripped securities,
there is no specific legal authority existing regarding whether the character of
the securities, for federal income tax purposes, will be the same as the loans.
The IRS could take the position that the loans' character is not carried over to
the securities in such circumstances. Pass-through securities will be, and,
although the matter is not free from doubt, stripped securities should be
considered to represent:
o "real estate assets" within the meaning of section 856(c)(4)(A) of
the Code; and
o "loans secured by an interest in real property" within the meaning
of section 7701(a)(19)(C)(v) of the Code.
Interest income attributable to pass-through securities and stripped securities
should be considered to represent "interest on obligations secured by mortgages
on real property or on interests in real property" within the meaning of section
856(c)(3)(B) of the Code. Reserves or funds underlying the securities may cause
a proportionate reduction in the above-described qualifying status categories of
securities.
Sale or Exchange
Subject to the discussion below with respect to any trust fund as to
which a partnership election is made, in the opinion of tax counsel, a holder's
tax basis in a security is the price the holder pays for the security, increased
by amounts of OID or market discount included in income, and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a security, measured by the difference between the amount realized and the
security's basis as so adjusted, will generally be capital gain or loss,
assuming that the security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the security is more
than one year and short-term capital gain or loss if the holding period of the
Security is one year or less. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of capital
losses is subject to certain limitations. Prospective investors should consult
their own tax advisors concerning these tax law provisions.
In the case of a security held by a bank, thrift, or similar
institution described in section 582 of the Code, however, gain or loss realized
on the sale or exchange of a REMIC regular interest security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a regular
interest security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of:
o the amount that would have been includible in the holder's income if
the yield on the regular interest security had equaled 110% of the
applicable federal rate as of the beginning of such holder's holding
period,
over
o the amount of ordinary income actually recognized by the holder with
respect to the regular interest security.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to any
trust fund as to which a partnership election is made, a holder, other than a
holder of a REMIC residual interest security, may, under certain circumstances,
be subject to "backup withholding" with respect to distributions or the proceeds
of a sale of certificates to or through brokers that represent interest or
original issue discount on the securities. The current backup withholding rate
is 30.5%. This rate is scheduled to adjust for periods after 2001. This
withholding generally applies if the holder of a security:
o fails to furnish the applicable trustee with its taxpayer
identification number;
o furnishes the applicable trustee an incorrect taxpayer
identification number;
o fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
o under certain circumstances, fails to provide the applicable trustee
or such holder's securities broker with a certified statement,
signed under penalty of perjury, that the taxpayer identification
number provided is its correct number and that the holder is not
subject to backup withholding.
Backup withholding will not apply, however, with respect to certain
payments made to holders, including payments to certain exempt recipients (such
as exempt organizations) and to certain nonresident alien individuals, foreign
partnerships or foreign corporations. Holders should consult their tax advisers
as to their qualification for exemption from backup withholding and the
procedure for obtaining the exemption.
The applicable trustee will report to the holders and to the servicer
for each calendar year the amount of any "reportable payments" during such year
and the amount of tax withheld, if any, with respect to payments on the
securities.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to any trust fund as to
which a partnership election is made, under the Code, unless interest (including
OID) paid on a security (other than a residual interest security) is considered
to be "effectively connected" with a trade or business conducted in the United
States by a nonresident alien individual, foreign partnership or foreign
corporation, in the opinion of tax counsel, interest will normally qualify as
portfolio interest, and will be exempt from federal income tax. However,
interest will not qualify as portfolio interest where:
o the recipient is a holder, directly or by attribution, of 10% or
more of the capital or profits interest in the issuer, or
o the recipient is a controlled foreign corporation to which the
issuer is a related person.
For interest to qualify for the portfolio interest exemption from U.S.
withholding tax, the holder must generally complete a Form W-8BEN indicating
that the holder is a non-U.S. Person. The Form W-8BEN, or in certain
circumstances other documentation, must be provided to the person otherwise
required to withhold U.S. tax. If a foreign holder is a partnership or other
type of pass-through entity that is not treated for U.S. withholding tax
purposes as the beneficial owner of the income with respect to the security, the
holder generally must receive the Form W-8BEN as described in the previous
sentence from the holder's partners or other beneficial owners of the income
with respect to the security and may be required to provide the forms, and
certain additional information, to the person through whom the holder holds the
security. The forms provided by the holder or its interestholders regarding
status as a non-U.S. Person must generally be passed through the ownership chain
to the person otherwise required to withhold tax in order for the exemption to
apply. These provisions supersede the generally applicable provisions of United
States law that would otherwise require the issuer to withhold at a 30% rate
(unless such rate were reduced or eliminated by an applicable tax treaty) on,
among other things, interest and other fixed or determinable, annual or periodic
income paid to nonresident alien individuals, foreign partnerships or foreign
corporations. Holders of pass-through securities and stripped securities,
including ratio strip securities, however, may be subject to withholding to the
extent that the loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder and appropriate documentation is provided to the person
otherwise required to withhold. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of REMIC residual interest securities who are
foreign persons will generally be treated as interest for purposes of the 30%
(or lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, the
holder of a residual interest security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the residual interest security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations that would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Regulations could, for example, require withholding prior to
the distribution of cash in the case of residual interest securities that do not
have significant value. Under the REMIC Regulations, if a residual interest
security has tax avoidance potential, a transfer of a residual interest security
to a nonresident alien individual, foreign partnership or foreign corporation
will be disregarded for all federal tax purposes. A residual interest security
has tax avoidance potential unless, at the time of the transfer the transferor
reasonably expects that the REMIC will distribute to the transferee residual
interest holder amounts that will equal at least 30% of each excess inclusion,
and that such amounts will be distributed at or after the time at which the
excess inclusions accrue and not later than the calendar year following the
calendar year of accrual. If a nonresident alien individual, foreign partnership
or foreign corporation transfers a residual interest security to a U.S. Person,
and if the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions, then the transfer is disregarded and the transferor
continues to be treated as the owner of the residual interest security for
purposes of the withholding tax provisions of the Code. See "--Excess
Inclusions" above.
Tax Characterization of the Trust Fund as a Partnership
Tax counsel is of the opinion that a trust fund structured as a
partnership will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the trust agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
trust fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the certificates has
been structured as a private placement under an IRS safe harbor, so that the
trust fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the trust fund were taxable as a corporation for federal income tax
purposes, in the opinion of tax counsel, the trust fund would be subject to
corporate income tax on its taxable income. The trust fund's taxable income
would include all its income, possibly reduced by its interest expense on the
notes. Any such corporate income tax could materially reduce cash available to
make payments on the notes and distributions on the certificates, and holders of
certificates could be liable for any such tax that is unpaid by the trust fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The trust fund will agree, and
the noteholders will agree by their purchase of notes, to treat the notes as
debt for federal income tax purposes. As a result, tax counsel is, (except as
otherwise provided in the related prospectus supplement,) of the opinion that
the notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the notes are denominated in U.S. dollars, and that the notes are
not "indexed securities" or "strip notes." Moreover, the discussion assumes that
the interest formula for the notes meets the requirements for "qualified stated
interest" under the OID Regulations, and that any OID on the notes (i.e., any
excess of the principal amount of the notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID Regulations. If these conditions are not satisfied with respect to any given
series of notes, additional tax considerations with respect to the notes will be
disclosed in the applicable prospectus supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of tax counsel, the notes
will not be considered issued with OID. The stated interest on the notes will be
taxable to a noteholder as ordinary interest income when received or accrued in
accordance with the noteholder's method of tax accounting. Under the OID
Regulations, a holder of a note issued with a de minimis amount of OID must
include the OID in income, on a pro rata basis, as principal payments are made
on the note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A holder of a note that is a "short-term note" (i.e., it has a fixed
maturity date of not more than one year from the issue date) may be subject to
special rules. An accrual basis holder of a short-term note (and certain cash
method holders, including regulated investment companies, as set forth in
section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a short-term note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the short-term note). However, a cash basis holder of a
short-term note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the short-term note until the taxable disposition of the
short-term note. A cash basis taxpayer may elect under section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
short-term note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a short-term note is purchased for more or less than its
principal amount.
Sale or Other Disposition. In the opinion of tax counsel, if a
noteholder sells a note, the holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the holder's
adjusted tax basis in the note. The adjusted tax basis of a note to a particular
noteholder will equal the holder's cost for the note, increased by any market
discount, acquisition discount, OID and gain previously included by the
noteholder in income with respect to the note and decreased by the amount of
bond premium (if any) previously amortized and by the amount of principal
payments previously received by the noteholder with respect to the note. Any
such gain or loss will be capital gain or loss if the note was held as a capital
asset, except for gain representing accrued interest and accrued market discount
not previously included in income. Capital losses generally may be used only to
offset capital gains.
Foreign Holders. In the opinion of tax counsel, interest payments made
(or accrued) to a noteholder who is a "foreign person" (i.e., nonresident alien,
foreign corporation or other non-U.S. Person) generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person:
o is not actually or constructively a "10 percent shareholder" of the
trust fund or the seller (including a holder of 10% of the
outstanding certificates) or a "controlled foreign corporation" with
respect to which the trust fund or the seller is a "related person"
within the meaning of the Code; and
o provides the trustee or other person who is otherwise required to
withhold U.S. tax with respect to the notes with an appropriate
statement (on Form W-8BEN), signed under penalties of perjury,
certifying that the beneficial owner of the note is a foreign person
and providing the foreign person's name and address.
If a foreign holder is a partnership or other type of pass-through entity that
is not treated for U.S. withholding tax purposes as the beneficial owner of the
income with respect to the certificate, the holder generally must receive the
Form W-8BEN as described in the previous sentence from the holder's partners or
other beneficial owners of the income with respect to the certificate and may be
required to provide the forms, and certain additional information, to the person
through whom the holder holds the certificates. The forms provided by the holder
or its interestholders regarding status as a non-U.S. Person must generally be
passed through the ownership chain to the person otherwise required to withhold
tax in order for the exemption to apply. If a note is held through a securities
clearing organization or certain other financial institutions, the foreign
person that owns the note should furnish such organization or institution with a
Form W-8BEN or a similar form. The organization or institution may then be
required to forward the Form W-8BEN to the withholding agent. If interest is not
portfolio interest and is not effectively connected with the conduct of a U.S.
trade or business, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax; provided, that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt noteholder fail
to provide the required certification, the trust fund will be required to backup
withhold from the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
The current backup withholding rate is 30.5%. This rate is scheduled to adjust
for periods after 2001.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of tax counsel, the IRS successfully asserted that one or more of the
notes did not represent debt for federal income tax purposes, the notes might be
treated as equity interests in the trust fund. If so treated, the trust fund
might be taxable as a corporation with the adverse consequences described above
(and the taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on notes recharacterized as equity).
Alternatively, and most likely in the view of tax counsel, the trust fund might
be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders. For example, income to
certain tax-exempt entities (including pension funds) may be "unrelated business
taxable income," income to foreign holders generally would be subject to U.S.
tax and U.S. tax return filing and withholding requirements, and individual
holders might be subject to certain limitations on their ability to deduct their
share of the trust fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The trust fund and the
servicer will agree, and the certificateholders will agree by their purchase of
certificates, to treat the trust fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
trust fund, the partners of the partnership being the certificateholders, and
the notes being debt of the partnership. However, the proper characterization of
the arrangement involving the trust fund, the certificates, the notes, the trust
fund and the servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. Any such
characterization would not result in materially adverse tax consequences to
certificateholders as compared to the consequences from treatment of the
certificates as equity in a partnership, described below. The following
discussion assumes that the certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the certificates are denominated in U.S. dollars, none of the
certificates is an indexed security or a stripped certificate, and that a series
of securities includes a single class of certificates. If these conditions are
not satisfied with respect to any given series of certificates, additional tax
considerations with respect to such certificates will be disclosed in the
applicable prospectus supplement.
Partnership Taxation. If the trust fund is a partnership, in the
opinion of tax counsel, the trust fund will not be subject to federal income
tax. Rather, in the opinion of tax counsel, each certificateholder will be
required to separately take into account the holder's allocated share of income,
gains, losses, deductions and credits of the trust fund. The trust fund's income
will consist primarily of interest and finance charges earned on the loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of loans. The trust fund's
deductions will consist primarily of interest accruing with respect to the
notes, servicing and other fees, and losses or deductions upon collection or
disposition of loans.
In the opinion of tax counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations and
the partnership agreement (here, the trust agreement and related documents). The
trust agreement will provide, in general, that the certificateholders will be
allocated taxable income of the trust fund for each month equal to the sum of:
o the interest that accrues on the certificates in accordance with
their terms for such month, including interest accruing at the
pass-through rate for that month and interest on amounts previously
due on the certificates but not yet distributed;
o any trust fund income attributable to discount on the loans that
corresponds to any excess of the principal amount of the
certificates over their initial issue price;
o prepayment premium payable to the certificateholders for that month;
and
o any other amounts of income payable to the certificateholders for
that month.
This allocation will be reduced by any amortization by the trust fund
of premium on loans that corresponds to any excess of the issue price of
certificates over their principal amount. All remaining taxable income of the
trust fund will be allocated to the depositor. Based on the economic arrangement
of the parties, in the opinion of tax counsel, this approach for allocating
trust fund income should be permissible under applicable Treasury regulations,
although no assurance can be given that the IRS would not require a greater
amount of income to be allocated to certificateholders. Moreover, in the opinion
of tax counsel, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire pass-through rate
plus the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of that amount. Thus, cash
basis holders will in effect be required to report income from the certificates
on the accrual basis and certificateholders may become liable for taxes on trust
fund income even if they have not received cash from the trust fund to pay
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all certificateholders but certificateholders may be
purchasing certificates at different times and at different prices,
certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the trust fund.
In the opinion of tax counsel, all of the taxable income allocated to a
certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) may
constitute "unrelated business taxable income" generally taxable to the holder
under the Code.
In the opinion of tax counsel, an individual taxpayer's share of
expenses of the trust fund (including fees to the servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might be
disallowed to the individual in whole or in part and might result in such holder
being taxed on an amount of income that exceeds the amount of cash actually
distributed to the holder over the life of the trust fund.
The trust fund intends to make all tax calculations relating to income
and allocations to certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each loan, the trust fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on certificateholders.
Discount and Premium. It is believed that the loans were not issued
with OID, and, therefore, the trust fund should not have OID income. However,
the purchase price paid by the trust fund for the loans may be greater or less
than the remaining principal balance of the loans at the time of purchase. If
so, in the opinion of tax counsel, the loan will have been acquired at a premium
or discount, as the case may be. (As indicated above, the trust fund will make
this calculation on an aggregate basis, but might be required to recompute it on
a loan-by-loan basis.)
If the trust fund acquires the loans at a market discount or premium,
the trust fund will elect to include any discount in income currently as it
accrues over the life of the loans or to offset any premium against interest
income on the loans. As indicated above, a portion of market discount income or
premium deduction may be allocated to certificateholders.
Section 708 Termination. In the opinion of tax counsel, under section
708 of the Code, the trust fund will be deemed to terminate for federal income
tax purposes if 50% or more of the capital and profits interests in the trust
fund are sold or exchanged within a 12-month period. Pursuant to final Treasury
regulations issued May 9, 1997 under section 708 of the Code, if such a
termination occurs, the trust fund would be deemed to contribute its assets to a
new partnership in exchange for interests in the new partnership. Such interests
would be deemed distributed to the partners of the original trust fund in
liquidation thereof, which would not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of tax counsel,
capital gain or loss will be recognized on a sale of certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the certificates sold. A certificateholder's tax basis in a certificate will
generally equal the holder's cost increased by the holder's share of trust fund
income (includible in income) and decreased by any distributions received with
respect to the certificate. In addition, both the tax basis in the certificates
and the amount realized on a sale of a certificate would include the holder's
share of the notes and other liabilities of the trust fund. A holder acquiring
certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in the certificates, and, upon sale or other disposition of
some of the certificates, allocate a portion of the aggregate tax basis to the
certificates sold (rather than maintaining a separate tax basis in each
certificate for purposes of computing gain or loss on a sale of that
certificate).
Any gain on the sale of a certificate attributable to the holder's
share of unrecognized accrued market discount on the loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The trust fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the trust fund will elect to include
market discount in income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect thereto, this excess will generally give rise to
a capital loss upon the retirement of the certificates.
Allocations Between Transferors and Transferees. In general, the trust
fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the certificateholders
in proportion to the principal amount of certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a certificateholder sells its
certificates at a profit (loss), the purchasing certificateholder will have a
higher (lower) basis in the certificates than the selling certificateholder had.
The tax basis of the trust fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the trust fund were to file an election under
section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the trust fund will not make such
election. As a result, certificateholders might be allocated a greater or lesser
amount of trust fund income than would be appropriate based on their own
purchase price for certificates.
Administrative Matters. The trustee is required to keep or have kept
complete and accurate books of the trust fund. Books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the trust fund will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust fund and will report each certificateholder's allocable share of items of
trust fund income and expense to holders and the IRS on Schedule K-1. The trust
fund will provide the Schedule K-l information to nominees that fail to provide
the trust fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the trust fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust fund
with a statement containing certain information on the nominee, the beneficial
owners and the certificates so held. Such information includes:
o the name, address and taxpayer identification number of the nominee;
and
o as to each beneficial owner (a) the name, address and identification
number of such person, (b) whether such person is a U.S. Person, a
tax-exempt entity or a foreign government, an international
organization or any wholly owned agency or instrumentality of either
of the foregoing, and (c) certain information on certificates that
were held, bought or sold on behalf of such person throughout the
year.
In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust fund information
as to themselves and their ownership of certificates. A clearing agency
registered under section 17A of the Securities Exchange Act of 1934 is not
required to furnish any such information statement to the trust fund. The
information referred to above for any calendar year must be furnished to the
trust fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the trust fund with the information
described above may be subject to penalties.
The depositor will be designated as the tax matters partner in the
related trust agreement and, as such, will be responsible for representing the
certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the trust fund by the appropriate taxing authorities
could result in an adjustment of the returns of the certificateholders, and,
under certain circumstances, a certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the trust fund. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the trust fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
Persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the trust fund would be engaged in a trade or business in the United States
for such purposes, the trust fund will withhold as if it were so engaged in
order to protect the trust fund from possible adverse consequences of a failure
to withhold. The trust fund expects to withhold on the portion of its taxable
income that is allocable to foreign certificateholders pursuant to section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.1% (subject to adjustment in years beginning after 2001) for all other
foreign holders. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require the trust fund to change its
withholding procedures. In determining a holder's withholding status, the trust
fund may rely on IRS Form W-8BEN or a similar form, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the trust fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the trust fund on Form W-8BEN in order to assure appropriate crediting of the
taxes withheld. A foreign holder generally would be entitled to file with the
IRS a claim for refund with respect to taxes withheld by the trust fund taking
the position that no taxes were due because the trust fund was not engaged in a
U.S. trade or business. However, interest payments made (or accrued) to a
certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the trust fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30%, unless reduced
or eliminated pursuant to an applicable treaty. In such case, a foreign holder
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to "backup" withholding tax
if, in general, the certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code. The current backup withholding rate is 30.5%.
This rate is scheduled to adjust for periods after 2001.
State Tax Considerations
In addition to the federal income tax considerations described in this
prospectus under "Material Federal Income Tax Considerations," potential
investors should consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the securities. State and local
income tax law may differ substantially from the corresponding federal law, and
this discussion does not purport to describe any aspect of the income tax laws
of any state or locality. Therefore, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences of
an investment in the securities.
FASIT Securities
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities effective on
September 1, 1997. On February 4, 2000, the IRS and Treasury issued proposed
Treasury regulations for FASITs. The regulations generally would not be
effective until final regulations are filed with the federal register. However,
it appears that certain anti-abuse rules would apply as of February 4, 2000.
Investors also should note that the FASIT discussions contained herein
constitutes only a summary of the federal income tax consequences to holders of
FASIT securities. With respect to each series of FASIT securities, the related
prospectus supplement will provide a detailed discussion regarding the federal
income tax consequences associated with the particular transaction.
FASIT securities will be classified as either FASIT "regular
securities," which generally will be treated as debt for federal income tax
purposes, or FASIT "ownership securities," which generally are not treated as
debt for such purposes, but rather as representing rights and responsibilities
with respect to the taxable income or loss of the related series. The prospectus
supplement for each series of securities will indicate whether one or more FASIT
elections will be made for the series, and which securities of the series will
be designated as regular securities, and which, if any, will be designated as
ownership securities.
Qualification as a FASIT. The trust fund underlying a series (or one or
more designated pools of assets held in the trust fund) will qualify under the
Code as a FASIT in which the FASIT regular securities and the FASIT ownership
securities will constitute the "regular interests" and the "ownership
interests," respectively, if
o a FASIT election is in effect,
o certain tests concerning the composition of the FASIT's assets and
the nature of the holders' interests in the FASIT are met on a
continuing basis, and
o the trust fund is not a regulated investment company or RIC as
defined in section 851(a) of the Code.
However, the qualification as a FASIT of any trust fund for which a
FASIT election is made depends on the trust's ability to satisfy the
requirements of the FASIT provisions on an ongoing basis, including, without
limitation, the requirements of any final Treasury regulations that may be
promulgated in the future under the FASIT provisions or as a result of any
change in applicable law. Thus, no assurances can be made regarding the
qualification as a FASIT of any trust for which a FASIT election is made at any
particular time after the issuance of securities by the trust.
Asset Composition. In order for a trust fund (on one or more designated
pools of assets held by a trust fund) to be eligible for FASIT status,
substantially all of the assets of the trust fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter. Permitted assets include
o cash or cash equivalents,
o debt instruments with fixed terms that would qualify as REMIC
regular interests if issued by a REMIC (generally, instruments that
provide for interest at a fixed rate, a qualifying variable rate, or
a qualifying interest-only type rate,
o foreclosure property,
o certain hedging instruments (generally, interest and currency rate
swaps and credit enhancement contracts) that are reasonably required
to guarantee or hedge against the FASIT's risks associated with
being the obligor on FASIT interests,
o contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
o FASIT regular interests, and
o REMIC regular interests.
o Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to
the holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT must meet certain requirements. All of
the interests in a FASIT must belong to either
o one or more classes of regular interests or
o a single class of ownership interest that is held by a fully taxable
domestic corporation. In the case of series that include FASIT
ownership securities, the ownership interest will be represented by
the FASIT ownership securities.
A FASIT interest generally qualifies as a regular interest if
o it is designated as a regular interest,
o it has a stated maturity no greater than thirty years,
o it entitles its holder to a specified principal amount,
o the issue price of the interest does not exceed 125% of its stated
principal amount,
o the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and
o if it pays interest, such interest is payable either at a fixed rate
with respect to the principal amount of the regular interest or at a
permissible variable rate with respect to the principal amount.
Permissible variable rates for FASIT regular interests are the same as those for
REMIC regular interest (i.e., certain qualified floating rates and weighted
average rates). See "Material Federal Income Tax Considerations--Taxation of
Debt Securities--Variable Rate Debt Securities" in this prospectus.
If a FASIT security fails to meet one or more of the requirements set
out in the third, fourth or fifth bullet in the preceding paragraph, but
otherwise meets the above requirements, it may still qualify as a type of
regular interest known as a "high-yield interest." In addition, if a FASIT
security fails to meet the requirements of the final bullet in the preceding
paragraph, but the interest payable on the security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the security, the security also will qualify as a
high-yield interest. A high-yield interest may be held only by domestic
corporations that are fully subject to corporate income tax, other FASITs and
dealers in securities who acquire such interests as inventory, rather than for
investment. In addition, holders of high-yield interests are subject to
limitations on offset of income derived from such interest. See "--Tax Treatment
of FASIT Regular Securities" and "--Treatment of High-Yield Interests" below.
Anti-Abuse Rule. Under proposed Treasury regulations, the IRS
Commissioner may make appropriate adjustments with regard to the FASIT and any
arrangement or transaction involving the FASIT if a principal purpose of forming
or using the FASIT is to achieve results inconsistent with the intent of the
FASIT provisions and the FASIT regulations. This determination would be based on
all of the facts and circumstances, including a comparison of the purported
business purpose for a transaction and the claimed tax benefits resulting from
the transaction.
Consequences of the Failure of the FASIT Trust to Qualify as a FASIT.
If a FASIT trust fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, proposed Treasury
regulations provide that its FASIT status would be lost for that year and the
FASIT trust would be unable to elect FASIT status without the Commissioner's
approval. If FASIT status is lost, under proposed Treasury regulations the
entity classification of the former FASIT would be determined under general
federal income tax principles. The holder of the FASIT ownership security would
be treated as exchanging the assets of the former FASIT for an amount equal to
their value and gain recognized would be treated as gain from a prohibited
transaction that is subject to the 100% tax, without exception. Loss, if any,
would be disallowed. In addition, the holder of the FASIT ownership security
must recognize cancellation of indebtedness income, on a regular interest by
regular interest basis, in an amount equal to the adjusted issue price of each
FASIT regular security outstanding immediately before the loss of FASIT status
over its fair market value. If the holder of the FASIT ownership security has a
continuing economic interest in the former FASIT, the characterization of this
interest is determined under general federal income tax principles. Holders of
FASIT regular securities are treated as exchanging their securities for
interests in the new entity classification of the former FASIT, which
classification is determined under general federal income tax principles. Gain
is recognized to the extent the new interest either does not qualify as debt or
differs either in kind or extent. The basis of the interest in the new entity
classification of the former FASIT equals the basis in the FASIT regular
security increased by any gain recognized on the exchange.
Tax Treatment of FASIT Regular Securities. Payments received by holders
of FASIT regular securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC regular securities. As in the case of holders of REMIC regular
securities, holders of FASIT regular securities must report income from such
securities under an accrual method of accounting, even if they otherwise would
have used the cash receipts and disbursements method. Except in the case of
FASIT regular securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT regular security
generally will be treated as ordinary income to the holder and a principal
payment on the security will be treated as a return of capital to the extent
that the holder's basis is allocable to that payment. Holders of FASIT regular
securities issued with original issue discount or acquired with market discount
or premium generally will be required to treat interest and principal payments
on the securities in the same manner described for REMIC regular securities. See
"Material Federal Income Tax Considerations--Taxation of Debt Securities,"
"--Market Discount," and "--Premium" in this prospectus. High-yield interests
may be held only by fully taxable domestic corporations, other FASITs, and
certain securities dealers. Holders of high-yield interests are subject to
limitations on their ability to use current losses or net operating loss
carryforwards or carrybacks to offset any income derived from those securities.
If a FASIT regular security is sold or exchanged, the holder generally
will recognize gain or loss upon the sale in the manner described above for
securities other than REMIC regular interest securities. See "Material Federal
Income Tax Considerations--Sale or Exchange" in this prospectus. In addition, if
a FASIT regular security becomes wholly or partially worthless as a result of
default and delinquencies of the underlying assets, the holder of the security
should be allowed to deduct the loss sustained (or alternatively be able to
report a lesser amount of income). See "Material Federal Income Tax
Considerations--Taxation of Debt Securities--Effects of Default and
Delinquencies" in this prospectus.
FASIT regular securities held by a real estate investment trust or REIT
will qualify as "real estate assets" within the meaning of section 856(c) (4)(A)
of the Code, and interest on such securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of section 856(c)(3)(B) of the Code to the same
extent that REMIC securities would be so considered. FASIT regular securities
held by a thrift institution taxed as a "domestic building and loan association"
will represent qualifying assets for purposes of the qualification requirements
set forth in section 7701(a)(19) of the Code to the same extent that REMIC
securities would be so considered. See "Material Federal Income Tax
Considerations--Taxation of Debt Securities--Status as Real Property Loans" in
this prospectus. In addition, FASIT regular securities held by a financial
institution to which section 585 of the Code applies will be treated as
evidences of indebtedness for purposes of section 582(c)(1) of the Code. FASIT
securities will not qualify as "government securities" for either REIT - or RIC
- - qualification purposes.
Treatment of High-Yield Interests. High-yield interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT security with
losses. High-yield interests may be held only by eligible corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an eligible corporation) initially acquires a
high-yield interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
high-yield interest multiplied by the highest corporate income tax rate. In
addition, transfers of high-yield interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the high-yield interest.
The holder of a high-yield interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the high-yield interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT regular security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT regular security and that have the same features as high-yield
interests.
Tax Treatment of FASIT Ownership Securities. A FASIT ownership security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT ownership security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the holder of a FASIT
ownership interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT ownership interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT ownership security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT regular
securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT ownership
securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT security as are the holders of high-yield
interests. See "FASIT Securities--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC residual
securities also will apply to FASIT ownership securities. Accordingly, losses on
dispositions of a FASIT ownership security generally will be disallowed where,
within six months before or after the disposition, the seller of such security
acquires any other FASIT ownership security or, in the case of a FASIT holding
mortgage assets, any interest in a taxable mortgage pool described in section
7701 of the Code that is economically comparable to a FASIT Ownership Security.
In addition, if any security that is sold or contributed to a FASIT by the
holder of the related FASIT ownership security was required to be
marked-to-market under section 475 of the Code by such holder, then section 475
will continue to apply to such securities, except that the amount realized under
the mark-to-market rules will be a greater of the securities' value under
present law or the securities' value after applying special valuation rules
contained in the FASIT provisions. Those special valuation rules generally
require that the value of debt instruments that are not traded on an established
securities market be determined by calculating the present value of the
reasonably expected payments under the instrument using a discount rate of 120%
of the applicable federal rate, compounded semiannually.
The holder of a FASIT ownership security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income derived
from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any series for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
securities will be subject to backup withholding to the same extent holders of
REMIC securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, holders of record of FASIT securities
generally will be treated in the same manner as holders of REMIC securities.
Under proposed Treasury regulations, if a non-U.S. Person holds (either
directly or through a vehicle which itself is not subject to U.S. federal income
tax, such as a partnership or a trust) a FASIT regular security and a "conduit
debtor" pays or accrues interest on a debt instrument held by such FASIT, any
interest received or accrued by the non-U.S. Person FASIT regular security
holder is treated as received or accrued from the conduit debtor. The proposed
Treasury regulations state that a debtor is a conduit debtor if the debtor is a
U.S. Person or the United States branch of a non-U.S. Person and the non-U.S.
Person FASIT regular security holder is (1) a "10 percent shareholder" of the
debtor, (2) a "controlled foreign corporation" and the debtor is a related
person with respect to the controlled foreign corporation or (3) related to the
debtor. As set forth above, the proposed Treasury regulations would not be
effective until final regulations are filed with the federal register.
Due to the complexity of the federal income tax rules applicable to
holders and the considerable uncertainty that exists with respect to many
aspects of those rules, potential investors should consult their own tax
advisors regarding the tax treatment of the acquisition, ownership, and
disposition of the securities.
ERISA Considerations
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended and the Code, which apply
only to securities of a series that are not divided into subclasses. If
securities are divided into subclasses, the related prospectus supplement will
contain information concerning considerations relating to ERISA and the Code
that are applicable to the related subclasses.
ERISA and section 4975 of the Code impose requirements on employee
benefit plans - and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and
collective investment funds and separate accounts in which plans, accounts or
arrangements are invested - and on persons who are fiduciaries with respect to
these types of plans and arrangements. In this prospectus we refer to these
types of plans and arrangements as "Plans." Generally, ERISA applies to
investments made by Plans. Among other things, ERISA requires that the assets of
Plans be held in trust and that the trustee, or other duly authorized fiduciary,
have exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans, such as the duty to invest prudently, to diversify investments unless it
is prudent not to do so, and to invest in accordance with the documents
governing the Plan. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a Plan, or who
renders investment advice for a fee, is considered to be a fiduciary of such
Plan (subject to certain exceptions not here relevant). Certain employee benefit
plans, such as governmental plans (as defined in section 3(32) of ERISA) and, if
no election has been made under section 410(d) of the Code, church plans (as
defined in section 3(33) of ERISA), are not subject to ERISA's requirements.
Accordingly, assets of such plans may be invested in securities without regard
to the ERISA considerations described above and below, subject to the provisions
of applicable federal or state law. Any such plan that is qualified and exempt
from taxation under sections 401(a) and 501(a) of the Code, however, is subject
to the prohibited transaction rules set forth in section 503 of the Code.
On January 5, 2000, the United States Department of Labor (DOL) issued
final regulations under section 401(c) of ERISA describing a safe harbor for
insurers that issued certain nonguaranteed policies supported by their general
accounts to Plans, and under which an insurer would not be considered an ERISA
fiduciary with respect to its general account by virtue of a Plan's investment
in such a policy. In general, to meet the safe harbor, an insurer must
o disclose certain specified information to investing Plan fiduciaries
initially and on an annual basis;
o allow Plans to terminate or discontinue a policy on 90 days' notice
to the insurer, and to elect, without penalty, either a lump-sum
payment or annual installment payments over a ten-year period, with
interest; and
o give Plans written notice of "insurer-initiated amendments" 60 days
before the amendments take effect.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA and section 4975 of the Code
prohibit a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest"), and impose
additional prohibitions where parties in interest are fiduciaries with respect
to a Plan. Certain parties in interest that participate in a prohibited
transaction may be subject to excise taxes imposed pursuant to section 4975 of
the Code, or penalties imposed pursuant to section 502(i) of ERISA, unless a
statutory, regulatory or administrative exemption is available.
The DOL has issued Plan asset regulations defining what constitutes the
assets of a Plan (Department of Labor Reg. Section 2510.3-101). Under these
regulations, the underlying assets and properties of corporations, partnerships,
trusts and certain other entities in which a Plan makes an "equity" investment
could be deemed for purposes of ERISA to be assets of the investing Plan in
certain circumstances.
Under the Plan asset regulations, the term "equity" interest is defined
as any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the trust fund issues notes that are not treated as equity
interests in the trust fund for purposes of the Plan asset regulations, a Plan's
investment in such notes would not cause the assets of the trust to be deemed
Plan assets. However, the seller, the servicer, the backup servicer, the
indenture trustee, the owner trustee, the underwriter and the depositor may be
the sponsor of or investment advisor with respect to one or more Plans. Because
such parties may receive certain benefits in connection with the sale of the
notes, the purchase of notes using Plan assets over which any of these parties
(or their affiliates) has investment authority might be deemed to be a violation
of the prohibited transaction rules of ERISA and the Code for which no exemption
may be available. Accordingly, notes may not be purchased using the assets of
any Plan if the seller, the servicer, the backup servicer, the indenture
trustee, the owner trustee, the underwriter, the depositor or any of their
affiliates
o has investment or administrative discretion with respect to such
Plan assets;
o has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets for a fee and
pursuant to an agreement or understanding that the advice will serve
as a primary basis for investment decisions with respect to the Plan
assets and will be based on the particular investment needs for the
Plan; or
o is an employer maintaining or contributing to such Plan.
In addition, the trust fund, any underwriter, the trustee or their
affiliates might be considered or might become "parties in interest" with
respect to a Plan. Also, any holder of certificates of the trust fund, because
of its activities or the activities of its respective affiliates, may be deemed
to be a "party in interest" with respect to certain Plans, including but not
limited to Plans sponsored by the holder. In either case, whether nor not the
assets of the trust are considered to be Plan assets the acquisition or holding
of notes by or on behalf of a Plan could give rise to a prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
exemptions such as:
o Prohibited Transaction Class Exemption (PTCE) 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified
professional asset manager;"
o PTCE 90-1, which exempts certain transactions involving insurance
company pooled separate accounts;
o PTCE 91-38, which exempts certain transactions involving bank
collective investment funds;
o PTCE 95-60, which exempts certain transactions involving insurance
company general accounts; or
o PTCE 96-23, which exempts certain transactions effected on behalf of
a Plan by certain "in-house asset managers."
There can be no assurance that any of these class exemptions will apply with
respect to any particular Plan's investment in notes, or, even if it did apply,
that any exemption would apply to all prohibited transactions that may occur in
connection with such an investment. Unless a different requirement is imposed in
the prospectus supplement, each prospective purchaser or transferee of a note
that is a Plan or a person acting on behalf or investing the assets of a Plan
shall be required to represent (or, with respect to any transfer of a beneficial
interest in a global note, shall be deemed to represent) to the indenture
trustee and the note registrar that the relevant conditions for exemptive relief
under at least one of the foregoing exemptions have been satisfied.
The Plan asset regulations provide that, generally, the assets of an
entity in which a Plan invests will not be deemed to be assets of the Plan for
purposes of ERISA if the equity interest acquired by the investing Plan is a
publicly-offered security, or if equity participation by benefit plan investors
is not significant. In general, a publicly-offered security, as defined in the
Plan asset regulations, is a security that is widely held, freely transferable
and registered under the Securities Exchange Act of 1934, as amended. Equity
participation in an entity by benefit plan investors is not significant if,
after the most recent acquisition of an equity interest in the entity, less than
25% of the value of each class of equity interest in the entity is held by
"benefit plan investors," which include benefit plans described in ERISA or
under section 4975 of the Code, whether or not they are subject to Title I of
ERISA, as well as entities whose underlying assets include assets of a Plan by
reason of a Plan's investment in the entity.
If no exception under the Plan asset regulations applies and if a Plan
(or a person investing Plan assets, such as an insurance company general
account) acquires an equity interest in the trust, then the assets of the trust
would be considered to be assets of the Plan. Because the loans held by the
trust may be deemed assets of each Plan that purchases an equity interest, an
investment in an equity interest issued by the trust by a Plan might be a
prohibited transaction under ERISA and subject to an excise tax under section
4975 of the Code, and may cause transactions undertaken in the course of
operating the trust to constitute prohibited transactions, unless a statutory or
administrative exemption applies.
The DOL issued to Bear, Stearns & Co. Inc., an individual underwriter
exemption (Prohibited Transaction Exemption 90-30, 55 Fed. Reg. 21461 (1990)),
which exempts from the application of certain of the prohibited transaction
rules transactions relating to the acquisition, sale and holding by Plans of
certain securities, including certificates, representing an interest in
asset-backed pass-through entities, including trusts, that hold certain types of
receivables or obligations and with respect to which Bear, Stearns & Co. Inc.,
or certain of its affiliates, is the underwriter, or the manager or co-manager
of an underwriting syndicate.
The underwriter exemption sets forth the following general conditions
which must be satisfied before a transaction involving the acquisition, sale and
holding of the certificates or a transaction in connection with the servicing,
operation and management of the trust fund may be eligible for exemptive relief
thereunder:
o The acquisition of the certificates by a Plan is on terms (including
the price for the certificates) that are at least as favorable to
the investing Plan as they would be in an arm's-length transaction
with an unrelated party.
o The rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced
by other certificates of the same trust fund, other than in the case
of a "designated transaction" (as defined below).
o The certificates acquired by the Plan have received a rating at the
time of such acquisition that is in one of the three (or in the case
of a designated transaction, four) highest generic rating categories
from any of Fitch, Inc., Moody's Investors Service, Inc. and
Standard & Poor's.
o The trustee is not an affiliate of the underwriters, the depositor,
the servicer, any borrower whose obligations under one or more
mortgage loans constitute more than 5% of the aggregate unamortized
principal balance of the assets in the trust, the counterparty in a
permitted notional principal transaction, or any of their respective
affiliates (together with the trustee, the "restricted group").
o The sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting or placing such
certificates; the sum of all payments made to and retained by the
depositor pursuant to the sale of the mortgage loans to the trust
represents not more than the fair market value of such mortgage
loans; and the sum of all payments made to and retained by the
servicers represent not more than reasonable compensation for the
servicers' services under the pooling and servicing agreements and
reimbursement of the servicers' reasonable expenses in connection
therewith.
o The Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
For purposes of the underwriter exemption, a "designated transaction"
means, for certificates issued on or after August 23, 2000, a transaction in
which the assets underlying the certificates consist of single-family
residential, multi-family residential, home equity, manufactured housing and/or
commercial mortgage obligations that are fully secured by single-family
residential, multi-family residential or commercial real property or leasehold
interests in the foregoing.
Moreover, the underwriter exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
fiduciary causes a Plan to acquire certificates in a trust containing
receivables on which such person (or its affiliate) is an obligor; provided,
that among other requirements:
o the person (or its affiliate) is not an obligor with respect to more
than 5% of the fair market value of the obligations or receivables
contained in the trust;
o the Plan is not a plan with respect to which any member of the
restricted group is the "plan sponsor" (as defined in section
3(16)(B) of ERISA);
o in the case of an acquisition in connection with the initial
issuance of certificates, at least 50% of each class of certificates
in which Plans have invested is acquired by persons independent of
the restricted group and at least 50% of the aggregate interest in
the trust fund is acquired by persons independent of the restricted
group;
o a Plan's investment in certificates of any class does not exceed 25%
of all of the certificates of that class outstanding at the time of
the acquisition; and
o immediately after the acquisition, no more than 25% of the assets of
any Plan with respect to which such person has discretionary
authority or renders investment advice are invested in certificates
representing an interest in one or more trusts containing assets
sold or serviced by the same entity.
The underwriter exemption issued to Bear, Stearns & Co., Inc. was
amended by Prohibited Transaction Exemption 97-34, 62 Fed. Reg. 39021 (1997), in
part, to provide exemptive relief to certain mortgage-backed and asset-backed
securities transactions that utilize pre-funding accounts and that otherwise
satisfy the requirements of the underwriter exemption. Mortgage loans or other
secured receivables supporting payments to certificateholders, and having a
value equal to no more than 25% of the total principal amount of the
certificates being offered by the trust, may be transferred to the trust within
a 90-day or three-month funding period following the closing date instead of
being required to be either identified or transferred on or before the closing
date. The relief is available when the following conditions are met:
o The funding limit (i.e., the ratio of the amount allocated to the
pre-funding account to the total principal amount of the
certificates being offered) must not exceed 25%.
o All the additional obligations transferred after the closing date
must meet the same terms and conditions for eligibility as the
original obligations used to create the trust, which terms and
conditions have been approved by a rating agency; provided, that the
terms and conditions for determining the eligibility of an
obligation may be changed if such changes receive prior approval
either by a majority vote of the outstanding certificateholders or
by a rating agency.
o The transfer of additional obligations to the trust during the
funding period must not result in the certificates to be covered by
the underwriter exemption receiving a lower credit rating from a
rating agency upon termination of the funding period than the rating
that was obtained at the time of the initial issuance of the
certificates by the trust.
o Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the obligations in the
trust at the end of the funding period must not be more than 100
basis points lower than the average interest rate for the
obligations transferred to the trust on the closing date.
o In order to insure that the characteristics of the additional
obligations are substantially similar to the original obligations
which were transferred to the trust fund:
(i) the characteristics of the additional obligations
must be monitored by an insurer or other credit
support provider that is independent of the
depositor; or
(ii) an independent accountant retained by the depositor
must provide the depositor with a letter (with copies
provided to each rating agency rating the
certificates, the related underwriter and the related
trustee) stating whether or not the characteristics
of the additional obligations conform to the
characteristics described in the related prospectus
or prospectus supplement and/or pooling and servicing
agreement. In preparing the letter, the independent
accountant must use the same type of procedures as
were applicable to the obligations transferred to the
trust as of the closing date.
o The period of pre-funding must end no later than three months or 90
days after the closing date or earlier in certain circumstances if
the pre-funding account falls below the minimum level specified in
the pooling and servicing agreement or an event of default occurs.
o Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in certain permitted investments.
o The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest
account used in connection with a pre-funding
account;
(ii) the duration of the period of pre-funding;
(iii) the percentage and/or dollar amount of the funding
limit for the trust; and
(iv) that the amounts remaining in the pre-funding account
at the end of the funding period will be remitted to
certificateholders as repayments of principal.
o The related pooling and servicing agreement must describe the
permitted investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
additional obligations.
On November 13, 2000, the DOL published in the Federal Register an
amendment to the underwriter exemption (Prohibited Transaction Exemption
2000-58, 65 Fed. Reg. 67765 (2000)) that, effective as of August 23, 2000,
generally permits Plans to purchase securities, including subordinated
securities, rated in any of the four highest ratings categories (provided that
all other requirements of the underwriter exemption are met). The description
above reflects this amendment.
In general, neither PTCE 83-1, which exempts certain transactions
involving Plan investments in mortgage trusts, nor the underwriter exemption
applies to a trust which contains unsecured obligations. However, PTE 2000-58
provides that, for purposes of the underwriter exemption, residential and home
equity loan receivables issued in designated transactions may be less than fully
secured if:
o the rights and interests evidenced by the certificates issued in the
designated transaction are not subordinated to the rights and
interests evidenced by other securities of the same trust fund,
o the certificates have received a rating at the time of acquisition
that is in one of the two highest generic rating categories from a
rating agency, and
o the receivables are secured by collateral whose fair market value on
the closing date of the designated transaction is at least 80% of
the sum of the outstanding principal balance due under the
receivable and the outstanding principal balance of any other
receivable of higher priority which is secured by the same
collateral.
Any Plan fiduciary that proposes to cause a Plan to purchase securities
should consult with counsel concerning the impact of ERISA and the Code, the
applicability of PTCE 83-1, the underwriter exemption, or any other exemption
and the potential consequences in their specific circumstances, prior to making
an investment. Moreover, each Plan fiduciary should determine whether, under the
general fiduciary standards of investment prudence and diversification, an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Legal Matters
The legality of the securities of each series, including the material
federal income tax consequences with respect to the securities, will be passed
upon for the depositor by Brown & Wood LLP, New York, New York, Morgan, Lewis &
Bockius LLP, New York, New York, or other counsel designated in the prospectus
supplement.
Financial Information
A new trust fund will be formed for each series of securities. No trust
fund will engage in any business activities or have any assets or obligations
prior to the issuance of the related series of securities. Accordingly, no
financial statements with respect to any trust fund will be included in this
prospectus or in the related prospectus supplement.
Available Information
The depositor has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the securities. This
prospectus, which forms a part of the registration statement, and the prospectus
supplement relating to each series of securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the registration statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to the registration statement and its exhibits. The registration statement
and exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the SEC at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048. In addition, the SEC maintains a
Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the depositor,
that file electronically with the SEC.
Incorporation of Certain Information by Reference
This prospectus incorporates by reference all documents and reports
filed by the depositor, Bear Stearns Asset Backed Securities, Inc., with respect
to a trust fund pursuant to Section 13(a), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, prior to the termination of the offering of
the related securities. Upon request by any person to whom this prospectus is
delivered in connection with the offering of one or more classes securities, the
depositor will provide or cause to be provided without charge a copy of any of
the documents and/or reports incorporated herein by reference, in each case to
the extent the documents or reports relate to those classes of securities, other
than the exhibits to the documents (unless the exhibits are specifically
incorporated by reference in such documents). Requests to the depositor should
be directed in writing to: Bear Stearns Asset Backed Securities, Inc., 245 Park
Avenue, New York, New York 10167, telephone number (212) 272-4095. The depositor
has determined that its financial statements are not material to the offering of
any securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each trust fund, that file
electronically with the SEC.
Ratings
It is a condition to the issuance of the securities of each series
offered by this prospectus and the accompanying prospectus supplement that they
shall have been rated in one of the four highest rating categories by the
nationally recognized statistical rating agency or agencies specified in the
prospectus supplement.
Each such rating will be based on, among other things, the adequacy of
the value of the trust fund assets and any credit enhancement with respect to
the related class and will reflect the rating agency's assessment solely of the
likelihood that the related holders will receive payments to which they are
entitled. No rating will constitute an assessment of the likelihood that
principal prepayments on the related loans will be made, the degree to which the
rate of prepayments might differ from that originally anticipated or the
likelihood of early optional termination of the securities. A rating should not
be deemed a recommendation to purchase, hold or sell securities, inasmuch as it
does not address market price or suitability for a particular investor. A rating
will not address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a security at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios.
There is also no assurance that any rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the applicable rating agency in the future if in its judgment circumstances so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of trust fund assets or any credit enhancement with
respect to a series, a rating might also be lowered or withdrawn because of,
among other reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of the credit enhancement
provider's long-term debt.
The amount, type and nature of any credit enhancement established with
respect to a series of securities will be determined on the basis of criteria
established by each rating agency named in the related prospectus supplement.
These criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each rating agency determines the amount of credit enhancement required with
respect to each class of securities. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately reflect
future experience nor any assurance that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of loans. No assurance can be given that
values of any properties have remained or will remain at their levels on the
respective dates of origination of the related loans. If residential real estate
markets should experience an overall decline in property values such that the
principal balances of the loans in a particular trust fund and any secondary
financing on the related properties become equal to or greater than the value of
those properties, the rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
additional, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal of and interest on the loans and, accordingly, the rates
of delinquencies, foreclosures and losses with respect to any trust fund. To the
extent that losses are not covered by credit enhancement, losses will be borne,
at least in part, by the holders of one or more classes of the securities of the
related series.
Legal Investment Considerations
Unless otherwise specified in the related prospectus supplement, the
securities will not constitute "mortgage-related securities" within the meaning
of the Secondary Market Mortgage Credit Enhancement Act of 1984, as amended.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the securities constitute legal investments for them.
Plan of Distribution
The depositor may offer each series of securities through Bear, Stearns
& Co. Inc. (BS&Co.) or one or more other firms that may be designated at the
time of the related offering. The participation of BS&Co. in any offering will
comply with Schedule E to the By-Laws of the National Association of securities
Dealers, Inc. The prospectus supplement relating to each series of securities
will set forth the specific terms of the offering of the series and of each
class within the series, the names of the underwriters, the purchase price of
the securities, the proceeds to the depositor from the sale, any securities
exchange on which the securities may be listed, and, if applicable, the initial
public offering prices, the discounts and commissions to the underwriters and
any discounts and concessions allowed or reallowed to dealers. The place and
time of delivery of each series of securities will also be set forth in the
related prospectus supplement. BS&Co. is an affiliate of the depositor.
Glossary of Terms
Agency Securities. Mortgage-backed securities issued or guaranteed by
Ginnie Mae, Fannie Mae or Freddie Mac.
Asset Value. Unless otherwise specified in the related prospectus
supplement with respect to the primary assets in the trust fund, the product of
the Asset Value percentage set forth in the related indenture multiplied by the
lesser of
o the stream of remaining regularly scheduled payments in the primary
assets net of certain amounts payable as expenses, together with
income earned on each regularly scheduled payment received through
the day preceding the next distribution date at the Assumed
Reinvestment Rate, if any, discounted to present value at the
highest interest rate on the notes of the series over periods equal
to the interval between payments on the notes and
o the then outstanding principal balance of the primary assets.
Assumed Reinvestment Rate. With respect to a series of securities, the
highest rate permitted by the rating agencies named in the related prospectus
supplement or a rate insured by means of a surety bond, guaranteed investment
contract, reinvestment agreement or other arrangement satisfactory to the rating
agencies.
Home Equity Loans. Closed-end loans and/or revolving credit line loans
secured by mortgages, deeds of trust or other similar security instruments
creating senior or junior liens on one- to four-family residential properties or
mixed-use properties.
Home Improvement Contracts. Home Improvement installment sales
contracts and installment loan agreements which are either unsecured or secured
by mortgages, deeds of trust or similar security instruments creating generally
junior liens on one- to four-family residential properties or mixed-use
properties or secured by purchase money security interests in the related home
improvements.
Insurance Proceeds. Amounts received by the related servicer under any
title insurance policy, hazard insurance policy or other insurance policy
covering any primary asset in a trust fund, other than amounts to be applied to
the restoration or repair of the related property or released to the borrower
under the related agreement.
Liquidation Proceeds. Amounts received by the related servicer in
connection with the liquidation of the primary assets or related real property
in a trust fund, whether through foreclosure sale, repossession or otherwise,
including payments in connection with the primary assets received from the
borrower, other than amounts required to be paid or refunded to the borrower
under the applicable loan documents or pursuant to law, net of the related
liquidation expenses.
OID Regulations. Sections 1271 through 1275 of the Internal Revenue
Code of 1986, as amended, and the Treasury regulations issued thereunder on
February 2, 1994 and amended on June 11, 1996.
Manufactured Housing Contracts. Manufactured housing installment sales
contracts and installment loan agreements secured by senior or junior liens on
the related manufactured homes or secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on the real estate
on which the related manufactured homes are located.
Private Label Securities. Private mortgage-backed securities, other
than Agency Securities, backed or secured by underlying loans that may be
Residential Loans, Home Equity Loans, Home Improvement Contracts and/or
Manufactured Housing Contracts.
Residential Loans. Loans secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on one- to
four-family residential properties.
U.S. Person: Any of the following:
o a citizen or resident of the United States;
o a corporation or a partnership (including an entity treated as a
corporation or partnership for U.S. federal income tax purposes)
organized in or under the laws of the United States, or any State
thereof or the District of Columbia (unless in the case of a
partnership Treasury regulations are adopted that provide
otherwise);
o an estate whose income from sources outside the United States is
includible in gross income for federal income tax purposes
regardless of its connection with the conduct of a trade or business
within the United States; or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or
more U.S. Persons have the authority to control all substantial
decisions of the trust.
In addition, certain trusts which would not qualify as U.S. Persons under the
above definition but which are eligible to and make an election to be treated as
U.S. Persons will also be treated as U.S. Persons.
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No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this prospectus supplement and
the prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the depositor or by the
underwriters. This prospectus supplement and the prospectus do not constitute an
offer to sell, or a solicitation of an offer to buy, the securities offered
hereby by anyone in any jurisdiction in which such an offer or solicitation is
not authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make any such offer or
solicitation. Neither the delivery of this prospectus supplement and the
prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that information herein or therein is correct as of any time since
the date of this prospectus supplement or the prospectus.
Table of Contents
Prospectus Supplement
Table of Contents............................ S-iii
Summary...................................... S-1
Risk Factors................................. S-4
Transaction Overview......................... S-10
The Mortgage Loan Pool....................... S-11
The Originators, the Seller and the Servicer. S-22
The Indenture Trustee and the Collateral Agent S-34
Description of the Notes and Trust Certificates S-34
Servicing of the Mortgage Loans.............. S-51
The Policy................................... S-58
The Note Insurer............................. S-61
MBIA Information............................. S-61
Prepayment and Yield Considerations.......... S-64
Material Federal Income Tax Consequences..... S-69
State and Local Tax Consequences............. S-71
ERISA Considerations......................... S-71
Plan of Distribution......................... S-72
Legal Investment............................. S-73
Incorporation of Certain Information by
Reference ................................. S-73
Experts...................................... S-74
Legal Matters................................ S-74
Ratings...................................... S-74
Glossary..................................... S-75
Prospectus
Risk Factors................................. 4
Description of the Securities................ 14
The Trust Funds.............................. 19
Credit Enhancement........................... 39
Servicing of Loans........................... 44
The Agreements............................... 53
Material Legal Aspects of the Loans.......... 64
The Depositor................................ 78
Use of Proceeds.............................. 78
Material Federal Income Tax Considerations... 79
State Tax Considerations..................... 109
FASIT Securities............................. 109
ERISA Considerations......................... 115
Legal Matters................................ 122
Financial Information........................ 122
Available Information........................ 122
Incorporation of Certain Information by
Reference.................................. 122
Ratings...................................... 123
Legal Investment Considerations.............. 124
Plan of Distribution......................... 124
Glossary of Terms............................ 125
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$322,320,000
[GRAPHIC OMITTED] (R)
ABFS Mortgage Loan Trust 2001-4
Issuer
American Business Credit, Inc.
Servicer
Bear Stearns Asset Backed Securities, Inc.
Depositor
$322,320,000 Class A Notes
Mortgage-Backed Notes
Series 2001-4
--------------------
PROSPECTUS SUPPLEMENT
--------------------
Bear, Stearns & Co. Inc.
Credit Suisse First Boston
December 3, 2001
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