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Filed pursuant to Rule 424(b)(5)
Registration No. 333-43091
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 13, 2000)
$214,951,000
COUNTRYWIDE HOME LOAN TRUST 2001-HLV1
HOME LOAN-BACKED NOTES, SERIES 2001-HLV1
BAY VIEW BANK, N.A.
TRANSFEROR
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
LITTON LOAN SERVICING LP
SERVICER
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INITIAL PROCEEDS
CLASS OF PRINCIPAL NOTE PRICE TO UNDERWRITING TO THE
NOTES BALANCE(1) RATE PUBLIC DISCOUNT DEPOSITOR(2)
- ---------------------------------------------------------------------------------------------------------------------------
Class A-1 $103,718,000 5.913% 99.99979% 0.12500% 99.87479%
Class A-2 $ 28,149,000 6.341% 99.99823% 0.25000% 99.74823%
Class A-3 $ 4,768,000 6.664% 99.99907% 0.37500% 99.62407%
Class A-4 $ 11,812,000 6.946%(3) 99.99900% 0.50000% 99.49900%
Class A-5 $ 6,227,000 7.197%(3) 99.99373% 0.62500% 99.36873%
Class M-1 $ 22,746,000 7.669%(3) 99.99660% 0.75000% 99.24660%
Class M-2 $ 15,922,000 7.913%(3) 99.99722% 0.87500% 99.12222%
Class B-1 $ 15,922,000 9.385%(3) 97.99701% 1.00000% 96.99701%
Class B-2 $ 5,687,000 9.000%(3) 85.31572% 0.00000% 85.31572%
Total $214,951,000
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(1) This amount is subject to a variance of 5%.
(2) Before deducting expenses, estimated to be approximately $550,000.
(3) After the first payment date on which an optional redemption may be
exercised, the Note Rate will increase by 0.50% if not so exercised.
The notes represent The Trust
non-recourse obligations of
the Trust only and do not - The Trust is a Delaware business trust formed pursuant to
represent an interest in or a trust agreement between Bear Stearns Asset Backed
obligations of Bear Stearns Securities, Inc. and Wilmington Trust Company.
Asset Backed Securities, Inc.,
Countrywide Home Loans, Inc., - The Trust will issue nine classes of notes, which are
the Servicer, the Indenture offered hereby, and will issue one class of certificates,
Trustee, the Owner Trustee or which is not offered hereby.
any of their affiliates.
The Notes
This prospectus supplement may
be used to offer and sell the - The Notes are principally secured by the assets of the
notes only if accompanied by Trust, which consist of home loans that have fixed rates of
the prospectus. interest and are secured primarily by junior mortgages on
one- to four-family residential properties in which the
borrowers have little or no equity.
- The Notes are not insured or guaranteed by any
governmental agency or any other entity.
Credit Enhancement
- Certain classes of securities will be subordinated to
other classes of securities and provide credit support for
those classes of securities.
- Certain excess interest received on the home loans will be
applied as payments of principal on the notes to establish
and maintain a level of overcollateralization and to
otherwise cover current losses.
REVIEW THE INFORMATION IN "RISK FACTORS" ON PAGE S-7 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 3 IN THE PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these notes or passed upon the
adequacy or accuracy of this prospectus supplement and accompanying prospectus.
Any representation to the contrary is a criminal offense.
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COUNTRYWIDE SECURITIES CORPORATION BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JANUARY 26, 2001
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For 90 days following the date of this prospectus supplement, all dealers
selling the notes will deliver a prospectus supplement and prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters of the notes and with respect to their unsold allotments or
subscriptions.
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 notes in any state where the offer is not permitted.
We do not claim that the information in this prospectus supplement and the
accompanying prospectus is accurate as of any date other than the dates stated
on their respective covers.
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SUMMARY
This summary highlights selected information from this document and does not
contain all of the information that you need to consider in making your
investment decision. Please read this entire prospectus supplement and the
accompanying prospectus for additional information about the notes.
COUNTRYWIDE HOME LOAN TRUST 2001-HLV1
HOME LOAN-BACKED NOTES, SERIES 2001-HLV1
EXPECTED
ORIGINAL MATURITY RATINGS (S&P/
CLASS/INTEREST NOTE RATE PRINCIPAL BALANCE(1) DATE(2) MOODY'S/FITCH)
- -------------- --------- -------------------- ----------------- --------------
Class A-1................. 5.913% $103,718,000 March 10, 2012 AAA/Aaa/AAA
Class A-2................. 6.341% $ 28,149,000 July 10, 2016 AAA/Aaa/AAA
Class A-3................. 6.664% $ 4,768,000 August 10, 2017 AAA/Aaa/AAA
Class A-4................. 6.946%(3) $ 11,812,000 February 10, 2021 AAA/Aaa/AAA
Class A-5................. 7.197%(3) $ 6,227,000 July 10, 2022 AAA/Aaa/AAA
Class M-1................. 7.669%(3) $ 22,746,000 June 10, 2022 AA/Aa2/AA
Class M-2................. 7.913%(3) $ 15,922,000 June 10, 2022 A/A2/A
Class B-1................. 9.385%(3) $ 15,922,000 May 10, 2022 BBB/Baa2/BBB
Class B-2................. 9.000%(3) $ 5,687,000 March 10, 2022 BBB-/--/BBB-
Total..................... $214,951,000
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(1) This amount is subject to a variance of 5%.
(2) Each date was determined as described under "Prepayment and Yield
Considerations -- Maturity Date." We expect the actual maturity date for the
securities will be significantly earlier than the final scheduled maturity
date stated herein.
(3) After the first payment date on which an optional redemption may be
exercised, the Note Rate will increase by 0.50% per annum if the option is
not so exercised.
THE TRANSFEROR
- - Bay View Bank, N.A.
THE SERVICER
- - Litton Loan Servicing LP will be the servicer.
- - The servicer will receive a monthly fee from payments on the home loans equal
to 0.75% per annum on the principal balance of each home loan.
THE TRUST
- - Countrywide Home Loan Trust 2001 -- HLV1
THE DEPOSITOR
- - Bear Stearns Asset Backed Securities, Inc.
THE ORIGINATOR
- - PSB Lending Corp.
THE SELLER
- - CHL Transfer Corp.
THE INDENTURE TRUSTEE
- - Wells Fargo Bank Minnesota, N. A.
THE OWNER TRUSTEE
- - Wilmington Trust Company, acting not in its individual capacity but solely as
owner trustee.
CUT-OFF DATE
- - For each home loan, the opening of business on January 1, 2001.
CLOSING DATE
- - On or about January 30, 2001.
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PAYMENT DATES
- - The 10th day of each month, or if such day is not a business day, the next
business day. The first payment date is February 12, 2001.
COLLECTION PERIOD
- - The calendar month preceding the month of a payment date.
REGISTRATION OF NOTES
The trust will issue the notes in book-entry form. You will hold your interests
either through a depository in the United States or through one of two
depositories in Europe. While the notes are book-entry, they will be registered
in the name of the applicable depository, or in the name of the depository's
nominee.
Transfers within any depository system will be made in accordance with the usual
rules and operating procedures of that system. Cross-market transfers between
two different depository systems may be made through a third-party bank and/or
the related depositories. The limited circumstances under which definitive notes
will replace the book-entry notes are described in this prospectus supplement.
We refer you to "Description of the Notes" and "Annex I" in this prospectus
supplement for additional information.
ASSETS OF THE TRUST
The trust's assets include:
- - a pool of home loans that have fixed rates of interest, secured primarily by
junior mortgages, deeds of trust, or other security instruments primarily on
one- to four-family residential properties in which the borrowers have little
or no equity and the related loan files;
- - payments of interest received on the home loans on and after the cut-off date
and principal payments on the home loans received on and after the cut-off
date; and
- - amounts on deposit in certain accounts described in this prospectus
supplement.
THE HOME LOANS
1. HOME LOAN STATISTICS:
On the closing date, the trust will acquire a pool of home loans that have fixed
rates of interest. The home loans had the following characteristics as of the
cut-off date:
- - number of home loans: 6,650
- - aggregate principal balance: $227,462,787.49
- - average principal balance of home loans: $34,204.93
- - principal balances of home loans range: $99.72 to $98,496.02
- - mortgaged property location: 37.83% in California, 8.47% in Florida, 4.63% in
Arizona, 3.68% in Nevada and 3.21% in Georgia
- - interest rate range: 7.000% to 19.490%
- - weighted average interest rate: 13.256%
- - loan age range: 11 to 56 months
- - weighted average loan age: 31 months
- - combined loan-to-value ratio range: 28.00% to 220.77%
- - weighted average combined loan-to-value ratio: 116.19%
2. CHARACTERISTICS OF HOME LOANS:
- - The home loans will consist of loans for which the related net proceeds were
used to finance (i) property improvements, (ii) debt consolidation, or (iii) a
combination of property improvements, debt consolidation, cash-out, credit
insurance premiums, origination costs or other consumer purposes.
- - All of the home loans will be secured by liens on mortgaged properties in
which the
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borrowers have little or no equity (i.e., the related combined loan-to-value
ratios approach or exceed 100%).
- - The home loans provide for scheduled payments that will be, if timely paid,
sufficient to amortize fully the principal balance of the related home loan on
or before its maturity date.
- - Interest on the home loans will accrue on an "actuarial interest" method.
We refer you to "The Home Loan Pool" in this prospectus supplement for
additional information.
MONTHLY EXPENSE ADVANCES
The Servicer may make cash advances on behalf of the Trust to cover customary
property protection expenses. The Servicer is not required, nor does it intend,
to advance delinquent principal or interest.
We refer you to "Description of the Transfer and Servicing
Agreements -- Servicing" in this prospectus supplement for additional
information.
THE NOTES
1. General
- - Each month, the indenture trustee will calculate the amount of principal and
interest you are owed.
- - If you own a note on the last day of the calendar month prior to the related
payment date, you will be entitled to receive payments on the related payment
date.
2. Interest Payments: Interest on the notes will accrue during the calendar
month prior to the applicable payment date. The indenture trustee will calculate
interest based on a 360-day year of twelve 30-day months. On each payment date,
you will be entitled to the following amounts:
- - interest at the related note rate that accrued during the related accrual
period on your note balance; and
- - any interest that was due on a prior payment date that was not paid. In
addition, interest will accrue and be payable on the amount of interest which
was previously due and not paid to the extent permitted by applicable law.
3. Principal Payments: Noteholders will be entitled to the principal collected
during the prior collection period on the home loans to the extent and in the
order of priority set forth under "Description of the Notes -- Payments."
For a period of at least three years from the Closing Date, all principal
received on the home loans will be payable solely to the Class A Notes, until
the principal balances of such notes equal zero.
We refer you to "Description of the Notes -- Payments" in this prospectus
supplement for additional information.
THE CERTIFICATES
- - The trust will also issue a class of certificates which are not being offered
pursuant to this prospectus supplement.
- - The certificates have no principal balance and will not bear interest.
CREDIT ENHANCEMENT
Excess Interest. Because more interest is expected to be paid by the borrowers
than is necessary to pay the interest due on the notes and other fees and
expenses of the trust, excess interest collections will be available to offset
losses on the home loans and to create and maintain the overcollateralization
described below.
Overcollateralization. The use of excess interest to make payments of principal
on the notes will cause the aggregate principal balance of the notes to amortize
more quickly than the aggregate principal balance of the home loans, resulting
in the overcollateralization of the notes. The amount of any such
overcollateralization will be available to absorb losses realized on liquidated
home loans.
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Subordination of Subordinated Notes. Subordination is designed to provide the
holders of notes having a higher payment priority with protection against losses
by allocating realized losses among the subordinated notes, beginning with the
notes with the lowest payment priority, before losses are allocated to the notes
with a higher payment priority.
OPTIONAL REDEMPTION
The Servicer, at its option, may effect an early redemption of the notes and
purchase of the certificates on any payment date after the aggregate principal
balance of the home loans is reduced to any amount less than or equal to 10% of
the aggregate principal balance of the home loans as of the cut-off date.
After the first payment date on which an optional redemption may be exercised,
the interest rate of each class of securities, other than the Class A-1, Class
A-2 and Class A-3 Notes, will be increased by 0.50% per annum if the option is
not so exercised.
We refer you to "Description of the Notes -- Optional Redemption" in this
prospectus supplement for additional information.
FEDERAL TAX CONSIDERATIONS
For federal income tax purposes:
- - Tax counsel is of the opinion that the notes will be treated as debt
instruments.
- - You must agree to treat your note as indebtedness for federal, state and local
income and franchise tax purposes.
We refer you to "Certain Federal Income Tax Consequences" in this prospectus
supplement and in the accompanying prospectus for additional information.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA") and the prohibited transaction provisions of
ERISA and Section 4975 of the Internal Revenue Code can limit investments by
certain pension, employee benefit and other plans, such as individual retirement
accounts. Pension, employee benefit and other plans should be able to purchase
investments like the notes so long as they are treated as debt under applicable
state law and have no "substantial equity features." Any plan fiduciary
considering whether to purchase the notes on behalf of a plan should consult
with its counsel regarding the application of ERISA and Section 4975 of the
Internal Revenue Code and the availability of any exemptions.
We refer you to "ERISA Considerations" in this prospectus supplement and the
accompanying prospectus for additional information.
LEGAL INVESTMENT CONSIDERATIONS
The Secondary Mortgage Market Enhancement Act of 1984 defines "mortgage related
securities" to include only securities backed by first mortgages, and not second
mortgages. Because the pool of home loans consists of junior home loans, the
notes will not be "mortgage related securities" under that definition.
We refer you to "Legal Investment Matters" in this prospectus supplement and
"Legal Investment" in the accompanying prospectus for additional information.
NOTE RATINGS
The trust will not issue the notes unless the notes receive the ratings set
forth on the table at the beginning of this summary.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal by any rating agency.
We refer you to "Ratings" and "Risk Factors -- Ratings of the Notes" in this
prospectus supplement for additional information.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO ANY PURCHASE
OF THE NOTES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE ACCOMPANYING PROSPECTUS.
HOME LOAN DEFAULT RISKS
Noteholders are protected by the available forms of credit enhancement
against the risk of loss realized on the home loans. However, in the event that
the available credit enhancement is inadequate to provide protection to the
noteholders, any losses on the home loans would be borne by such holders. The
risks presented by the home loans include the following:
- High LTV Ratios: Most of the home loans are secured by liens on the
mortgaged properties in which the borrowers have little or no equity.
Approximately 93.15% of the home loans have original combined
loan-to-value ratios in excess of 100%. Home loans with high original
combined loan-to-value ratios will be more sensitive to declining
property values than would those with lower original combined
loan-to-value ratios and therefore may experience a higher incidence of
default and severity of losses. In addition, with respect to home loans
with original combined loan-to-value ratios near or in excess of 100%, if
the related borrowers sell their homes, such borrowers may be unable to
repay the home loans in full from the sale proceeds of the financed
properties and other funds available. Accordingly, such home loans likely
may experience higher rates of delinquencies, defaults and losses.
- Additional Debt: With respect to home loans the proceeds of which were
used in whole or in part for debt consolidation, the related borrower may
incur further consumer debt. This reloading of debt could impair the
ability of such borrowers to repay the home loans, which in turn could
result in higher rates of delinquency and loss on the home loans.
- Junior Liens: All of the home loans are secured by liens junior to one
or more senior liens on the related mortgaged properties. In general, a
junior lienholder may not foreclose on the related mortgaged property
unless it forecloses subject to the senior lien(s), in which case it must
either pay the entire amount due under the senior mortgage or agree to
make payments under the senior mortgage if the borrower is in default
thereunder. When it is uneconomical to foreclose on a mortgaged property
or engage in other loss mitigation procedures, the Servicer may write off
the entire outstanding balance of the home loan as a bad debt. These are
risks particularly applicable to home loans secured by second liens that
have high combined loan-to-value ratios or have small balances relative
to the total indebtedness of the borrower because it is more likely that
the Servicer would determine foreclosure to be uneconomical for those
types of home loans than for first lien mortgage loans with low
loan-to-value ratios. We refer you to "Certain Legal Aspects of the
Loans -- Junior Mortgages; Rights of Senior Mortgages" in the
accompanying prospectus.
- Underwriting Standards: The underwriting standards under which the home
loans originally were underwritten are analogous to credit lending,
rather than mortgage lending, since underwriting decisions were based
primarily on the borrower's credit history and capacity to repay rather
than on the value of the collateral. The underwriting standards allow
loans to be approved with combined loan-to-value ratios of up to 125%,
although some of the home loans were originated with combined
loan-to-value ratios in excess of 125%. See "Description of the Home Loan
Pool -- Underwriting Standards" in this
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prospectus supplement. Because of the relatively high combined
loan-to-value ratios of the home loans and the fact that the home loans
are primarily secured by second liens, losses on the home loans will
likely be higher than on first lien mortgage loans. Generally, the
underwriting requirements of the Originator did not require that a
borrower obtain fire and casualty insurance or title insurance as a
condition to approving the home loan. Accordingly, if a mortgaged
property suffers any uninsured hazard or casualty losses, or if the
borrower is found not to have clear title to such mortgaged property, you
may bear the risk of loss resulting from a default by the related
borrower to the extent such losses are not recovered by foreclosure or
liquidation proceeds on such defaulted home loans and available credit
enhancement is insufficient to cover such losses.
- Economic Conditions: For the period of time during which the home loans
were originated, economic conditions nationally and in most regions of
the country were generally favorable. A deterioration in economic
conditions could be expected to adversely affect the ability and
willingness of borrowers to repay their home loans and could result in
higher rates of delinquencies, defaults and losses on such home loans.
Because of lenders' limited experience with loans similar to the home
loans, no prediction can be made as to the severity of the effect of a
general economic downturn on the rate of delinquencies and defaults on
the home loans.
ADDITIONAL FACTORS AFFECTING DELINQUENCIES, DEFAULTS AND LOSSES ON THE HOME
LOANS
- No Servicer Delinquency Advances. In the event of a delinquency on a
home loan, neither the Servicer, any subservicer, nor any other person
will have any obligation, nor do any intend, to advance scheduled monthly
payments of principal and interest with respect to such home loan. As a
result, the amount of principal and interest received on the home loans
during any particular collection period may be less than the amount of
principal and interest payable on the securities on the related payment
date. Due to the payment priorities on the notes, shortfalls may result
in losses on the subordinate notes. See "Description of the Transfer and
Servicing Agreements -- Servicing" in this prospectus supplement.
- Loss Mitigation. The Servicer may use a wide variety of practices to
limit losses on defaulted home loans, including writing off part of the
debt, reducing future payments, and deferring the collection of past due
payments. The servicing agreement also permits the Servicer to release
the lien on a limited number of mortgaged properties in order to reduce
the amount of a potential loss.
- Acquisitions from Third Parties. All of the home loans have been
acquired by the Transferor by purchase from the originator, PSB Lending
Corp. See "The Transferor -- Purchase of Home Loans" in this prospectus
supplement. Pursuant to the underwriting guidelines of the originator,
the assessment of the creditworthiness of the borrower was the primary
consideration in underwriting a home loan. The evaluation of the adequacy
of the value of the related mortgaged property, together with the amount
of all liens senior to the lien of a home loan (i.e., the related
"combined loan-to-value ratio") was given less consideration, and in
certain cases no consideration, in underwriting the home loans. See "The
Home Loan Pool -- Underwriting Criteria." The credit quality of some of
the borrowers under the home loans is lower than that of borrowers under
mortgage loans conforming to the Fannie Mae or Freddie Mac underwriting
guidelines for first-lien, single family mortgage loans. Consequently,
the home loans are likely to experience higher rates of delinquencies,
defaults and losses (which rates could be substantially higher) than
those that would be experienced by loans underwritten in conformity with
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the Fannie Mae or Freddie Mac underwriting guidelines for first-lien,
single family mortgage loans. Also, the losses sustained from defaulted
home loans are likely to be more severe (and will frequently be total
losses) because the costs incurred in the collection and liquidation of
defaulted home loans in relation to the smaller principal balances
thereof are proportionately higher than for first-lien, single family
mortgage loans, and because all of the home loans are secured by junior
liens on mortgaged properties in which the borrowers had little or no
equity at the time of origination of such home loans. Although the
creditworthiness of the borrower was the primary consideration in the
underwriting of the home loans, we cannot assure you that the
creditworthiness of a borrower will not deteriorate as a result of future
economic and social factors, which deterioration may result in a
delinquency or default by a borrower on the related home loan.
Furthermore, because the adequacy of the value of the related mortgaged
property, if any, was given less or no consideration in underwriting a
home loan, we cannot assure you that any proceeds will be recovered from
the foreclosure or liquidation of the mortgaged property, for a defaulted
home loan. In response to changes and developments in the consumer
finance area as well as the refinement of the originator's credit
evaluation methodology, the originator's underwriting requirements for
certain of the home loans changed from time to time, which in certain
instances, resulted in more stringent and in other instances less
stringent, underwriting requirements. Depending upon the date on which
the home loans were purchased by the Transferor, such home loans included
in the home loan pool were purchased by the Transferor under different
underwriting requirements, and accordingly, certain home loans included
in the home loan pool may be of a different credit quality and have
different loan characteristics from other home loans. Furthermore, to the
extent that certain home loans were purchased by the Transferor under
less stringent underwriting requirements, such home loans may be more
likely to experience higher rates of delinquencies, defaults and losses
than those home loans purchased under more stringent underwriting
requirements.
- Dependence on Servicer for Servicing Home Loans. Upon the Servicer's
failure to remedy a Servicer Event of Default under the Sale and
Servicing Agreement, a majority of the noteholders or the Indenture
Trustee may remove the Servicer and appoint a successor servicer subject
to the pledge and assignment to the Servicing Rights Pledgee. If the
Servicer is not replaced, noteholders will be dependent upon the Servicer
to adequately and timely perform its servicing obligations and remit to
the Indenture Trustee payments of principal and interest received on the
home loans. The manner in which the Servicer performs its servicing
obligations will affect the amount and timing of principal and interest
payments received on the home loans. Those principal and interest
payments and other recoveries in respect of the home loans are the sole
source of funds for the payments due to noteholders. See "The
Servicer -- Servicing Experience" in this prospectus supplement.
- Non-recordation of Assignments. The Transferor may not be required to
record assignments of the mortgages to the Indenture Trustee in the real
property records of California and certain other states. In such cases,
the Mortgage may instead be recorded in the Servicer's name. See
"Description of the Transfer and Servicing Agreements -- Sale and
Assignment of the Home Loans" herein.
Although the recordation of the assignments of the mortgages in favor of
the Indenture Trustee is not necessary to effect a transfer of the home
loans to the Indenture Trustee, if the Transferor were to sell, assign,
satisfy or discharge any home loan prior to recording
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the related assignment in favor of the Indenture Trustee, the other
parties to such sale, assignment, satisfaction or discharge may have
rights superior to those of the Indenture Trustee. In some states, in the
absence of such recordation of the assignments of the mortgages, the
transfer to the Indenture Trustee of the home loans may not be effective
against certain creditors or purchasers from the Transferor or a receiver
of the Transferor. If those other parties, creditors or purchasers have
rights to the home loans that are superior to those of the Indenture
Trustee, the Trust could lose the right to future payments of principal
and interest from those home loans and, accordingly, noteholders could
suffer a loss of principal and interest to the extent that such loss is
not otherwise covered by the applicable credit enhancement.
- Transfer of Servicing. The Servicer is expected to begin servicing the
home loans as of February 1, 2001. Until the servicing transfer date, the
home loans will be serviced by the originator. Following the transfer of
the servicing on the servicing transfer date, the rate and severity of
delinquencies, defaults and losses on the home loans may increase, and
may increase significantly, at least for some transition period of time.
If that were to happen and available credit enhancement is insufficient
to cover any loss, you might experience a loss on your note.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
HOME LOAN BALANCE
Substantial delays could be encountered in connection with the liquidation
of delinquent home loans. Further, liquidation expenses such as legal fees, real
estate taxes and maintenance and preservation expenses may reduce the portion of
liquidation proceeds payable, if any, to you. If a mortgaged property fails to
provide adequate security for the home loan, you will incur a loss on your
investment if the credit enhancement described in this prospectus supplement is
insufficient to cover the loss.
We refer you to "Certain Legal Aspects of the Loans -- Foreclosure on
Mortgages" in the accompanying prospectus.
PREPAYMENTS AFFECT TIMING AND RATE OF RETURN ON YOUR INVESTMENT
The yield to maturity on your notes will be directly related to the rate of
principal payments on the home loans. Please consider the following:
- Borrowers may fully or partially prepay their home loan at any time.
Approximately 67.85% of the home loans require the payment of prepayment
penalties which, if enforced, may reduce the likelihood of prepayments on
such home loans.
- A substantial majority of the home loans contain due-on-sale provisions.
Due-on-sale provisions require the borrower to fully pay the home loan
when the mortgaged property is sold. Generally, the Servicer will enforce
the due-on-sale provision unless prohibited by applicable law. However,
the Servicer may waive a due-on-sale provision in order to mitigate
losses. We refer you to "Certain Legal Aspects of the
Loans -- Due-on-Sale Clauses in Mortgage Loans" in the accompanying
prospectus.
- The rate of principal payments on the home loans is influenced by a
variety of factors, including general economic conditions, interest
rates, the availability of alternative financing and homeowner mobility.
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- The types of home loans in the trust generally are not viewed by borrowers
as permanent financing. Accordingly, the home loans may experience a higher
rate of prepayment than purchase money first lien mortgage loans.
- We cannot predict the rate at which borrowers will repay their home loans,
nor are we aware of any publicly available studies or statistics on the
rate of prepayment of home loans similar to the home loans in this pool.
- If you purchased your note at a premium and you receive your principal
faster than expected, your yield to maturity will be lower than you
anticipated. If you purchased your note at a discount and you receive your
principal slower than expected, your yield to maturity will be lower than
you anticipated.
- The Transferor will be required to repurchase home loans from the trust as
a result of certain breaches of representations and warranties or certain
defects in the home loan files that have not been cured. If the Transferor
does repurchase those home loans, the repurchases will have the same effect
on your yield as a prepayment of the home loans. If the Transferor fails to
repurchase those home loans, the home loans will stay in the trust. In the
event any of those home loans defaults and if the available amounts of
credit enhancement are inadequate, noteholders will bear the risk of any
resulting delays in payment or losses.
- As long as credit enhancement is available, liquidations of defaulted home
loans will have the same effect on your yield as a prepayment of the home
loans. See "-- Home Loan Default Risks" in this prospectus supplement for a
discussion of the default risks presented by the home loans.
- If the notes are redeemed, you have no assurance that similar investments
offering comparable yields will be available.
We refer you to "Prepayment and Yield Considerations" in this prospectus
supplement.
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT
Credit enhancement will be provided by excess interest, overcollateralization
and the subordination of the Class B-2 Notes, the Class B-1 Notes, the Class M-2
Notes, and the Class M-1 Notes, respectively, to each class of securities having
a higher payment priority to such class. The securities are not insured by any
financial guaranty insurance policy. If the home loans experience higher rates
of delinquencies, defaults or losses than initially anticipated, there can be no
assurance that the amounts available from the applicable credit enhancement will
be adequate to cover the delays or shortfalls in payments that result from such
higher delinquencies, defaults or losses. If the amounts available from the
available credit enhancement are inadequate, noteholders will bear the risk of
any resulting delays in payment or losses.
As a result of delinquencies on the home loans, the amount of interest
received on the home loans during any collection period may be less than the
amount of interest payable on the securities on the related payment date. The
Servicer is not required, nor does it intend, to advance delinquent payments of
principal and interest.
The holder of the Certificate will not be required to refund any amounts
previously distributed to that holder pursuant to the transfer and servicing
agreements, regardless of whether there are sufficient funds on a subsequent
payment date to pay all amounts then payable to noteholders.
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INDEMNIFICATION BY THE TRUST
The Trust Agreement and Indenture provide that the Owner Trustee and the
Indenture Trustee will be entitled to indemnification by the Trust for any loss,
liability or reasonable out-of-pocket expense incurred by the Owner Trustee or
Indenture Trustee in connection with the performance of its duties and
obligations under any of the Transfer and Servicing Agreements. These payments
for indemnification will have priority over payments on the notes. Therefore,
shortfalls may result if the Trust is required to make indemnification payments
and remaining amounts are insufficient to cover payments on the notes.
LIMITED HISTORICAL DELINQUENCY, LOSS AND PREPAYMENT INFORMATION
The Servicer does not have any experience with respect to the performance,
including the delinquency and loss experience and the rate of prepayments, of
these home loans. Accordingly, the delinquency experience and loan loss and
liquidation experience set forth under "The Servicer -- Servicing Experience" in
this prospectus supplement may not be indicative of the performance of the home
loans. As a result, there is no meaningful historical performance data to permit
an accurate assessment of the likely delinquency, default and loss experience of
the home loans over an extended period of time. Significant uncertainty exists
regarding such likely experience over time and in differing economic and
interest rate environments. Because loans such as the home loans have
characteristics that combine characteristics similar to unsecured consumer debt
and secured consumer debt, the delinquency, default and loss experience of the
home loans is unlikely to be comparable to either of those types of consumer
debt and is unlikely to reflect a blending or averaging of such experience. As a
result, noteholders do not have, and will not have for an indeterminate amount
of time, information available to them to assess with any degree of confidence
the likely delinquency, default and loss experience of the home loans. You
should make your investment determinations based on the underwriting criteria,
the applicable credit enhancement described herein, the characteristics of the
home loans and other information provided herein, and not based on any prior
delinquency experience and loan loss and liquidation experience information set
forth in this prospectus supplement.
INTEREST PAYMENTS ON THE HOME LOANS MAY BE REDUCED
If a borrower prepays a home loan, the borrower is charged interest only up
to the date of the prepayment, instead of a full month. In addition, the
Soldiers' and Sailors' Civil Relief Act of 1940 permits certain modifications to
the payment terms for mortgage loans, including a reduction in the amount of
interest paid by the borrower, under certain circumstances. The Servicer will
not pay for any interest shortfalls created by prepayments or by the Soldiers'
and Sailors' Civil Relief Act of 1940. If the available credit enhancement is
insufficient to cover those shortfalls, you may incur a loss.
RATINGS OF THE NOTES
On the closing date, the rating agencies will rate the notes as set forth
in "Ratings" in this prospectus supplement. A rating is not a recommendation to
purchase, hold or sell notes, and it does not comment as to market price or
suitability for a particular investor. The ratings of the notes address the
likelihood of the payment of principal and interest on the notes pursuant to
their terms. We cannot assure you that a rating will remain for any given period
of time or that a rating agency will not lower or withdraw its rating if in its
judgment circumstances in the future so warrant.
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RISK OF LOSSES AS A RESULT OF GEOGRAPHIC CONCENTRATION
The mortgaged properties relating to the home loans are located in 49
states. However, approximately 37.83% of the mortgaged properties (each by
aggregate principal balance as of the cut-off date) are located in California.
If California experiences in the future weaker economic conditions or greater
rates of decline in real estate values than the United States generally, then
the home loans may experience higher rates of delinquencies, defaults and
foreclosures than would otherwise be the case. Natural disasters affecting
regions of the United States from time to time may result in prepayments of home
loans or in losses. Mortgaged properties located in California may be more
susceptible to certain types of hazards, such as wildfires and mudslides, and
certain types of special hazards not covered by insurance, such as earthquakes,
than properties located in other parts of the country.
LIMITED RESALE
Each underwriter intends to make a market for resale in the notes but has
no obligation to do so. There is no assurance that a market will develop or, if
it develops, that it will continue. Consequently, you may not be able to sell
your notes readily or at prices that will enable you to realize your desired
yield. The market values of the notes are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary markets for mortgage-backed and asset-backed securities have
experienced periods of illiquidity and can be expected to do so in the future.
Illiquidity can have a severely adverse effect on the prices of securities that
are especially sensitive to prepayment, credit or interest rate risk, or that
have been structured to meet the investment requirements of limited categories
of investors.
BANKRUPTCY OR INSOLVENCY OF CERTAIN PARTIES
The transfer of the home loans by the Transferor to CHL Transfer Corp. was
characterized in the mortgage loan purchase agreement as a sale transaction.
Nevertheless, in the event of insolvency of the Transferor, the Federal Deposit
Insurance Corporation (the "FDIC") as conservator or receiver, could attempt to
recharacterize the sale of the home loans to CHL Transfer Corp. as a borrowing
secured by a pledge of the home loans. If such an attempt to recharacterize the
transfer of the home loans were successful, the FDIC could elect to accelerate
payment of the notes and liquidate the home loans, with the holders of the notes
entitled to no more than the outstanding class principal balances, if any, of
the classes of notes, together with interest thereon at the applicable note
rates. In the event of an acceleration of the notes, the holders of the notes
would lose the right to future payments of interest, might suffer reinvestment
losses in a lower interest rate environment and may fail to recover their
initial investment. Further, with respect to an acceleration by the FDIC,
interest may be payable only through the date of appointment of the FDIC as
conservator or receiver. The FDIC has a reasonable period of time (which it has
stated will generally not exceed 180 days after the date of its appointment) to
elect to accelerate payment. Whether or not an acceleration takes place, delays
in payments on the notes and possible reductions in the amount of such payments
could occur.
CHL Transfer Corp. will treat its transfer of the home loans to the
depositor as a sale of the home loans. However, if CHL Transfer Corp. becomes
bankrupt, the trustee in bankruptcy of CHL Transfer Corp. may argue that the
home loans were not sold but were only pledged to secure a loan to CHL Transfer
Corp. If that argument is made, delays or reduction in payments
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on the notes could result. If that argument is successful, the bankruptcy
trustee could elect to sell the home loans and pay down the notes early. Thus,
the right to future payments of interest would be lost, and noteholders might
suffer reinvestment loss in a lower interest rate environment and may fail to
recover their initial investment.
In addition, if the Servicer becomes bankrupt, a bankruptcy trustee or
receiver may have the power to prevent the Indenture Trustee from appointing a
successor servicer. Any related delays in servicing could result in increased
delinquencies or losses on the home loans.
REPURCHASE OBLIGATION OF THE TRANSFEROR
Pursuant to the transfer and servicing agreements described in this
prospectus supplement, the Transferor has agreed to cure in all material
respects any breach of the Transferor's representations and warranties set forth
in the Sale and Servicing Agreement with respect to defective home loans which
materially and adversely affects the value of the home loan or the interests of
the noteholders in the related home loan. If the Transferor cannot cure such
breach within a specified period of time, the Transferor is required to
repurchase such defective home loans from the Trust. During the third quarter of
2000, the Transferor entered into a formal agreement with the Office of the
Comptroller of the Currency. The provisions of this agreement, among other
things, require that the Transferor's Board of Directors adopt a new budget as
well as new strategic, earnings and capital plans. The new strategic plan will
establish objectives for the Transferor's overall risk profile, earnings
performance, growth and capital adequacy. In addition, a provision of the
agreement states that the Transferor may not declare or distribute any dividends
without the prior written approval of the Office of the Comptroller of the
Currency. Although the Transferor does not believe that this agreement would
prevent it from meeting its repurchase obligations, no assurance can be given
that, at any particular time, the Transferor will be capable, financially or
otherwise, of repurchasing defective home loans from the Trust. If the
Transferor is unable to repurchase or replace a defective home loan, the
Servicer, on behalf of the Trust, will pursue other customary and reasonable
efforts, if any, to recover the maximum amount possible with respect to such
defective home loan. If the Servicer is unable to collect all amounts due to the
Trust with respect to such defective home loan, the resulting loss will be borne
by the note holders to the extent that such loss is not otherwise covered by
amounts available from the credit enhancement provided for the notes.
FORWARD-LOOKING INFORMATION
Certain of the information contained in this prospectus supplement
constitutes "forward-looking statements." These statements may include
projections of average life and maturity dates of the notes. These statements
are intended to convey our projections or expectations as of the date of this
prospectus supplement. These statements are inherently subject to a variety of
risks, uncertainties and other factors that may cause the actual results and
performance of the notes and the trust to be materially different from any
future results or performance expressed or implied by the forward-looking
statements. These factors include general economic and business conditions,
political and/or social conditions, interest rate changes, prepayments amounts,
loss and delinquency history, servicing performance, and the law and government
regulatory initiatives.
We will not update or revise any forward-looking statement to reflect
changes in our expectations or changes in the conditions or circumstances on
which such statements were originally based.
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USE OF PROCEEDS
The Depositor will use the proceeds from the sale of the Home Loans to the
Trust for the purchase of the Home Loans from CHL Transfer Corp.
DESCRIPTION OF THE TRUST
GENERAL
The Trust, Countrywide Home Loan Trust 2001-HLV1, will be a business trust
formed under the laws of the State of Delaware pursuant to the Trust Agreement
for the transactions described in this Prospectus Supplement. After its
formation, the Trust will not engage in any activity other than (i) acquiring,
holding and managing the Home Loans and the other assets of the Trust and
proceeds therefrom, (ii) issuing the Securities, (iii) making payments on the
Securities, and (iv) engaging in related activities.
All of the home loans (the "Home Loans") were sold by the Transferor to CHL
Transfer Corp. (the "Seller") pursuant to the Mortgage Loan Purchase and Interim
Servicing Agreement (the "Mortgage Loan Purchase Agreement") dated as of
December 29, 2000, between the Transferor and the Seller. On the Closing Date,
the Home Loans will be sold by CHLTC to the Depositor, and by the Depositor to
the Trust, pursuant to a Sale and Servicing Agreement to be dated as of January
1, 2001 (the "Sale and Servicing Agreement"), among the Trust, the Depositor,
the Seller, the Transferor, the Servicer and the Indenture Trustee. Pursuant to
the Indenture, the Trust will pledge and assign the Home Loans to the Indenture
Trustee for the benefit of the Noteholders. The Trust will be entitled to all
payments of interest and principal and all proceeds received in respect of the
Home Loans on or after the Cut-Off Date.
The assets of the Trust will consist primarily of Home Loans, which will be
secured by Mortgages. See "The Home Loan Pool" herein. The assets of the Trust
will also include (i) payments of accrued interest and principal collected in
respect of the Home Loans received on or after the Cut-Off Date; (ii) amounts on
deposit in the Collection Account (excluding investment income thereon) and the
Note Payment Account; (iii) the related Home Loan Files and credit files; and
(iv) certain other ancillary or incidental funds, rights and properties related
to the foregoing. On the Closing Date, the Trust will include the unpaid
principal balance of each Home Loan as of the Cut-Off Date (the "Cut-Off Date
Principal Balance"). The "Principal Balance" of a Home Loan on any day is equal
to its Cut-Off Date Principal Balance, minus all principal reductions credited
against the principal balance of such Home Loan since such Cut-Off Date;
provided, however, that the Principal Balance of a Liquidated Home Loan will be
zero. With respect to any date, the "Pool Principal Balance" will be equal to
the aggregate Principal Balance of the Home Loans as of such date.
The Servicer will be required to service the Home Loans pursuant to the
Sale and Servicing Agreement (collectively, with the Indenture, the
Administration Agreement (as defined herein), the Mortgage Loan Purchase
Agreement and the Trust Agreement, the "Transfer and Servicing Agreements") and
will be compensated for such services as described under "Description of the
Transfer and Servicing Agreements -- Servicing" herein.
The Trust's principal offices are located in Wilmington, Delaware, in care
of Wilmington Trust Company, as Owner Trustee, at the address set forth below
under "-- The Owner Trustee."
THE OWNER TRUSTEE
Wilmington Trust Company will act not in its individual capacity but solely
as the Owner Trustee under the Trust Agreement. Wilmington Trust Company is a
Delaware banking corporation and its principal offices are located at Rodney
Square North, 1100 North Market Street, Wilmington, Delaware 19890.
Certain functions of the Owner Trustee under the Trust Agreement and the
Sale and Servicing Agreement will be performed by Wells Fargo Bank Minnesota,
N.A., pursuant to the terms of an administration agreement dated as of January
1, 2001 (the "Administration Agreement") among the Trust, Wells Fargo Bank
Minnesota, N.A. and the Owner Trustee.
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THE HOME LOAN POOL
GENERAL
The Home Loan Pool will consist of the Home Loans conveyed to the Trust.
The Home Loans will consist of loans for which the related proceeds were used to
finance (i) property improvements, (ii) debt consolidation, or (iii) a
combination of property improvements, debt consolidation, cash-out, credit
insurance premiums, origination costs or other consumer purposes. All of the
Mortgages for the Home Loans will be junior in priority to one or more senior
liens on the related Mortgaged Properties, which will consist primarily of owner
occupied single family residences. Substantially all of the Home Loans will be
secured by liens on Mortgaged Properties in which the borrowers have little or
no equity (i.e., the related combined loan-to-value ratios approach or exceed
100%).
"Combined loan-to-value ratio" means, with respect to any Home Loan, the
fraction, expressed as a percentage, the numerator of which is the principal
balance of such Home Loan at origination plus, in the case of a junior lien Home
Loan, the aggregate outstanding principal balance of the related senior lien
loans on the date of origination of such Home Loan, and the denominator of which
is the appraised or stated value of the related Mortgaged Property at the time
of origination of such Home Loan.
PAYMENTS ON THE HOME LOANS
The Home Loans provide for a schedule of payments that will be, if timely
paid, sufficient to amortize fully the principal balance of the related Home
Loan on or before its maturity date. The scheduled monthly payment dates of the
Home Loans occur throughout the month. Each Home Loan bears interest at a fixed
rate (the "Home Loan Rate"). Interest on the Home Loans will accrue on an
"actuarial interest" method. No Home Loan provides for deferred interest or
negative amortization.
The "actuarial interest" method provides that interest is charged and
payments are due as of a scheduled day each month that is fixed at the time of
origination, and payments received after a grace period following such scheduled
day are subject to late charges. A scheduled payment on such a Home Loan
received either earlier or later than the scheduled due date thereof will not
affect the amortization schedule or the relative application of such payment to
principal and interest in respect of such Home Loan.
UNDERWRITING CRITERIA
General. The Transferor purchased the Home Loans from PSB Lending Corp.
(the "Originator"). The Transferor provided the information set forth in the
following paragraphs concerning the origination practices of the Originator in
effect at the time of the origination of the Home Loan. None of the Depositor,
the Owner Trustee, the Indenture Trustee, the Servicer, the Seller, the
Underwriters or any of their respective affiliates have made or will make any
representation as to the accuracy or completeness of such information.
Generally, the underwriting standards of the Originator placed a greater
emphasis on the creditworthiness of the borrower than on the underlying
collateral in evaluating the likelihood that a borrower would be able to repay
the home loan. Some of the home loans that the Originator purchased through its
correspondent network were re-underwritten by the Originator to assure that such
home loans had been originated in accordance with the Originator's underwriting
requirements.
Generally, the home loans acquired or originated by the Originator were
made to borrowers that typically have limited access to consumer financing for a
variety of reasons, such as high levels of debt service-to-income, unfavorable
past credit experience, insufficient home equity value, lower income or a
limited credit history. With respect to these home loans, the collection of loan
payments from each borrower is subject to various risks, including, without
limitation, the risk that such borrower will not be able to make payments of
interest and principal on the home loan and that the realizable value of the
related mortgaged property will not be sufficient to repay the outstanding
interest and principal owed on
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such home loan. The Originator used its own credit evaluation criteria to
classify the borrowers of home loans by risk class. Loans were classified by the
Originator into four graduations of quality designated as 'A+', 'A', 'B+' and
'B' credits. These criteria included, as a significant component, the credit
bureau score (the "Credit Score") derived based on a methodology developed by
Fair, Isaac and Company, a consulting firm specializing in creating predictive
default models through scoring mechanisms. The Credit Scores, which were
obtained from national credit reporting organizations, are numerical
representations of borrowers' estimated default probability, and generally range
from a low of 350 to a high of 800. A borrower with a Credit Score of 720 or
higher would be assigned the highest classification for credit quality by the
Originator. Additional criteria include the borrower's debt-to-income ratio,
mortgage credit history, consumer credit history, prior bankruptcies, prior
foreclosures, notices of default, deeds-in-lieu of foreclosure and
repossessions. The Originator believed that the most important credit
characteristics were the borrower's Credit Score and debt-to-income ratio, the
latter of which, generally could not exceed 45% of the borrower's gross income,
but depending on certain compensating factors, could be increased to 50% of the
borrower's income.
The Originator had a credit policy that provided a number of guidelines to
assist underwriters in the credit review and decision process. The Originator's
underwriting guidelines provided for the evaluation of a loan applicant's
creditworthiness through the use of a consumer credit report, verification of
employment and a review of the debt service-to-income ratio of the applicant.
Income was verified through various means, including without limitation,
applicant interviews, written verifications with employers, review of pay stubs
or tax returns. The borrower was required to demonstrate sufficient levels of
disposable income to satisfy debt repayment requirements.
In response to changes and developments in the consumer finance area as
well as the refinement of the Originator's credit evaluation methodology, the
Originator's underwriting requirements for certain of the home loans changed
from time to time, which in certain instances, resulted in more stringent and in
other instances less stringent, underwriting requirements. Depending upon the
date on which the home loans were purchased by the Transferor, such home loans
included in the home loan pool were purchased by the Transferor under different
underwriting requirements, and accordingly, certain home loans included in the
home loan pool may be of a different credit quality and have different loan
characteristics from other home loans. Furthermore, to the extent that certain
home loans were purchased by the Transferor under less stringent underwriting
requirements, such home loans may be more likely to experience higher rates of
delinquencies, defaults and losses than those home loans purchased under more
stringent underwriting requirements.
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CHARACTERISTICS OF THE HOME LOANS
The following information sets forth certain characteristics of the Home
Loans expected to be included in the Trust at the Closing Date (such pool, the
"Home Loan Pool"). This information, as well as other information in this
prospectus supplement describing the Home Loans and the Home Loan Pool are
approximate percentages based on the Original Pool Principal Balance. The
"Original Pool Principal Balance" is $227,462,787.49, which is equal to the Pool
Principal Balance of the Home Loans as of the Cut-Off Date.
HOME LOAN RATES
AGGREGATE PERCENT OF TOTAL
NUMBER OF PRINCIPAL BY AGGREGATE
RANGE OF HOME LOAN RATES (%) HOME LOANS BALANCE PRINCIPAL BALANCE
- ---------------------------- ---------- ------------ -----------------
6.501 to 7.000.................................. 1 $ 32,669 0.01%
8.501 to 9.000.................................. 3 57,651 0.03
9.001 to 9.500.................................. 3 143,320 0.06
9.501 to 10.000.................................. 61 2,124,101 0.93
10.001 to 10.500.................................. 187 6,729,186 2.96
10.501 to 11.000.................................. 321 11,223,829 4.93
11.001 to 11.500.................................. 256 9,171,742 4.03
11.501 to 12.000.................................. 985 35,152,570 15.45
12.001 to 12.500.................................. 556 19,426,716 8.54
12.501 to 13.000.................................. 1,042 37,196,205 16.35
13.001 to 13.500.................................. 532 18,595,148 8.18
13.501 to 14.000.................................. 966 33,868,843 14.89
14.001 to 14.500.................................. 322 10,892,270 4.79
14.501 to 15.000.................................. 588 19,464,710 8.56
15.001 to 15.500.................................. 246 7,204,905 3.17
15.501 to 16.000.................................. 301 8,549,310 3.76
16.001 to 16.500.................................. 95 2,646,993 1.16
16.501 to 17.000.................................. 110 2,959,765 1.30
17.001 to 17.500.................................. 21 625,179 0.27
17.501 to 18.000.................................. 30 858,545 0.38
18.001 to 18.500.................................. 3 66,193 0.03
18.501 to 19.000.................................. 16 385,092 0.17
19.001 to 19.500.................................. 5 87,845 0.04
----- ------------ ------
Total................................... 6,650 $227,462,787 100.00%
===== ============ ======
The weighted average Home Loan Rate of the Home Loans as of the Cut-Off
Date was approximately 13.256% per annum.
CURRENT PRINCIPAL BALANCES
AGGREGATE PERCENT OF TOTAL
RANGE OF CUT-OFF DATE NUMBER OF PRINCIPAL BY AGGREGATE
PRINCIPAL BALANCES ($) HOME LOANS BALANCE PRINCIPAL BALANCE
---------------------- ---------- ------------ -----------------
$0.00 to $25,000.00........................... 1,810 $ 36,010,150 15.83%
25,000.01 to 50,000.00........................... 4,141 149,415,051 65.69
50,000.01 to 75,000.00........................... 670 39,569,934 17.40
75,000.01 to 100,000.00........................... 29 2,467,653 1.08
----- ------------ ------
Total................................... 6,650 $227,462,787 100.00%
===== ============ ======
The average principal balance of the Home Loans as of the Cut-Off Date was
approximately $34,205.
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REMAINING TERMS TO MATURITY
AGGREGATE PERCENT OF TOTAL
RANGE OF REMAINING NUMBER OF PRINCIPAL BY AGGREGATE
TERM TO MATURITY (MONTHS) HOME LOANS BALANCE PRINCIPAL BALANCE
------------------------- ---------- ------------ -----------------
1 to 120........................................ 622 $ 14,271,677 6.27%
121 to 180........................................ 2,011 62,612,409 27.53
181 to 300........................................ 4,017 150,578,701 66.20
----- ------------ ------
Total................................... 6,650 $227,462,787 100.00%
===== ============ ======
The weighted average remaining term to maturity of the Home Loans as of the
Cut-Off Date was approximately 208 months.
GEOGRAPHIC CONCENTRATION
PERCENTAGE OF TOTAL
NUMBER OF AGGREGATE BY AGGREGATE
STATE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- ---------- ----------------- -------------------
Alabama........................................ 94 $ 2,773,856 1.22%
Alaska......................................... 90 3,369,462 1.48
Arizona........................................ 312 10,530,598 4.63
Arkansas....................................... 2 68,553 0.03
California..................................... 2,416 86,054,687 37.83
Colorado....................................... 119 4,233,532 1.86
Connecticut.................................... 54 1,958,554 0.86
Delaware....................................... 14 485,280 0.21
District of Columbia........................... 2 73,695 0.03
Florida........................................ 610 19,258,813 8.47
Georgia........................................ 227 7,302.047 3.21
Idaho.......................................... 79 2,530,711 1.11
Illinois....................................... 101 3,505,734 1.54
Indiana........................................ 90 3,213,828 1.41
Iowa........................................... 41 1,475,739 0.65
Kansas......................................... 36 1,158,382 0.51
Kentucky....................................... 53 1,591,188 0.70
Louisiana...................................... 35 1,026,380 0.45
Maine.......................................... 9 308,702 0.14
Maryland....................................... 186 6,845,933 3.01
Massachusetts.................................. 42 1,499,542 0.66
Michigan....................................... 66 2,064,368 0.91
Minnesota...................................... 112 3,976,334 1.75
Mississippi.................................... 15 485,121 0.21
Missouri....................................... 93 2,876,294 1.26
Montana........................................ 17 594,051 0.26
Nebraska....................................... 43 1,551,319 0.68
Nevada......................................... 250 8,367,204 3.68
New Hampshire.................................. 38 1,445,695 0.64
New Jersey..................................... 101 3,650,003 1.60
New Mexico..................................... 34 1,143,241 0.50
New York....................................... 77 2,627,763 1.16
North Carolina................................. 140 4,708,515 2.07
North Dakota................................... 8 220,697 0.10
Ohio........................................... 156 5,079,509 2.23
Oklahoma....................................... 99 2,905,296 1.28
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PERCENTAGE OF TOTAL
NUMBER OF AGGREGATE BY AGGREGATE
STATE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- ---------- ----------------- -------------------
Oregon......................................... 122 $ 4,205,245 1.85%
Pennsylvania................................... 130 4,499,196 1.98
Rhode Island................................... 6 201,466 0.09
South Carolina................................. 8 274,658 0.12
South Dakota................................... 8 213,410 0.09
Tennessee...................................... 62 1,893,605 0.83
Utah........................................... 56 1,817,067 0.80
Vermont........................................ 10 400,880 0.18
Virginia....................................... 151 4,943,561 2.17
Washington..................................... 166 5,627,152 2.47
Wisconsin...................................... 44 1,632,967 0.72
West Virginia.................................. 11 374,994 0.16
Wyoming........................................ 15 417,962 0.18
----- ------------ -------
6,650 $227,462,787 100.00%
===== ============ =======
CREDIT SCORES*
AGGREGATE PERCENT OF TOTAL
RANGE OF NUMBER OF PRINCIPAL BY AGGREGATE
CREDIT SCORES HOME LOANS BALANCE PRINCIPAL BALANCE
- ------------- ---------- ------------ -----------------
801 to 820........................................ 25 $ 846,227 0.37%
781 to 800........................................ 163 5,631,538 2.48
761 to 780........................................ 354 12,107,034 5.32
741 to 760........................................ 539 18,474,881 8.12
721 to 740........................................ 818 28,733,330 12.63
701 to 720........................................ 1,077 37,894,441 16.66
681 to 700........................................ 1,086 38,120,914 16.76
661 to 680........................................ 937 32,167,744 14.14
641 to 660........................................ 637 20,601,850 9.06
621 to 640........................................ 480 15,774,796 6.94
601 to 620........................................ 306 9,723,165 4.27
581 to 600........................................ 166 5,445,870 2.39
561 to 580........................................ 62 1,940,996 0.85
----- ------------ ------
Total................................... 6,650 $227,462,787 100.00%
===== ============ ======
- ---------------
* The Credit Scores referenced in this table with respect to substantially all
of the Home Loans were obtained by the Transferor from one or more credit
reporting agencies no more than 60 days prior to the Closing Date. With
respect to the remaining Home Loans, Credit Scores were determined at the time
of origination.
The weighted average Credit Score of the Home Loans as of the Cut-Off Date
was approximately 693.
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DEBT-TO-INCOME RATIOS*
AGGREGATE PERCENT OF TOTAL
RANGE OF NUMBER OF PRINCIPAL BY AGGREGATE
DEBT-TO-INCOME RATIOS HOME LOANS BALANCE PRINCIPAL BALANCE
- --------------------- ---------- ------------ -----------------
MISSING........................................... 2 $ 60,135 0.03%
10.01 to 15.00.................................... 8 268,736 0.12
15.01 to 20.00.................................... 42 1,267,262 0.56
20.01 to 25.00.................................... 258 7,944,488 3.49
25.01 to 30.00.................................... 680 22,281,367 9.80
30.01 to 35.00.................................... 1,223 40,998,103 18.02
35.01 to 40.00.................................... 1,737 58,010,118 25.50
40.01 to 45.00.................................... 2,163 75,590,563 33.23
45.01 to 50.00.................................... 531 20,822,811 9.15
50.01 to 55.00.................................... 3 116,942 0.05
60.01 to 65.00.................................... 2 58,008 0.03
65.01 to 70.00.................................... 1 44,253 0.02
----- ------------ ------
Total................................... 6,650 $227,462,787 100.00%
===== ============ ======
- ---------------
* Determined at the time of origination of the related Home Loan.
The weighted average debt-to-income ratio of the Home Loans as of the
Cut-Off Date was approximately 38.13%.
COMBINED LOAN-TO-VALUE RATIOS
AGGREGATE PERCENT OF TOTAL
RANGE OF COMBINED NUMBER OF PRINCIPAL BY AGGREGATE
LOAN-TO-VALUE RATIOS HOME LOANS BALANCE PRINCIPAL BALANCE
- -------------------- ---------- ------------ -----------------
50.00 and below................................... 6 $ 155,511 0.07%
50.01 to 55.00.................................... 1 31,520 0.01
55.01 to 60.00.................................... 2 28,321 0.01
60.01 to 65.00.................................... 1 33,584 0.01
65.01 to 70.00.................................... 1 18,367 0.01
70.01 to 75.00.................................... 5 136,926 0.06
75.01 to 80.00.................................... 20 563,812 0.25
80.01 to 85.00.................................... 22 580,417 0.26
85.01 to 90.00.................................... 60 1,655,675 0.73
90.01 to 95.00.................................... 130 3,914,198 1.72
95.01 to 100.00................................... 276 8,472,394 3.72
100.00 to 105.00.................................. 393 12,880,619 5.66
105.01 to 110.00.................................. 670 20,978,877 9.22
110.01 to 115.00.................................. 1,084 35,280,679 15.51
115.01 to 120.00.................................. 1,319 45,205,766 19.87
120.01 to 125.00.................................. 2,373 85,324,696 37.51
125.01 to 130.00.................................. 134 5,207,728 2.29
130.01 to 135.00.................................. 147 6,814,380 3.00
135.01 to 140.00.................................. 2 64,611 0.03
140.01 to 150.00.................................. 2 71,785 0.03
150.01+........................................... 2 42,923 0.02
----- ------------ ------
Total................................... 6,650 $227,462,787 100.00%
===== ============ ======
The weighted average Combined Loan-to-Value Ratio of the Home Loans as of
the Cut-Off Date was 116.19%.
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MORTGAGED PROPERTY TYPES
CUT-OFF DATE
NUMBER OF PRINCIPAL PERCENT OF
PROPERTY TYPE HOME LOANS BALANCE MORTGAGE POOL
- ------------- ---------- ------------ -------------
Single family....................................... 6,205 $214,331,241 94.23%
Condominium......................................... 298 8,390,188 3.69
PUD................................................. 95 3,341,748 1.47
Manufactured Homes.................................. 24 612,714 0.27
Town Homes.......................................... 16 430,049 0.19
2 Family............................................ 8 253,673 0.11
3 Family............................................ 3 68,946 0.03
Other............................................... 1 34,230 0.02
----- ------------ ------
Total..................................... 6,650 $227,462,787 100.00%
===== ============ ======
OCCUPANCY TYPE*
CUT-OFF DATE
NUMBER OF PRINCIPAL PERCENT OF
OCCUPANCY TYPE HOME LOANS BALANCE MORTGAGE POOL
- -------------- ---------- ------------ -------------
Missing............................................. 1 $ 34,890 0.02%
Non-Owner Occupied.................................. 2 83,900 0.04
Owner Occupied...................................... 6,647 227,343,998 99.95
----- ------------ ------
Total..................................... 6,650 $227,462,787 100.00%
===== ============ ======
- ---------------
* Based on representations of the borrowers at the time of origination.
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THE TRANSFEROR
GENERAL
Bay View Bank, N.A. (the "Transferor") is a national bank, and is the
largest independent bank operating exclusively in the San Francisco Bay area.
The Transferor uses the deposits it attracts from the general public, together
with borrowing and other sources of funds, to fund its lending and leasing
activities. Most of the mortgage loans that it originates are secured by
properties located in California, primarily northern California. As of September
30, 2000, the Transferor had $6.027 billion of assets, $3.7 billion of net loans
and leases and $3.8 billion of deposits. The Transferor is a wholly owned
subsidiary of Bay View Capital Corporation. The principal executive offices of
the Transferor are located at 2121 South El Camino Real, San Mateo, California
94403.
REPURCHASE OF HOME LOANS
The Transferor is required (i) within 60 days after discovery by the
Transferor or notice thereof to cure in all material respects any breach of the
representations or warranties made with respect to a Home Loan (a "Defective
Home Loan") or (ii) on or before the Determination Date next succeeding the end
of such 60-day period, to repurchase such Defective Home Loan, at a price (the
"Purchase Price") equal to the Principal Balance of such Defective Home Loan as
of the date of repurchase, plus all accrued and unpaid interest on such
Defective Home Loan to and including the Due Date in the most recent Collection
Period computed at the applicable Home Loan Rate. The repurchase of any Home
Loan will result in accelerated principal payments on the Notes.
THE SERVICER
GENERAL
The Servicer will service the Home Loans in accordance with the terms set
forth in the Sale and Servicing Agreement and will be entitled to the Servicing
Fee and to certain additional servicing compensation. The Servicer may perform
any of its obligations under the Sale and Servicing Agreement through one or
more subservicers. Notwithstanding any such subservicing arrangement, the
Servicer will remain liable for its servicing duties and obligations under the
Sale and Servicing Agreement as if the Servicer alone were servicing the Home
Loans.
THE SERVICER
Litton Loan Servicing LP (the "Servicer") provided the information set
forth in the following paragraphs. None of the Depositor, the Transferor, the
Owner Trustee, the Indenture Trustee, the Seller, the Underwriters or any of
their respective affiliates have made or will make any representation as to the
accuracy or completeness of such information.
The Servicer, a Delaware limited partnership, was formed in December 1996,
with all of the general and limited partnership interests owned by Enhance
Financial Services Group, Inc. ("EFSG"), Mortgage Guaranty Insurance Corporation
and C-BASS Holding LLC. On October 1, 1998 Litton Loan Servicing, Inc. was a
wholly-owned subsidiary of EFSG and transferred its business to the Servicer.
From and after October 1, 1998, the Servicer has been conducting all activities
formerly conducted by Litton Loan Servicing, Inc. Radian Group Inc. ("Radian")
and EFSG announced on November 14, 2000 that they had entered into a definitive
agreement pursuant to which Radian would acquire EFSG. The transaction, which is
expected to close in the first quarter of 2001, is subject to various regulatory
approvals as well as the approval of Radian and EFSG stockholders and certain
conditions. The Servicer currently employs approximately 290 individuals. The
main office of the Servicer is located at 5373 W. Alabama, Houston, Texas 77056.
The Servicer is currently a Fannie Mae-and Freddie Mac-approved servicer and an
approved FHA and VA lender with a servicing portfolio in excess of $5.159
billion. The Servicer specializes in
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servicing sub-performing mortgage loans and entering into workouts with the
related mortgagors. Recent transactions for which the Servicer acts as servicer
include C-BASS ABS, LLC 1998-1, Merrill Lynch Mortgage Investors, Inc. Series
1998-FF2, Series 1998-FF3, Series 1998-GN3, Series 1999-H1, Series 1999-H2,
Series 1999-CB1, Series 1999-CB2, Series 1999-CB4, Series 1999-NC1, Series
2000-FF1, Series 2000-CB1, New Century Mortgage Securities, Inc., Series
1999-NCC, Financial Asset Securities Corp., Series 1998-3, Series 1999-CB5,
Series 2000-1, Asset Backed Funding Corporation, Series 1999-1, Series 2000-CB2,
Prudential Securities Secured Financing Corporation, Series 2000-CB3,
Residential Asset Funding Corporation, Series 2000-CB4 and PaineWebber Mortgage
Acceptance Corporation IV, Series 2000-HE-1.
Fitch assigned the Servicer its RSS1 residential special servicer rating on
November 16, 1999. The rating is based on the Servicer's ability to manage and
liquidate nonperforming residential mortgage loans and real estate owned assets.
This RSS1 rating is the highest special servicer rating attainable from Fitch
which reflects the Servicer's sophisticated proprietary default management
technology, the financial strength of its well-capitalized parent and its highly
experienced management and staff.
Fitch assigned the Servicer its RPS1 primary servicer rating for sub-prime
and high loan-to-value ratio product. The RPS1 rating is currently the highest
subprime primary servicer rating attainable from Fitch for any subprime
servicer, which is based on the strength of the Servicer's loan administration
processes including new loan set-up procedures and related technology, loan
accounting/cash management and loan reporting. The RPS1 rating for high
loan-to-value ratio product is based on the Servicer's intensive focus on early
collection and loss mitigation.
In addition, Fitch has also assigned the Servicer its Special Servicer
Designation(TM) for residential mortgages.
Delinquency and Foreclosure Experience. The following table sets forth the
delinquency and foreclosure experience of the mortgage loans the Servicer
serviced as of the dates indicated. The Servicer's portfolio of mortgage loans
may differ significantly from the Home Loans in terms of interest rates,
principal balances, geographic distribution, types of properties and other
possibly relevant characteristics. There can be no assurance, and no
representation is made, that the delinquency and foreclosure experience with
respect to the Home Loans will be similar to that reflected in the table below,
nor is any representation made as to the rate at which losses may be experienced
on liquidation of defaulted Home Loans. The actual delinquency experience on the
Home Loans will depend, among other things, upon the value of the real estate
underlying such Home Loans and the ability of the related mortgagor to make
required payments. It should be noted that the Servicer's business emphasizes to
a certain degree the acquisition of servicing rights with respect to
non-performing and subperforming mortgage loans and the Servicer has been an
active participant in the market for such servicing rights since 1997. The
acquisition of such servicing rights may have affected the delinquency and
foreclosure experience of the Servicer.
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DELINQUENCY AND FORECLOSURE EXPERIENCE(1)
AS OF SEPTEMBER 30, 2000 AS OF DECEMBER 31, 1999
----------------------------------- -----------------------------------
% BY % BY
NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL
LOANS BALANCE(2) BALANCE LOANS BALANCE(2) BALANCE
------ -------------- --------- ------ -------------- ---------
Current Loans........ 48,699 $3,371,172,566 67.5% 37,105 $2,580,776,677 69.98%
Period of
Delinquency(3)
30 Days............ 7,146 $ 502,100,981 10.1% 4,638 $ 323,122,291 8.76%
60-89 Days......... 2,723 $ 196,753,561 3.9% 1,886 $ 133,339,006 3.62%
90 Days or More.... 3,030 $ 179,919,121 3.6% 2,056 $ 127,745,979 3.46%
------ -------------- ------ ------ -------------- ------
Total Delinquency.... 12,899 $ 878,773,663 17.6% 8,580 $ 584,207,276 15.84%
====== ============== ====== ====== ============== ======
Foreclosures/
Bankruptcy(4)...... 7,883 $ 613,260,143 12.3% 5,503 $ 433,109,387 11.74%
Real Estate Owned.... 1,938 $ 128,836,135 2.6% 1,264 $ 89,691,707 2.43%
------ -------------- ------ ------ -------------- ------
Total Portfolio...... 71,419 $4,992,042,507 100.00% 52,452 $3,687,785,047 100.00%
====== ============== ====== ====== ============== ======
AS OF DECEMBER 31, 1998
-----------------------------------
% BY
NO. OF PRINCIPAL PRINCIPAL
LOANS BALANCE(2) BALANCE
------ -------------- ---------
Current Loans........ 39,063 $2,489,678,138 78.01%
Period of
Delinquency(3)
30 Days............ 3,689 $ 233,734,152 7.32%
60-89 Days......... 1,497 $ 87,944,512 2.76%
90 Days or More.... 2.578 $ 121,504,523 3.81%
------ -------------- ------
Total Delinquency.... 7,764 $ 443,183,187 13.89%
====== ============== ======
Foreclosures/
Bankruptcy(4)...... 2,780 $ 197,668,255 6.19%
Real Estate Owned.... 1.009 $ 60,867,154 1.91%
------ -------------- ------
Total Portfolio...... 50.616 $3,191,396,734 100.00%
====== ============== ======
- ------------
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) For the Real Estate Owned properties, the principal balance is at the time
of foreclosure.
(3) No mortgage loan is included in this section of the table as delinquent
until it is 30 days past due.
(4) Exclusive of the number of loans and principal balance shown in Period of
Delinquency.
It is unlikely that the delinquency experience of the Home Loans comprising
the Home Loan Pool will correspond to the delinquency experience of the
Servicer's mortgage portfolio set forth in the foregoing table. The statistics
shown above represent the delinquency experience for the Servicer's mortgage
servicing portfolio only for the periods presented, whereas the aggregate
delinquency experience on the Home Loans comprising the Home Loan Pool will
depend on the results obtained over the life of the Home Loan Pool. The Servicer
does not have significant historical delinquency, bankruptcy, foreclosure or
default experience that may be referred to for purposes of estimating the future
delinquency and loss experience of Home Loans. There can be no assurance that
the Home Loans comprising the Home Loan Pool will perform consistent with the
delinquency or foreclosure experience described herein. It should be noted that
if the residential real estate market should experience an overall decline in
property values, the actual rates of delinquencies and foreclosures could be
higher than those previously experienced by the Servicer. In addition, adverse
economic conditions may affect the timely payment by borrowers of scheduled
payments of principal and interest on the Home Loans and, accordingly, the
actual rates of delinquencies and foreclosures with respect to the Home Loan
Pool.
SERVICER EVENTS OF DEFAULT
"Servicer Events of Default" will consist of, subject to applicable cure
periods, without limitation: (i) any failure of the Servicer to deposit in the
Collection Account any amount required to be deposited under the Sale and
Servicing Agreement, which failure continues unremedied for five Business Days;
(ii) any failure by the Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the Sale and Servicing
Agreement, which failure continues unremedied for a period of 30 days after
notice; (iii) the loss or delinquency experience with respect to the Home Loans
exceeds certain levels as specified in the Sale and Servicing Agreement; and
(iv) certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings relating to the Servicer and certain
actions by the Servicer indicating insolvency, reorganization or inability to
pay its obligations or the Servicer shall dissolve or liquidate, in whole or
part, in any material respect.
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If a Servicer Event of Default occurs, the Indenture Trustee may, and at
the direction of a majority in interest of the Noteholders, shall remove the
Servicer. The Servicer may resign only in accordance with the terms of the Sale
and Servicing Agreement. No removal or resignation shall become effective until
(i) the Indenture Trustee or a successor servicer acceptable to the Indenture
Trustee shall have assumed the Servicer's responsibilities and obligations in
accordance therewith subject to the pledge and assignment to the Servicing
Rights Pledgee as described below, and (ii) each Rating Agency has confirmed
that the ratings of the Notes will be unaffected by the Indenture Trustee's or
successor servicer's assumption of the Servicer's responsibilities and
obligations.
PLEDGE AND ASSIGNMENT OF SERVICER'S RIGHTS
On or after the Closing Date, the Servicer will pledge and assign all of
its right, title and interest in, to and under the Sale and Servicing Agreement
to one or more lenders (each, a "Servicing Rights Pledgee") selected by the
Servicer, including First Union National Bank, as the representative of certain
lenders. In the event that a Servicer Event of Default as described above
occurs, the Indenture Trustee has agreed to the appointment of the selected
Servicing Rights Pledgee or its designee as the successor servicer, provided
that at the time of such appointment the Servicing Rights Pledgee or such
designee meets the requirements of a successor servicer described in the Sale
and Servicing Agreement (including being acceptable to the Rating Agencies) and
that the selected Servicing Rights Pledgee or such designee agrees to be subject
to the terms of the Sale and Servicing Agreement.
S-26
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DESCRIPTION OF THE NOTES
GENERAL
The Trust will issue the Class A-1 Notes, the Class A-2 Notes, the Class
A-3 Notes, the Class A-4 Notes, the Class A-5 Notes, the Class M-1 Notes, the
Class M-2 Notes, the Class B-1 Notes and the Class B-2 Notes (together, the
"Notes") pursuant to the Indenture. The Class M-1, Class M-2, Class B-1 and
Class B-2 Notes are referred to as the "Subordinated Notes." The Trust will also
issue a Certificate (the "Certificate" and together with the Notes, the
"Securities") pursuant to the Trust Agreement dated as of January 1, 2001 (the
"Trust Agreement") among the Depositor and the Owner Trustee. The Notes will be
secured by the assets of the Trust pursuant to the Indenture. The Certificate
will represent the ownership interest in the Trust. The Certificate is not being
offered hereby.
On each Payment Date, the Indenture Trustee or its designee will pay to the
persons in whose names the Notes are registered on the last day of the month
immediately preceding the month of the related Payment Date (the "Record Date")
the portion of the aggregate payment to be made to each Noteholder as described
below. Payments on the Notes will be made to Beneficial Owners only through DTC,
Clearstream or Euroclear and their respective Participants (except under certain
limited circumstances).
BOOK-ENTRY AND DEFINITIVE NOTES
The Notes will be issued in the form of beneficial interests in one or more
restricted global certificates (the "Book-Entry Notes"), deposited with a
custodian for The Depository Trust Company ("DTC" and, together with any
successor depository selected by the Depositor, the "Depository"). The Notes
will not be issued in bearer form. Beneficial interests in the Notes may be held
in denominations of $25,000 or any integral multiples of $1 in excess thereof.
The registered holders of the Notes are sometimes referred to in this section as
"Noteholders" and the owners of beneficial interests in the Book-Entry Notes as
"Note Owners."
Book-Entry Notes. The Notes will be represented initially by one or more
Book-Entry Notes and will be deposited with DTC or its custodian and registered
in the name of Cede & Co., as nominee of DTC. 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 Uniform Commercial Code and a "clearing agency" registered pursuant to
Section 17A of the Securities and Exchange Act of 1934. DTC was created to hold
securities for its participating organizations ("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 certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations. Indirect access to
the DTC system also is available to others such as the Underwriters offering the
Notes, banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Notes may be held through DTC in the United States, or Clearstream,
Luxembourg or the Euroclear System in Europe, if a Note Owner is a participant
of those systems, or indirectly through organizations that are participants in
those systems.
Owners of beneficial interests in Book-Entry Notes that are not
Participants or Indirect Participants of DTC who desire to purchase, sell or
otherwise transfer ownership of, or other interests in, Notes may do so only
through Participants and Indirect Participants. In addition, Note Owners will
receive all distributions of principal of and interest on the Notes through
Participants, as described below. It is anticipated that the only "Noteholder"
of record of the Book-Entry Notes will be Cede & Co., as nominee of DTC. Note
Owners will not be recognized by the Indenture Trustee as Noteholders, as such
term is used in the Indenture, and Note Owners will be permitted to exercise the
rights of Noteholders only indirectly through DTC and its Participants.
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Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Notes among Participants on whose behalf it acts with respect to the
Book-Entry Notes. Participants and Indirect Participants with which Note Owners
have accounts with respect to the Notes similarly are required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Note Owners. Accordingly, although Note Owners will not hold
physical certificates for Notes represented by the Book-Entry Notes, the Rules
provide a mechanism by which Note Owners will receive payments and will be able
to transfer their interests in such Notes.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a holder to
pledge Book-Entry Notes to persons or entities that do not participate in the
DTC system, or to otherwise act with respect to such Book-Entry Notes, may be
limited due to the lack of a physical certificate.
DTC has advised the Trust that, unless and until Notes are issued in
registered form, it will take any action permitted to be taken by a Noteholder
under the Indenture only at the direction of one or more Participants to whose
accounts with DTC the Book-Entry Notes are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that such
actions are taken on behalf of Participants whose holdings include such
undivided interests.
DTC may discontinue providing its services as securities depositary with
respect to any class of Notes at any time by giving reasonable notice to the
Trustee or the Indenture Trustee, as applicable. Under these circumstances, in
the event that a successor securities depositary is not obtained, fully
registered, certificated Notes are required to be printed and delivered. A trust
may decide to discontinue use of the system of book-entry transfers through DTC
or a successor securities depositary. In that event, fully registered,
certificated Notes will be delivered to the Note Owners. See "-- Definitive
Notes" below.
The information in this section concerning DTC and DTC's book-entry system
are from sources that the Depositor believes to be reliable, but the Depositor
does not take any responsibility for the accuracy of this information.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf
of the participants in the Clearstream, Luxembourg and Euroclear systems,
respectively, through customers' securities accounts in Clearstream,
Luxembourg's and Euroclear's names on the books of their respective depositaries
which in turn will hold these positions in customers' securities accounts in the
depositaries' names on the books of DTC.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg as a
professional depositary. Clearstream holds securities for its participants and
facilities the clearance and settlement of securities transactions between its
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates.
Indirect access to Clearstream, Luxembourg is also available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Clearstream, Luxembourg 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's participants
through simultaneous electronic book entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. On December 31, 2000,
Euroclear Bank S.A./N.V. took over the Euroclear-related operating and banking
responsibilities formerly performed by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York. Euroclear Bank S.A./N.V. currently operates
Euroclear, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation. Euroclear's operator conducts all operations and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with Euroclear's operator. Euroclear Clearance Systems S.C. establishes policy
for Euroclear on behalf of Euroclear's participants, including banks, securities
brokers and dealers, and other professional financial intermediaries.
S-28
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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.
Euroclear holds all securities on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
operator acts under the Euroclear terms and conditions only on behalf of
Euroclear's participants, and has no record of or relationship with persons
holding through Euroclear's participants.
Transfers between direct participants will comply with DTC rules. Transfers
between Clearstream's participants and Euroclear's participants will comply with
their rules and operating procedures.
DTC will effect, under DTC rules, cross-market transfers between persons
holding directly or indirectly through DTC in the United States, on the one
hand, and directly or indirectly through Clearstream or Euroclear, on the other,
through the relevant European international clearing system through its
depository; however, these cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in this system as required by its rules and procedures and within
its established deadlines, European time. The relevant European international
clearing system will, if the transaction meets its settlement requirement,
deliver instructions to its depositary to take action to effect final settlement
on its behalf by delivering or receiving securities in DTC, and making or
receiving payment using its normal procedures for same-day funds settlement
applicable to DTC. Clearstream participants and Euroclear participants may not
deliver instructions directly to the depositories.
Because of time-zone differences, credits of securities in Clearstream or
Euroclear as a result of a transaction with a DTC participant will be made
during the subsequent securities settlement processing day, dated the business
day following the DTC settlement date, and the credits or any transactions in
the securities settled during the processing day will be reported to the
relevant Clearstream participant or Euroclear participant on that business day.
Cash received in Clearstream or Euroclear as a result of sales of securities by
or through a Clearstream participant or a 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.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of securities among participants of
DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform these procedures and these procedures may be discontinued at
any time.
Except as required by law, none of the Depositor, the Trust, the Owner
Trustee, the Transferor or the Indenture Trustee will have any liability for any
aspect of the records relating to or distributions made on account of beneficial
ownership interests in 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.
Definitive Notes. The Notes will be issued in registered form to
Noteholders, or their nominees, rather than to DTC, only if (i) DTC advises the
Indenture Trustee in writing that DTC is no longer willing or able to discharge
properly its responsibilities as nominee and depository with respect to the
Notes and the Indenture Trustee is unable to locate a qualified successor; (ii)
the Depositor, at its sole option and with the consent of the Indenture Trustee,
elects to terminate the book-entry system through DTC or (iii) after the
occurrence of any Indenture Event of Default, DTC, at the direction of
Noteholders having a majority in interest of the Notes, advises the Indenture
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) to the exclusion of any physical securities being issued to
Noteholders is no longer in the best interest of Noteholders. Upon issuance in
registered form of physical Notes, such Notes will be transferable directly (and
not exclusively on a book-entry basis), and registered holders will deal
directly with the Indenture Trustee with respect to transfers, notices and
distributions.
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The holder of any Definitive Note may exchange the same in whole or in part
(in an original principal amount equal to $25,000 or any integral multiple of $1
in excess thereof) for other Definitive Notes or, if such holder is entitled to
hold an interest in Book-Entry Notes (subject to the rules and procedures of
DTC), for a beneficial interest in Book-Entry Notes by surrendering such
Definitive Note to the Indenture Trustee (and completing the form of transfer on
the reverse thereof) together with any certificate or other required
documentation. No service charge will be imposed for any registration of
transfer or exchange, but the Indenture Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
PAYMENTS
For the definitions of certain of the defined terms used in the following
subsection, see "-- Related Definitions" below.
Available Collection Amount. Payments on the Notes on each Payment Date
will be made from the Available Collection Amount. The Servicer will withdraw
from the Collection Account and remit to the Indenture Trustee for deposit in
the Note Payment Account the Available Collection Amount on the first Business
Day prior to each Payment Date (each such day, a "Determination Date"). With
respect to each Payment Date, the "Available Collection Amount" is the sum of
the Interest Funds and the Principal Funds.
Payments of Interest. Interest on the Class Principal Balance of each
Class of Notes will accrue during each Accrual Period at the applicable Interest
Rate set forth or described on the cover hereof and will be payable to
Noteholders on each Payment Date, commencing in February 2001. The "Accrual
Period" for each Class of Notes will be the calendar month preceding the month
in which the related Payment Date occurs. Interest on each Class of Notes will
be calculated on the basis of a 360-day year of twelve 30-day months.
On each Payment Date, the Interest Funds for such Payment Date are required
to be distributed in the following order of priority, until such Interest Funds
have been fully distributed:
(1) concurrently, to the Class A-1, Class A-2, Class A-3, Class A-4 and
Class A-5 Notes, the Current Interest and any Interest Carry Forward
Amount for each such Class; provided, however, that if the Interest
Funds are not sufficient to make a full distribution of the aggregate
Current Interest and the aggregate Interest Carry Forward Amount for
the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Notes,
such Interest Funds will be distributed pro rata among each such Class
based upon the ratio of (x) the Current Interest and any Interest Carry
Forward Amount for such Class to (y) the aggregate Current Interest and
the aggregate Interest Carry Forward Amount for all such Classes; and
(2) to the Class M-1 Notes, the Current Interest for such Class,
(3) to the Class M-2 Notes, the Current Interest for such Class,
(4) to the Class B-1 Notes, the Current Interest for such Class,
(5) to the Class B-2 Notes, the Current Interest for such Class, and
(6) any remainder to be distributed as described below under
"-- Overcollateralization Provisions."
The "Interest Funds" are equal to:
(a) the sum, without duplication, of:
(1) all scheduled interest collected during the related Collection
Period less the Servicing Fee, the Indenture Trustee Fee, the Owner
Trustee Fee and certain other expenses payable under the Transfer
and Servicing Agreements,
(2) all Post-Liquidation Proceeds collected during the related
Collection Period (to the extent such Post-Liquidation Proceeds
related to interest), and
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(3) Net Liquidation Proceeds collected during the related Collection
Period (to the extent such Net Liquidation Proceeds relate to
interest).
"Current Interest," with respect to each Class of the Notes and each
Payment Date, is the interest accrued at the applicable Note Rate for the
applicable Accrual Period on the Class Principal Balance of such Class plus any
amount previously distributed with respect to interest for such Class that is
recovered as a voidable preference by a trustee in bankruptcy.
"Interest Carry Forward Amount," with respect to each Class of the Notes
and each Payment Date, is the sum of:
(1) the excess of:
(a) Current Interest for such Class with respect to prior Payment Dates
over
(b) the amount actually distributed to such Class with respect to
interest on such prior Payment Dates and
(2) interest on such excess (to the extent permitted by applicable law) at
the applicable Note Rate.
Payments of Principal. On each Payment Date, the Principal Payment Amount
for such Payment Date is required to be distributed as follows until such
Principal Payment Amount has been fully distributed:
(1) For each Payment Date prior to the Stepdown Date or on which a Trigger
Event is in effect:
(A) to the Class A Notes, in the order and the priorities set forth
below,
(B) to the Class M-1 Notes, until the Class Principal Balance thereof is
reduced to zero,
(C) to the Class M-2 Notes, until the Class Principal Balance thereof is
reduced to zero,
(D) to the Class B-1 Notes, until the Class Principal Balance thereof is
reduced to zero,
(E) to the Class B-2 Notes, until the Class Principal Balance thereof is
reduced to zero, and
(F) any remainder to be distributed as described under
"-- Overcollateralization Provisions" below.
(2) For each Payment Date on and after the Stepdown Date and so long as a
Trigger Event is not in effect:
(A) to the Class A Notes, the Class A Principal Payment Amount, in the
order and priorities set forth below,
(B) to the Class M-1 Notes, the Class M-1 Principal Payment Amount until
the Class Principal Balance thereof is reduced to zero,
(C) to the Class M-2 Notes, the Class M-2 Principal Payment Amount until
the Class Principal Balance thereof is reduced to zero,
(D) to the Class B-1 Notes, the Class B-1 Principal Payment Amount until
the Class Principal Balance thereof is reduced to zero,
(E) to the Class B-2 Notes, the Class B-2 Principal Payment Amount until
the Class Principal Balance thereof is reduced to zero, and
(F) any remainder to be distributed as described under
"-- Overcollateralization Provisions" below.
The Principal Payment Amount or the Class A Principal Payment Amount, as
applicable, is required to be distributed to the Class A Notes sequentially, to
the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Notes, in that
order, until the respective Class Principal Balances thereof are reduced to
zero.
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Notwithstanding the foregoing order of priority, on any Payment Date on
which the aggregate Class Principal Balances of the Class A Notes are greater
than the Principal Balances of all the Home Loans, the Principal Payment Amount
or the Class A Principal Payment Amount, as applicable, will be distributed
among the Class A Notes pro rata and not sequentially.
"Principal Funds" are equal to:
(a) the sum, without duplication, of:
(1) the scheduled principal collected during the related Collection
Period,
(2) prepayments collected in the related Collection Period,
(3) the Principal Balance of each Home Loan that was repurchased by the
Transferor,
(4) all Net Liquidation Proceeds collected during the related Collection
Period (to the extent such Net Liquidation Proceeds related to
principal), and
(5) all Post-Liquidation Proceeds collected during the related
Collection Period (to the extent such Post Liquidation Proceeds
related to principal).
"Principal Payment Amount," with respect to each Payment Date, is the sum
of:
(1) the Principal Funds for such Payment Date, and
(2) any Extra Principal Payment Amount for such Payment Date.
"Class A Principal Payment Amount" is the excess of:
(a) the Class Principal Balance of the Class A Notes immediately prior to
such Payment Date over
(b) the lesser of (I) 32.0% of the Principal Balances for such Payment Date
of the Home Loans and (II) the Principal Balances for such Payment Date
of the Home Loans less the OC Floor.
"Class M-1 Principal Payment Amount" is the excess of:
(1) the sum of:
(a) the Class Principal Balance of the Class A Notes (after taking into
account distributions of the Class A Principal Payment Amount for
such Payment Date) and
(b) the Class Principal Balance of the Class M-1 Notes immediately prior
to such Payment Date over
(2) the lesser of:
(a) 52.0% of the Principal Balances for such Payment Date of the Home
Loans and
(b) the Principal Balances for such Payment Date of the Home Loans less
the OC Floor.
"Class M-2 Principal Payment Amount" is the excess of:
(1) the sum of:
(a) the Class Principal Balance of the Class A Notes (after taking into
account distributions of the Class A Principal Payment Amount for
such Payment Date),
(b) the Class Principal Balance of the Class M-1 Notes (after taking
into account distribution of the Class M-1 Principal Payment Amount
for such Payment Date) and
(c) the Class Principal Balance of the Class M-2 Notes immediately prior
to such Payment Date over
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(2) the lesser of:
(a) 66.0% of the aggregate Principal Balances for such Payment Date of
the Home Loans and
(b) the Principal Balances of the Home Loans for such Payment Date less
the OC Floor.
"Class B-1 Principal Payment Amount" is the excess of:
(1) the sum of
(a) the Class Principal Balance of the Class A Notes (after taking into
account distributions of the Class A Principal Payment Amount for
such Payment Date),
(b) the Class Principal Balance of the Class M-1 Notes (after taking
into account distribution of the Class M-1 Principal Payment Amount
for such Payment Date),
(c) the Class Principal Balance of the Class M-2 Notes (after taking
into account distributions of the Class M-2 Principal Payment Amount
for such Payment Date) and
(d) the Class Principal Balance of the Class B-1 Notes immediately prior
to such Payment Date over
(2) the lesser of:
(a) 80.0% of the Principal Balances for such Payment Date of the Home
Loans and
(b) the Principal Balances for such Payment Date of the Home Loans less
the OC Floor.
"Class B-2 Principal Payment Amount" is the excess of:
(1) the sum of
(a) the Class Principal Balance of the Class A Notes (after taking into
account distributions of the Class A Principal Payment Amount for
such Payment Date),
(b) the Class Principal Balance of the Class M-1 Notes (after taking
into account distribution of the Class M-1 Principal Payment Amount
for such Payment Date),
(c) the Class Principal Balance of the Class M-2 Notes (after taking
into account distributions of the Class M-2 Principal Payment Amount
for such Payment Date),
(d) the Class Principal Balance of the Class B-1 Notes (after taking
into account distributions of the Class B-1 Principal Payment Amount
for such Payment Date), and
(e) the Class Principal Balance of the Class B-2 Notes immediately prior
to such Payment Date over,
(2) the lesser of:
(a) 85.0% of the Principal Balances for such Payment Date of the Home
Loans and
(b) the Principal Balances for such Payment Date of the Home Loans less
the OC Floor,
provided, however, that after the Class Principal Balances of the Class A, Class
M-1, Class M-2 and Class B-1 Notes are reduced to zero, the Class B-2 Principal
Payment Amount for such Payment Date will equal 100% of the Principal Payment
Amount.
"Extra Principal Payment Amount," with respect to a Payment Date, is the
lesser of:
(1) the excess, if any, of:
(a) the Required Overcollateralization Amount for such Payment Date over
(b) the Overcollateralization Amount (after giving effect to
distributions of principal other than any Extra Principal Payment
Amount) for such Payment Date and
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(2) the Excess Cashflow for such Payment Date available therefor in the
priority set forth in this prospectus supplement.
"Excess Cashflow," with respect to any Payment Date, is the excess, if any,
of the Interest Funds and Principal Funds for such Payment Date over required
payments of interest and principal (excluding any Extra Principal Payment
Amount) on the Notes on such Payment Date.
"OC Floor" equals 0.50% of the sum of the Cut-Off Date Principal Balance of
the Home Loans.
"Remaining Excess Cashflow," with respect to any Payment Date, is the
excess, if any, of the Excess Cashflow for such Payment Date over the portion
thereof, if any, applied to the Notes pursuant to clauses (2) through (7) under
the fourth paragraph under "-- Overcollateralization Provisions" below.
"Required Overcollateralization Amount" means:
- prior to the Stepdown Date, an amount equal to 10.00% of the Cut-Off Date
Principal Balance of the Home Loans, less an amount equal to the Class
Principal Balance of the Class B-2 Notes, and
- on and after the Stepdown Date, an amount equal to 20.00% of the
Principal Balances for the current Payment Date of the Home Loans, less
an amount equal to the Class Principal Balance of the Class B-2 Notes,
subject to a minimum amount equal to the OC Floor;
provided, however, that, if on any Payment Date, a Trigger Event has occurred,
the Required Overcollateralization Amount shall be an amount equal to 30.00% of
the Principal Balances for the current Payment Date of the Home Loans, less an
amount equal to the Class Principal Balance of the Class B-2 Notes, subject to a
minimum amount equal to the OC Floor, until the Payment Date on which a Trigger
Event no longer exists.
"Overcollateralization Amount," with respect to any Payment Date, is the
excess, if any, of:
(a) the aggregate Principal Balances for such Payment Date of the Home
Loans over
(b) the Class Principal Balance of the Notes as of such date (after taking
into account the payment of principal on such Notes on such Payment
Date).
"Stepdown Date" is the later to occur of:
(1) the Payment Date in February 2004 or
(2) the first Payment Date on which the Pool Principal Balance is less than
or equal to 50.0% of the Original Pool Principal Balance.
A "Trigger Event," with respect to each Payment Date after the Stepdown
Date, exists if cumulative Realized Losses exceed the corresponding percentage
of the Original Pool Principal Balance set forth below for such Payment Date:
MONTHS FROM CUT-OFF DATE
37-42 11.50%
43-48 12.50%
49-60 13.50%
61 and thereafter 14.25%
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RELATED DEFINITIONS
Class Principal Balance: For each class of Notes, as of any date of
determination, the balance equal to the Original Class Principal Balance thereof
reduced by (i) all amounts previously paid to the Noteholders of such Class in
reduction of the Class Principal Balance thereof on all previous Payment Dates
and (ii), in the case of the Subordinated Notes only, any Applied Realized Loss
Amounts previously applied thereto.
Insurance Proceeds: With respect to any Payment Date and any Home Loan,
the proceeds paid to the Indenture Trustee or the Servicer by any insurer
pursuant to any insurance policy covering a Home Loan, Mortgaged Property or REO
Property or any other insurance policy that relates to a Home Loan, net of any
expenses incurred by the Indenture Trustee or the Servicer in connection with
the collection of such proceeds and not otherwise reimbursed, but excluding any
such proceeds that are to be applied to the restoration or repair of the
Mortgaged Property or released to the borrower in accordance with customary loan
servicing procedures.
Liquidated Home Loan: A defaulted Home Loan as to which the Servicer has
determined that all recoverable liquidation and insurance proceeds have been
received, which will be deemed to occur upon the earlier of: (a) the liquidation
of the related Mortgaged Property acquired through foreclosure or similar
proceedings, (b) the Servicer's determination in accordance with customary
servicing practices that no further amounts are collectible from the Home Loan
and any related collateral securing such Home Loan, or (c) any portion of a
scheduled monthly payment of principal and interest is in excess of 180 days
past due.
Net Liquidation Proceeds: With respect to any Payment Date, any cash
amounts received in respect of Liquidated Home Loans, whether through trustee's
sale, foreclosure sale, disposition of REO, whole loan sale or otherwise (other
than Insurance Proceeds and Released Mortgaged Property Proceeds), and any other
cash amounts received in connection with the management of the Mortgaged
Properties related to defaulted Home Loans, in each case, net of any
reimbursements to the Servicer and the Indenture Trustee made from such amounts
for any unreimbursed Servicing Fees and Indenture Trustee Fees and unreimbursed
Servicing Advances (including such Servicing Advances deemed to be
nonrecoverable Servicing Advances) made and any other fees and expenses paid or
owed to the Servicer, the Indenture Trustee or any other party in connection
with the foreclosure, conservation and liquidation of the related Liquidated
Home Loans or Mortgaged Properties.
Original Class Principal Balance: The principal balance for each class of
Notes on the Closing Date.
Post-Liquidation Proceeds: Any proceeds received by the Servicer with
respect to a Home Loan after the date on which such Home Loan has become a
Liquidated Home Loan.
Released Mortgaged Property Proceeds: With respect to any Payment Date and
any Home Loan, the proceeds received by the Servicer in connection with (a) a
taking of an entire Mortgaged Property by exercise of the power of eminent
domain or condemnation or (b) any release of part of the Mortgaged Property from
the lien of the related Mortgage, whether by partial condemnation, sale or
otherwise, which in either case are not released to the borrower in accordance
with applicable law, accepted servicing practices and the Sale and Servicing
Agreement, less unreimbursed Servicing Fees, Indenture Trustee Fees and
Servicing Advances (including such Servicing Advances deemed to be
nonrecoverable with respect to such Home Loan).
Termination Price: An amount equal to the sum of (a) the aggregate of the
outstanding Class Principal Balances of the Notes plus all accrued and unpaid
interest thereon at the applicable Note Rate, (b) any Servicing Compensation due
and unpaid, and (c) any unreimbursed Servicing Advances, including such
Servicing Advances deemed to be nonrecoverable.
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OVERCOLLATERALIZATION PROVISIONS
Credit enhancement with respect to each Class of Notes will be provided in
part by overcollateralization. On the Closing Date, $227,462,787.49 aggregate
principal amount of Home Loans will secure the payment of the Notes with an
initial Class Principal Balance of $214,951,000. The initial
Overcollateralization Amount is equal to 5.50% of the aggregate principal
balance of the Home Loans as of the Cut-Off Date. The Indenture requires that
the Overcollateralization Amount be increased to, and thereafter maintained at,
an amount described above under "-- Payments" in the definition of "Required
Overcollateralization Amount." This increase and subsequent maintenance is
intended to be accomplished by the application of monthly Excess Cashflow.
The application of monthly Excess Cashflow to reduce the Note Principal
Balance on any Payment Date will have the effect of accelerating the
amortization of the Notes relative to the amortization of the Home Loans and of
thereby increasing the Overcollateralization Amount. The Excess Cashflow will be
required to be applied as an Extra Principal Payment Amount whenever the
Overcollateralization Amount is less than the Required Overcollateralization
Amount. If on any Payment Date, after giving effect to any Extra Principal
Payment Amount, the aggregate Class Principal Balances of the Notes exceed the
Principal Balances of the Home Loans, the Class Principal Balances of the
Subordinated Notes (but not the Class A Notes) will be reduced, in inverse order
of seniority (beginning with the Class B-2 Notes) by an amount equal to such
excess. Any such reduction is an "Applied Realized Loss Amount."
If the Class Principal Balance of a Class of Subordinated Notes is reduced,
that Class thereafter will be entitled to distributions of interest and
principal only with respect to the Class Principal Balance as so reduced. On
subsequent Payment Dates, however, as described below, Excess Cashflow will be
applied to reduce Unpaid Realized Loss Amounts previously allocated to such
Notes in order of seniority.
On each Payment Date, the Excess Cashflow will be required to be
distributed as follows:
(1) the Extra Principal Payment Amount, to the Notes as described under
"-- Payments of Principal" above.
(2) to the Class M-1 Notes, any Interest Carry Forward Amount for such
Class,
(3) to the Class M-1 Notes, any Unpaid Realized Loss Amount for such Class,
(4) to the Class M-2 Notes, any Interest Carry Forward Amount for such
Class,
(5) to the Class M-2 Notes, any Unpaid Realized Loss Amount for such Class,
(6) to the Class B-1 Notes, any Interest Carry Forward Amount for such
Class,
(7) to the Class B-1 Notes, the Unpaid Realized Loss Amount for such Class,
(8) to the Class B-2 Notes, any Interest Carry Forward Amount for such
Class, and
(9) to the Class B-2 Notes, the Unpaid Realized Loss Amount for such Class.
On each Payment Date, the Remaining Excess Cashflow will be required to be
distributed to the holder of the Certificates.
"Applied Realized Loss Amount," with respect to any Class of the
Subordinated Notes and as to any Payment Date, means the sum of the Realized
Losses with respect to Home Loans which have been applied in reduction of the
Class Principal Balance of such Class.
"Realized Loss" is the excess of the Principal Balance of a defaulted Home
Loan over the Net Liquidation Proceeds with respect thereto that are allocated
to principal.
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"Unpaid Realized Loss Amount," with respect to any Class of the
Subordinated Notes and as to any Payment Date, is the excess of:
(1) Applied Realized Loss Amounts with respect to such Class over
(2) the sum of all distributions in reduction of the Applied Realized Loss
Amounts on all previous Payment Dates.
Any amounts distributed to a Class of Subordinated Notes in respect of any
Unpaid Realized Loss Amount will not be applied to reduce the Class Principal
Balance of such Class.
In the event that the Required Overcollateralization Amount is permitted to
decrease or "step down" on a Payment Date in the future, or in the event that an
Excess Overcollateralization Amount (as defined below) otherwise exists, then
any amounts relating to principal which would otherwise be distributed to the
holders of the Notes on such Payment Date will instead be distributed to the
holders of the Certificate (in each case as provided in the Sale and Servicing
Agreement) on such Payment Date until the applicable Excess
Overcollateralization Amount is reduced to zero. This has the effect of
decelerating the amortization of the Notes relative to the amortization of the
Home Loans, and of reducing the Overcollateralization Amount to the Required
Overcollateralization Amount. With respect to any Payment Date, the excess, if
any, of (a) the Overcollateralization Amount on such Payment Date over (b) the
Required Overcollateralization Amount is the "Excess Overcollateralization
Amount" with respect to such Payment Date.
OPTIONAL REDEMPTION
The Servicer may effect an early redemption of the Notes and purchase of
the Certificates on any Payment Date on or after which the Pool Principal
Balance declines to 10% or less of the Original Pool Principal Balance by
depositing with the Indenture Trustee an amount equal to the Termination Price
(the first such Payment Date, the "Initial Call Date"). All such amounts will be
paid first, to the Indenture Trustee for the payment of any outstanding
Indenture Trustee Fees or expenses due to the Indenture Trustee under the
Transfer and Servicing Agreements, second, to the Servicer for payment of
outstanding Servicing Compensation, third, to the Servicer for payment of
unreimbursed Servicing Advances (including such Servicing Advances deemed to be
nonrecoverable), fourth, to the Noteholders in an amount equal to the aggregate
of the outstanding Class Principal Balances of the Notes, plus all accrued and
unpaid interest thereon at the applicable Interest Rates and fifth, to the
Certificateholders. On the first Payment Date after the Initial Call Date, the
Interest Rate of each Class of Notes, other than the Class A-1, Class A-2 and
Class A-3 Notes, will be increased by 0.50% per annum if the early redemption is
not effected.
RIGHTS OF NOTEHOLDERS UPON OCCURRENCE OF EVENT OF DEFAULT
Events of default under the Indenture (the "Indenture Events of Default"
and together with the Servicer Events of Default, the "Events of Default") will
include, without limitation (i) default for a period in excess of five days in
the payment of any interest on any Note or default in the payment of the entire
Principal Balance of any Note on the Maturity Date; (ii) default in the
observance or performance of any covenant or agreement of the Issuer made in the
Indenture, or any representation or warranty of the Issuer made in the Indenture
or the Sale and Servicing Agreement which is not eliminated or otherwise cured,
for a period of 30 days after notice to the Issuer; and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings relating to the Issuer and certain actions by the Issuer
indicating insolvency, reorganization or inability to pay its obligations or if
the Issuer shall dissolve or liquidate, in whole or in part, in any material
respect.
Under the Indenture, a failure to pay the full amount of the portion of the
Noteholders' Current Interest within five days of the Payment Date on which such
payment is due (without regard to the amount of Available Funds) will constitute
an Event of Default.
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Subject to the conditions specified herein under "Description of the
Transfer and Servicing Agreements -- Duties of Owner Trustee and Indenture
Trustee," upon the occurrence of an Event of Default, holders of the Notes
representing more than 66 2/3% of the then outstanding principal amount of Notes
may exercise their remedies under the Indenture. These remedies include the
right to cause accrued interest to be paid pro rata in accordance with the
amount of unpaid accrued interest, and to cause principal on the outstanding
Notes to be paid (either in lump sum in redemption of the Notes or from monthly
collections on the Home Loans) pro rata out of remaining Available Funds,
regardless of the allocation, or sequential nature, of principal payments that
would otherwise apply, based upon the Principal Balances of the Notes (an
"acceleration"). On each Payment Date on and after any such acceleration of the
Notes, and following the reduction to zero of the Class Principal Balance of all
Classes of Notes, any remaining Available Funds will be applied in repayment
first, of Unpaid Interest and Unpaid Realized Loss Amounts on the Notes, and
then any remaining amounts will be paid to the Certificateholders. Such remedies
will also include the right to direct the Indenture Trustee's actions under the
Indenture unless such right is otherwise granted to holders of the Notes after
an acceleration of the Notes and to consent to the sale of the assets pledged to
secure the Notes. See "Description of the Securities" in the accompanying
Prospectus.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Home Loan Purchase
Agreement, the Indenture, the Sale and Servicing Agreement, the Administration
Agreement and the Trust Agreement (collectively, the "Transfer and Servicing
Agreements"). Copies of the Transfer and Servicing Agreements will be filed with
the Commission following the issuance of the Notes. The summary does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
all the provisions of the Transfer and Servicing Agreements. The following
summary supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the Transfer and Servicing
Agreements set forth under the heading "Description of the Agreements" in the
Prospectus.
SALE AND ASSIGNMENT OF THE HOME LOANS
On the Closing Date, the Seller will sell the Home Loans to the Depositor,
and the Depositor will sell the Home Loans to the Trust. The Trust will,
concurrently with such sale of the Home Loans, deliver or cause to be delivered
the Securities to the Depositor. The Trust will pledge and assign the Home Loans
to the Indenture Trustee in exchange for the Notes. Each Home Loan will be
identified in a schedule appearing as an exhibit to the Sale and Servicing
Agreement.
In addition, the Depositor will, as to each Home Loan, deliver or cause to
be delivered to the Indenture Trustee the related mortgage note endorsed to the
order of the Indenture Trustee without recourse, any assumption and modification
agreements and the Mortgage with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office), an assignment
of the Mortgage in the name of the Indenture Trustee in recordable form, and any
intervening assignments of the Mortgage (each, collectively, a "Home Loan
File"). Assignments of the Mortgages to the Indenture Trustee will be recorded
in the real property records for those states in which such recording is deemed
necessary to protect the Trust and the Indenture Trustee's interest in the Home
Loans against the claims of certain creditors of the Transferor or subsequent
purchasers. In these circumstances, the Transferor will deliver such assignments
to the Indenture Trustee after recordation. In the event that, with respect to
any Home Loan as to which recordation of the related assignment is required, the
Transferor cannot deliver the Mortgage or any assignment with evidence of
recording thereon concurrently with the conveyance thereof under the Sale and
Servicing Agreement because they have not yet been returned by the public
recording office, the Transferor will deliver or cause to be delivered to the
Indenture Trustee a certified true photocopy of such Mortgage or assignment. The
Transferor will deliver or cause to be delivered to the Indenture Trustee any
such Mortgage or assignment with evidence of recording indicated thereon upon
receipt thereof from the public recording office. The Indenture Trustee will
review (or cause
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to be reviewed) each Home Loan File within 45 days after the conveyance of the
related Home Loan to the Trust to ascertain that all required documents have
been executed and received.
SERVICING
In consideration for the performance of the loan servicing functions for
the Home Loans, the Servicer is entitled to a monthly fee (the "Servicing Fee")
equal to 0.75% per annum (the "Servicing Fee Rate") of the Pool Principal
Balance as of the first day of the Collection Period for the related Payment
Date. The Servicer may retain subservicers to service certain of the Home Loans.
Any such subservicer may be an affiliate of the Servicer. The Servicer will
remain responsible for the servicing of any such Home Loans and will pay the
fees of any subservicer out of its own funds. In addition to the Servicing Fee,
the Servicer is entitled to retain additional servicing compensation in the form
of assumption and other administrative fees, release fees, insufficient funds
charges, late payment charges, investment income on the amounts in the
Collection Account and any other servicing-related penalties and fees
(collectively, such additional compensation and Servicing Fee, the "Servicing
Compensation").
In the event of a delinquency or default with respect to a Home Loan,
neither the Servicer nor any subservicer will have an obligation to advance
scheduled monthly payments of principal or interest with respect to such Home
Loan. However, the Servicer or any subservicer will make reasonable servicing
advances with respect to the Home Loans (each, a "Servicing Advance") and will
be entitled to reimbursement for Servicing Advances as described herein
(including such Servicing Advances deemed to be nonrecoverable). Servicing
Advances may include costs and expenses advanced for the preservation,
restoration and protection of any Mortgaged Property, including advances to pay
delinquent real estate taxes and insurance. Any Servicing Advances by the
Servicer or any subservicer will be netted from the Available Collection Amount
prior to any payments to Noteholders, as described under "-- Collection Account
and Note Payment Account" below.
COLLECTION ACCOUNT AND NOTE PAYMENT ACCOUNT
The Servicer is required to deposit in an Eligible Account (the "Collection
Account"), within two Business Days of receipt, all payments received by the
Originator or the Servicer on or after the Cut-Off Date on account of principal
and interest on the Home Loans, all Net Liquidation Proceeds, Insurance
Proceeds, Released Mortgaged Property Proceeds, any amounts payable in
connection with the repurchase or substitution of any Home Loan and any amount
required to be deposited in the Collection Account in connection with the
redemption of the Notes and purchase of the Certificates. The foregoing
requirements for deposit in the Collection Account will be exclusive of payments
on account of principal and interest collected on the Home Loans before the
Cut-Off Date. The Servicer will be entitled to withdraw the Servicing
Compensation, Servicing Advances and any unreimbursed Servicing Fees and
Servicing Advances from the Collection Account or net such amounts prior to
deposit. Withdrawals will be made from the Collection Account only for the
purposes specified in the Sale and Servicing Agreement. The Collection Account
may be maintained at any depository institution that satisfies the requirements
set forth in the definition of Eligible Account in the Sale and Servicing
Agreement.
Amounts on deposit in the Collection Account will be invested in Permitted
Investments at the direction of the Servicer. All interest and any other
investment earnings on amounts on deposit in the Collection Account will be
withdrawn by the Servicer from the Collection Account as part of its Servicing
Compensation.
Any subservicer will also maintain a collection account for deposit of
payments received with respect to the Home Loans being serviced by such
subservicer. Such subservicer's collection account will be an Eligible Account
and will satisfy requirements that are substantially similar to the requirements
for the Collection Account.
The Indenture Trustee will establish and maintain with the Indenture
Trustee an account, in the name of the Indenture Trustee on behalf of the
Noteholders, into which amounts released from the Collection Account for payment
to the Noteholders will be deposited and from which all payments to the
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Noteholders will be made (the "Note Payment Account"). The Indenture Trustee
will be entitled to withdraw from the Note Payment Account the Indenture Trustee
Fee and any reasonable out-of-pocket expenses incurred by it under the Transfer
and Servicing Agreements.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Notes in their own names or as pledgees. For the purpose of
meeting the legal requirements of certain jurisdictions, the Owner Trustee and
the Indenture Trustee acting jointly (or in some instances, the Owner Trustee or
the Indenture Trustee acting alone) will have the power to appoint co-trustees
or separate trustees of all or any part of the Trust. In the event of such an
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Owner Trustee by the Trust Agreement and upon the Indenture Trustee by
the Indenture will be conferred or imposed upon the Owner Trustee and the
Indenture Trustee, respectively, and in each such case such separate trustee or
co-trustee, jointly, or, in any jurisdiction in which the Owner Trustee or
Indenture Trustee will be incompetent or unqualified to perform certain acts,
singly upon such separate trustee or co-trustee, which will exercise and perform
such rights, powers, duties and obligations solely at the direction of the Owner
Trustee or the Indenture Trustee, as applicable.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Depositor will be obligated to appoint a successor thereto. The
Noteholders may also remove the Owner Trustee or the Indenture Trustee if either
ceases to be eligible to continue as such under the Trust Agreement or the
Indenture, as the case may be, becomes legally unable to act or becomes
insolvent. In such circumstances, the Depositor will be obligated to appoint a
successor Owner Trustee or a successor Indenture Trustee, as applicable. Any
resignation or removal of the Owner Trustee or Indenture Trustee and appointment
of a successor thereto will not become effective until acceptance of the
appointment by such successor.
In consideration for the performance of its duties and obligations under
the Transfer and Servicing Agreements, the Indenture Trustee is entitled to a
monthly fee (the "Indenture Trustee Fee") equal to 0.013% per annum of the Pool
Principal Balance as of the first day of the Collection Period for the related
Payment Date. The Owner Trustee is entitled to a fee (the "Owner Trustee Fee"),
payable annually, equal to $4,000.
The Trust Agreement and Indenture will provide that the Owner Trustee and
Indenture Trustee will be entitled to indemnification by the Trust for, and will
be held harmless against, any loss, liability or expense incurred by the Owner
Trustee or Indenture Trustee, in connection with the performance of its duties
and obligations or the exercise of its rights under any of the Transfer and
Servicing Agreements, in whatever capacity it is acting under any of such
Transfer and Servicing Agreements, not resulting from its own willful
misfeasance, bad faith or negligence (other than by reason of a breach of any of
its representations or warranties to be set forth in the Trust Agreement or
Indenture, as the case may be). However, the Owner Trustee and Indenture Trustee
will not be entitled to indemnification by the holder of the Certificate.
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Certificates (other than the execution
and authentication thereof), the Notes or any Home Loans or related documents,
and will not be accountable for the use or application by the Certificateholder
of any funds paid to the Certificateholder in respect of the Home Loans, or the
investment of any monies by the Servicer of funds in the Collection Account. So
long as no Event of Default has occurred and is continuing, the Owner Trustee
will be required to perform only those duties specifically required of it under
the Trust Agreement. Generally, those duties will be limited to the receipt of
the various certificates, reports or other instruments required to be furnished
to the Owner Trustee under the Trust Agreement, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the Trust Agreement. The Owner Trustee will not be charged with knowledge of
a failure by the Servicer to perform its duties under the Transfer and Servicing
Agreements
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which failure constitutes an Event of Default, unless the Owner Trustee obtains
actual knowledge of such failure.
The Owner Trustee will be under no obligation to exercise any of the rights
or powers vested in it by the Trust Agreement or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of the
holder of the Certificates, unless such Certificateholder has offered to the
Owner Trustee reasonable security or indemnity against the costs, expenses and
liabilities that may be incurred therein or thereby. Subject to the rights or
consent of the Noteholders and Indenture Trustee, no Certificateholder will have
any right under the Trust Agreement to institute any proceeding with respect to
the Trust Agreement, unless such holder previously has given to the Owner
Trustee written notice of the occurrence of an Event of Default and (i) the
Event of Default arises from the Servicer's failure to remit payments when due
or (ii) the Holders of the Certificates have made a written request upon the
Owner Trustee to institute such proceeding in its own name as the Owner Trustee
thereunder and have offered to the Owner Trustee reasonable indemnity, and the
Owner Trustee for 30 days has neglected or refused to institute any such
proceedings.
The Indenture Trustee will make no representations as to the validity or
sufficiency of the Indenture, the Certificates, the Notes (other than the
execution and authentication thereof) or any Home Loans or related documents,
and will not be accountable for the use or application by the Transferor, the
Servicer or the Owner Trustee of any funds paid to the Transferor, the Servicer
or the Owner Trustee in respect of the Notes or the Home Loans, or the
investment of any monies by the Servicer of funds in the Collection Account. So
long as no Event of Default under the Indenture or the Sale and Servicing
Agreement has occurred or is continuing, the Indenture Trustee will be required
to perform only those duties specifically required of it under the Transfer and
Servicing Agreements. Generally, those duties will be limited to the receipt of
the various certificates, reports or other instruments required to be furnished
to the Indenture Trustee under the Indenture, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the Indenture. The Indenture Trustee will not be charged with knowledge of a
failure by the Servicer to perform its duties under the Transfer and Servicing
Agreements, which failure constitutes an Event of Default under the Transfer and
Servicing Agreements, unless the Indenture Trustee obtains actual knowledge of
such failure.
The Indenture Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Indenture or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Noteholders, unless such Noteholders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby. No Noteholder will have any right under
the Indenture to institute any proceeding with respect to the Indenture, unless
such holder previously has given to the Indenture Trustee written notice of the
occurrence of an Event of Default and (i) the Event of Default arises from the
Servicer's failure to remit payments when due or (ii) Noteholders evidencing not
less than 25% of the outstanding amount of each such Class of Notes, acting
together as a single class, have made written request upon the Indenture Trustee
to institute such proceeding in its own name as the Indenture Trustee thereunder
and have offered to the Indenture Trustee reasonable indemnity, and the
Indenture Trustee for 30 days has neglected or refused to institute any such
proceedings. See "Description of the Notes -- Rights of Noteholders Upon
Occurrence of Event of Default" herein.
PREPAYMENT AND YIELD CONSIDERATIONS
No principal payments will be made on any Class of Notes on any Payment
Date until each Class of Notes having a higher principal payment priority has
received all principal to which it is entitled for such Payment Date. See
"Description of the Notes -- Payments" herein. As the rate of payment of
principal of the Notes depends primarily on the rate and timing of payment
(including prepayments) of principal on the Home Loans, final payment of any
Class of Notes could occur significantly earlier than the applicable Maturity
Date. Noteholders will bear the risk of being able to reinvest principal
payments on the Notes at
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yields at least equal to the yield on their respective Notes. No prediction can
be made as to the rate or timing of prepayments on the Home Loans in either
stable or changing interest rate environments. Any reinvestment risk due to the
rate of prepayment of the Home Loans will be borne entirely by Noteholders.
The subordination of each Class of Notes having a lower principal payment
priority to each Class of Notes having a higher principal payment priority will
provide limited protection to Holders of the Notes against losses on the Home
Loans. If the actual rate and amount of losses experienced on the Home Loans
exceed the rate and amount of such losses anticipated by an investor, the yields
to maturity (or to redemption, as described under "Description of the
Notes -- Optional Redemption" herein) on such subordinate Notes may be lower
than anticipated.
Approximately 67.85% of the Home Loans have prepayment penalties. The rate
of prepayment on the Home Loans cannot be accurately predicted. The prepayment
experience of the Trust with respect to the Home Loans may be affected by a wide
variety of factors, including, without limitation, economic conditions,
prevailing interest rate levels, the availability of alternative financing,
homeowner mobility and changes affecting the deductibility for federal income
tax purposes of interest payments on the Home Loans. Generally, however, because
the Home Loans bear interest at fixed rates, and the rate of prepayment on fixed
rate loans is sensitive to prevailing interests rates, if prevailing interest
rates fall significantly below the interest rates on the Home Loans, the Home
Loans are likely to be subject to higher prepayment rates than if prevailing
rates remain at or above the interest rates on the Home Loans. Conversely, if
prevailing interest rates rise significantly above the interest rates on the
Home Loans, the rate of prepayments would be likely to decrease. No
representations are made as to the particular factors that will affect the
prepayment of the Home Loans, as to the relative importance of such factors, or
as to the percentage of the principal balance of the Home Loan that will be paid
as of any date.
The effective yield to Noteholders will be lower than the yield otherwise
produced by the applicable Interest Rate, because the payment of interest
accrued during the applicable Accrual Period will not be made until the Payment
Date occurring in the month following such Accrual Period. See "Description of
the Notes -- Payments" herein. This delay will result in funds being paid to
such Noteholders approximately 9 days after the end of the applicable Accrual
Period, during which 9-day period no interest will accrue on such funds.
The rate of principal payments on the Notes, the aggregate amount of
distributions on the Notes and the yields to maturity of the Notes will be
directly affected by the rate and timing of principal reductions on the Home
Loans. Such principal reductions may be in the form of scheduled amortization
payments or unscheduled payments or reductions, which may include prepayments,
repurchases and liquidations or write-offs due to default, casualty, insurance
or other disposition. On any Payment Date on or after the Payment Date on which
the Pool Principal Balance declines to 10% or less of the Original Pool
Principal Balance, the Servicer may effect a redemption of the Notes and
purchase of the Certificates as described herein under "Description of the
Notes -- Optional Redemption."
The "weighted average life" of a Class of Notes refers to the average
amount of time that will elapse from the Closing Date to the date each dollar in
respect of principal of such Class is repaid. The weighted average life of each
Class of Notes will be influenced by, among other factors, the rate at which
principal reductions occur on the Home Loans as described herein. If substantial
principal prepayments on the Home Loans are received as a result of unscheduled
payments, liquidations or repurchases, payments to Noteholders due to such
prepayments may significantly shorten the weighted average lives of the Notes.
If the Home Loans experience delinquencies and defaults in the payment of
principal, then Noteholders will experience a delay in the receipt of principal
payments attributable to such delinquencies and defaults, which in certain
instances may result in longer actual average weighted lives of the Notes than
would otherwise be the case. Interest shortfalls on the Home Loans due to
principal prepayments in full and curtailments, and any resulting shortfall in
amounts payable on the Notes, will be covered to the extent of amounts available
from the applicable credit enhancement. See "Risk Factors -- Potential
Inadequacy of Credit Enhancement" herein.
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The weighted average life and yield to maturity of each Class of Notes will
also be influenced by the amount of Excess Cashflow generated by the Home Loans
and applied in reduction of the Class Principal Balances of such Notes. The
level of Excess Cashflow available on any Payment Date to be applied in
reduction of the Class Principal Balances of the Notes will be influenced by,
among other factors:
(1) the overcollateralization amount at such time (i.e., the extent to
which interest on the Home Loans is accruing on a higher principal
balance than the Class Principal Balance of the Notes),
(2) the delinquency and default experience of the Home Loans, and
(3) the provisions of the Sale and Servicing Agreement that permit any
principal to be distributed to the Certificates (in each case as
provided in the Sale and Servicing Agreement) when required
overcollateralization levels have been met.
To the extent that greater amounts of Excess Cashflow are distributed in
reduction of the Class Principal Balance of a Class of Notes, the weighted
average life thereof can be expected to shorten. No assurance, however, can be
given as to the amount of Excess Cashflow distributed at any time or in the
aggregate. See "Description of the Notes -- Overcollateralization Provisions"
herein.
The rate and timing of principal payments on the Home Loans will be
influenced by a variety of economic, geographic, social and other factors. These
factors may include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity, if any, in the mortgaged properties,
servicing decisions, homeowner mobility, the existence and enforceability of
"due-on-sale" clauses, seasoning of loans, market interest rates for similar
types of loans and the availability of funds for such loans. Substantially all
of the Home Loans contain due-on-sale provisions and the Servicer intends to
enforce such provisions unless (i) the Servicer, in a manner consistent with its
servicing practices, permits the purchaser of the related Mortgaged Property to
assume the Home Loan, or (ii) such enforcement is not permitted by applicable
law. In certain cases, the Servicer may, in a manner consistent with its
servicing practices, simply release the lien on the existing collateral, leaving
the related Home Loan unsecured. In such event, the Servicer will generally
require the borrower to make a partial prepayment in reduction of the principal
balance of the Home Loan to the extent that the borrower has received proceeds
from the sale of the prior residence that will not be applied to the purchase of
the new residence.
The rate of delinquencies and defaults on the Home Loans and of recoveries,
if any, on defaulted Home Loans and foreclosed properties will affect the rate
and timing of principal payments on the Home Loans, and, accordingly, the
weighted average lives of the Notes, and could cause a delay in the payment of
principal to the holders of Notes. Certain factors may influence delinquencies
and defaults, including origination and underwriting standards, loan-to-value
ratios and delinquency history. In general, defaults on Home Loans are expected
to occur with greater frequency in their early years, although little data is
available with respect to the rate of default on similar types of Home Loans.
The rate of default on Home Loans with high loan-to-value ratios, or on Home
Loans secured by junior liens, may be higher than that of Home Loans with lower
loan-to-value ratios or secured by first liens on comparable properties. In
addition, the rate and timing of prepayments, defaults and liquidations on the
Home Loans will be affected by the general economic condition of the area in
which the related Mortgaged Properties are located or the related borrower is
residing. See "The Home Loan Pool" herein. The risk of delinquencies and losses
is greater and voluntary principal prepayments are less likely in regions where
a weak or deteriorating economy exists, as may be evidenced by, among other
factors, increasing unemployment or falling property values.
Although certain data have been published with respect to the historical
prepayment experience of certain residential mortgage loans, such mortgage loans
differ in material respects from the Home Loans and such data may not be
reflective of conditions applicable to the Home Loans. No significant historical
prepayment data is generally available with respect to the types of Home Loans
included in the Home Loan Pool or similar types of loans, and there can be no
assurance that the Home Loans will achieve or fail to achieve any particular
rate of principal prepayment. A number of factors suggest that the prepayment
experience of the Home Loan Pool may be significantly different from that of a
pool of
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conventional first-lien, single family mortgage loans with equivalent interest
rates and maturities. One such factor is that the principal balance of the
average Home Loan is smaller than that of the average conventional first-lien
mortgage loan. A smaller principal balance may be easier for a borrower to
prepay than a larger balance and, therefore, a higher prepayment rate may result
for the Home Loan Pool than for a pool of first-lien mortgage loans,
irrespective of the relative average interest rates and the general interest
rate environment. In addition, in order to refinance a first-lien mortgage loan,
the borrower must generally repay any junior liens. However, a small principal
balance may make refinancing a Home Loan at a lower interest rate less
attractive to the borrower as the perceived impact to the borrower of lower
interest rates on the size of the monthly payment may not be significant. Other
factors that might be expected to affect the prepayment rate of the Home Loan
Pool include the relative creditworthiness of the borrowers, the amounts of and
interest rates on the underlying senior mortgage loans, and the tendency of
borrowers to use real property mortgage loans as long-term financing for home
purchase and junior liens as shorter-term financing for a variety of purposes,
which may include the direct or indirect financing of home improvement,
education expenses, debt consolidation, purchases of consumer durables such as
automobiles, appliances and furnishings and other consumer purposes.
Furthermore, because at origination substantially all of the Home Loans had
combined loan-to-value ratios that approached or exceeded 100%, the related
borrowers may have less opportunity to refinance the indebtedness secured by the
related Mortgaged Properties, including the Home Loans, and a lower prepayment
rate may result for the Home Loan Pool than for a pool of mortgage (including
first or junior lien) loans that have combined loan-to-value ratios less than
100%. However, the availability of credit from an increased number of lenders
making loans similar to the Home Loans may result in faster rates of prepayment
of the Home Loans than would otherwise be the case. In addition, any increase in
the market values of Mortgaged Properties, and the resulting decrease in the
combined loan-to-value ratios of the related Home Loans, may make alternative
sources of financing available to the related borrowers at lower interest rates.
REINVESTMENT RISK
During periods of falling interest rates, Noteholders may receive an
increased amount of principal payments at a time when such holders may be unable
to reinvest such payments in investments having a yield and rating comparable to
the Notes. Conversely, during periods of rising interest rates, Noteholders are
likely to receive a decreased amount of principal payments at a time when such
holders may have an opportunity to reinvest such payments in investments having
a yield and rating comparable to the Notes.
MATURITY DATE
The Maturity Date of each Class of Notes is set forth in the table at the
beginning of the summary. The Final Scheduled Maturity Date was determined by
calculating the final Payment Date with respect to each such Class on the basis
of the Modeling Assumptions that no Extra Principal Payments are made on the
Notes and an assumed constant prepayment rate of 0% of CPR (as defined herein).
The actual maturity of any Class of Notes may be significantly earlier than the
applicable Maturity Date.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on Notes purchased at a price less than par. Generally, greater than
anticipated prepayments of principal will decrease the yield on Notes purchased
at a price greater than par. The effect on an investor's yield due to principal
payments on the Home Loans occurring at a rate that is faster (or slower) than
the rate anticipated by the investor in the period immediately following the
issuance of the Notes will not be entirely offset by a subsequent like reduction
(or increase) in the rate of principal payments. The weighted average lives of
the Notes will also be affected by the amount and timing of delinquencies and
defaults on the Home Loans and the recoveries, if any, on Home Loans and
foreclosed properties.
The following information illustrates the effect of prepayments of the Home
Loans on the weighted average lives of the Notes under certain stated
assumptions and is not a prediction of the prepayment rate
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that might actually be experienced on the Home Loans. Weighted average life
refers to the average amount of time that will elapse from the date of delivery
of a security until each dollar of principal of such security will be repaid to
the investor. The weighted average lives of the Notes will be influenced by the
rate at which principal of the Home Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes unscheduled reductions of principal, including without limitation those
resulting from full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions, substitutions and
repurchases by or on behalf of the Transferor).
Prepayments on loans such as the Home Loans are commonly measured relative
to a prepayment standard or model. The model used in this Prospectus Supplement
(the "Constant Prepayment Rate" or "CPR") is a prepayment assumption which
represents a constant assumed rate of prepayment each month relative of the then
outstanding principal balance of a pool of home loans for the life of such home
loans. 30% CPR assumes a constant prepayment rate of 30% per annum. CPR does not
purport to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of loans, including the Home
Loans. The Depositor does not make any representations about the appropriateness
of the CPR model.
Modeling Assumptions. For purposes of preparing the tables below, the
actual characteristics of the Home Loans as of the Cut-Off Date have been used
and the following assumptions (the "Modeling Assumptions") have been made: (i)
all scheduled payments on the Home Loans are timely received on the first day of
each month, commencing February 1, 2001; (ii) there are no defaults, losses or
delinquencies on the Home Loans; (iii) the Home Loans prepay monthly at the
respective specified constant annual percentages of CPR specified in the table;
(iv) the Closing Date is January 30, 2001; (v) all principal prepayments
represent prepayments in full of the Home Loans and include 30 days of interest
thereon; (vi) there are no repurchases of or substitutions for the Home Loans;
(vii) no early redemption of the Notes is effected (except in the case of
"Weighted Average Life with Optional Redemption"); (viii) cash distributions are
received by the Noteholders on the 10th day of each month, commencing in
February 2001; (ix) the aggregate expense fee rate for each Home Loan is 0.765%;
and (x) the Home Loans have the approximate characteristics described below.
WEIGHTED REMAINING
PRINCIPAL AVERAGE TERM TO
CURRENT MORTGAGE MATURITY AGE AMORTIZATION
BALANCE($) RATE(%) (MONTHS) (MONTHS) METHOD
----------- --------- --------- -------- ------------
513,356 12.888158 31 29 Level Pay
407,343 13.135312 58 29 Level Pay
9,683,106 13.133516 89 30 Level Pay
58,345,965 13.156378 145 30 Level Pay
52,755,921 13.592898 202 31 Level Pay
105,757,097 13.156846 258 30 Level Pay
The tables on the following pages indicate the percentage of the Original
Class Principal Balance of each Class of Notes that would be outstanding at each
of the dates shown at the specified percentages of the Prepayment Assumption and
the corresponding weighted average life of each Class of Notes. Since these
tables have been prepared based on the Modeling Assumptions (including the
assumptions regarding the characteristics and performance of the Home Loans),
there are discrepancies between the characteristics of the actual Home Loans and
the characteristics of the Home Loans assumed in preparing the tables. Any such
discrepancy may have an effect upon the percentages of Class Principal Balances
outstanding and weighted average lives of the Notes set forth in the tables. In
addition, since the actual Home Loans have characteristics which differ from
those assumed in preparing the tables set forth below, the distributions of
principal on the Notes may be made earlier or later than as indicated in the
tables.
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PERCENT OF THE INITIAL NOTE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF CPR
CLASS A-1
------------------------------------------------------
DISTRIBUTION DATE 0% 10% 15% 20% 25% 30% 40%
----------------- ----- ----- ---- ---- ---- ---- ----
Initial Percentage..................... 100% 100% 100% 100% 100% 100% 100%
January 10, 2002....................... 91 69 59 48 37 26 5
January 10, 2003....................... 85 46 27 10 0 0 0
January 10, 2004....................... 79 24 1 0 0 0 0
January 10, 2005....................... 72 5 0 0 0 0 0
January 10, 2006....................... 64 0 0 0 0 0 0
January 10, 2007....................... 56 0 0 0 0 0 0
January 10, 2008....................... 45 0 0 0 0 0 0
January 10, 2009....................... 35 0 0 0 0 0 0
January 10, 2010....................... 24 0 0 0 0 0 0
January 10, 2011....................... 12 0 0 0 0 0 0
January 10, 2012....................... 0 0 0 0 0 0 0
Weighted Average Life (in years)(1).... 6.11 1.89 1.32 1.00 0.79 0.65 0.46
Weighted Average Life (in
years)(1)(2)......................... 6.11 1.89 1.32 1.00 0.79 0.65 0.46
- ------------
(1) The weighted average life of the Notes is determined by:
(a) multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Class Principal Balance for
such Class of Notes.
(2) To the Initial Call Date.
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PERCENT OF THE INITIAL NOTE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF CPR
CLASS A-2
------------------------------------------------------
DISTRIBUTION DATE 0% 10% 15% 20% 25% 30% 40%
----------------- ----- ----- ---- ---- ---- ---- ----
Initial Percentage....................... 100% 100% 100% 100% 100% 100% 100%
January 10, 2002......................... 100 100 100 100 100 100 100
January 10, 2003......................... 100 100 100 100 77 22 0
January 10, 2004......................... 100 100 100 27 0 0 0
January 10, 2005......................... 100 100 40 14 0 0 0
January 10, 2006......................... 100 53 17 0 0 0 0
January 10, 2007......................... 100 31 0 0 0 0 0
January 10, 2008......................... 100 14 0 0 0 0 0
January 10, 2009......................... 100 0 0 0 0 0 0
January 10, 2010......................... 100 0 0 0 0 0 0
January 10, 2011......................... 100 0 0 0 0 0 0
January 10, 2012......................... 91 0 0 0 0 0 0
January 10, 2013......................... 43 0 0 0 0 0 0
January 10, 2014......................... 32 0 0 0 0 0 0
January 10, 2015......................... 20 2 0 0 0 0 0
January 10, 2016......................... 7 0 0 0 0 0 0
January 10, 2017......................... 0 0 0 0 0 0 0
Weighted Average Life (in years)(1)...... 12.40 5.51 3.99 3.00 2.20 1.80 1.28
Weighted Average Life (in years)(1)(2)... 12.40 5.51 3.99 3.00 2.20 1.80 1.28
- ------------
(1) The weighted average life of the Notes is determined by:
(a) multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Class Principal Balance for
such Class of Notes.
(2) To the Initial Call Date.
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PERCENT OF THE INITIAL NOTE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF CPR
CLASS A-3
------------------------------------------------------
DISTRIBUTION DATE 0% 10% 15% 20% 25% 30% 40%
----------------- ----- ----- ---- ---- ---- ---- ----
Initial Percentage....................... 100% 100% 100% 100% 100% 100% 100%
January 10, 2002......................... 100 100 100 100 100 100 100
January 10, 2003......................... 100 100 100 100 100 100 0
January 10, 2004......................... 100 100 100 100 0 0 0
January 10, 2005......................... 100 100 100 100 0 0 0
January 10, 2006......................... 100 100 100 51 0 0 0
January 10, 2007......................... 100 100 92 0 0 0 0
January 10, 2008......................... 100 100 0 0 0 0 0
January 10, 2009......................... 100 97 0 0 0 0 0
January 10, 2010......................... 100 20 0 0 0 0 0
January 10, 2011......................... 100 0 0 0 0 0 0
January 10, 2012......................... 100 0 0 0 0 0 0
January 10, 2013......................... 100 0 0 0 0 0 0
January 10, 2014......................... 100 0 0 0 0 0 0
January 10, 2015......................... 100 0 0 0 0 0 0
January 10, 2016......................... 100 0 0 0 0 0 0
January 10, 2017......................... 51 0 0 0 0 0 0
January 10, 2018......................... 0 0 0 0 0 0 0
Weighted Average Life (in years)(1)...... 15.99 8.60 6.43 5.00 2.68 2.20 1.57
Weighted Average Life (in years)(1)(2)... 15.99 8.60 6.43 5.00 2.68 2.20 1.57
- ------------
(1) The weighted average life of the Notes is determined by:
(a) multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Class Principal Balance for
such Class of Notes.
(2) To the Initial Call Date.
S-48
49
PERCENT OF THE INITIAL NOTE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF CPR
CLASS A-4
------------------------------------------------------
DISTRIBUTION DATE 0% 10% 15% 20% 25% 30% 40%
----------------- ----- ----- ---- ---- ---- ---- ----
Initial Percentage....................... 100% 100% 100% 100% 100% 100% 100%
January 10, 2002......................... 100 100 100 100 100 100 100
January 10, 2003......................... 100 100 100 100 100 100 0
January 10, 2004......................... 100 100 100 100 44 0 0
January 10, 2005......................... 100 100 100 100 44 0 0
January 10, 2006......................... 100 100 100 100 44 0 0
January 10, 2007......................... 100 100 100 79 37 0 0
January 10, 2008......................... 100 100 100 47 11 0 0
January 10, 2009......................... 100 100 69 22 0 0 0
January 10, 2010......................... 100 100 44 3 0 0 0
January 10, 2011......................... 100 80 22 0 0 0 0
January 10, 2012......................... 100 54 4 0 0 0 0
January 10, 2013......................... 100 31 0 0 0 0 0
January 10, 2014......................... 100 16 0 0 0 0 0
January 10, 2015......................... 100 2 0 0 0 0 0
January 10, 2016......................... 100 0 0 0 0 0 0
January 10, 2017......................... 100 0 0 0 0 0 0
January 10, 2018......................... 83 0 0 0 0 0 0
January 10, 2019......................... 59 0 0 0 0 0 0
January 10, 2020......................... 32 0 0 0 0 0 0
January 10, 2021......................... 2 0 0 0 0 0 0
January 10, 2022......................... 0 0 0 0 0 0 0
Weighted Average Life (in years)(1)...... 18.29 11.33 8.84 7.02 4.49 2.43 1.73
Weighted Average Life (in years)(1)(2)... 18.28 11.30 8.82 6.99 4.46 2.43 1.73
- ------------
(1) The weighted average life of the Notes is determined by:
(a) multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Class Principal Balance for
such Class of Notes.
(2) To the Initial Call Date.
S-49
50
PERCENT OF THE INITIAL NOTE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF CPR
CLASS A-5
--------------------------------------------------------
DISTRIBUTION DATE 0% 10% 15% 20% 25% 30% 40%
- ----------------- ----- ----- ----- ----- ---- ---- ----
Initial Percentage..................... 100% 100% 100% 100% 100% 100% 100%
January 10, 2002....................... 100 100 100 100 100 100 100
January 10, 2003....................... 100 100 100 100 100 100 11
January 10, 2004....................... 100 100 100 100 100 0 0
January 10, 2005....................... 100 100 100 100 100 0 0
January 10, 2006....................... 100 100 100 100 100 0 0
January 10, 2007....................... 100 100 100 100 100 0 0
January 10, 2008....................... 100 100 100 100 100 0 0
January 10, 2009....................... 100 100 100 100 85 0 0
January 10, 2010....................... 100 100 100 100 59 0 0
January 10, 2011....................... 100 100 100 78 41 0 0
January 10, 2012....................... 100 100 100 56 27 0 0
January 10, 2013....................... 100 100 80 39 18 0 0
January 10, 2014....................... 100 100 62 28 12 0 0
January 10, 2015....................... 100 100 47 20 7 0 0
January 10, 2016....................... 100 82 35 14 0 0 0
January 10, 2017....................... 100 61 24 9 0 0 0
January 10, 2018....................... 100 43 16 0 0 0 0
January 10, 2019....................... 100 32 11 0 0 0 0
January 10, 2020....................... 100 22 5 0 0 0 0
January 10, 2021....................... 100 13 0 0 0 0 0
January 10, 2022....................... 37 0 0 0 0 0 0
January 10, 2023....................... 0 0 0 0 0 0 0
Weighted Average Life (in years)(1).... 20.78 17.01 14.29 11.92 9.99 2.70 1.93
Weighted Average Life (in
years)(1)(2)......................... 19.78 13.53 10.69 8.61 7.03 2.70 1.93
- ------------
(1) The weighted average life of the Notes is determined by:
(a) multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Class Principal Balance for
such Class of Notes.
(2) To the Initial Call Date.
S-50
51
PERCENT OF THE INITIAL NOTE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF CPR
CLASS M-1
------------------------------------------------------
DISTRIBUTION DATE 0% 10% 15% 20% 25% 30% 40%
- --------------------------------------- ----- ----- ---- ---- ---- ---- ----
Initial Percentage..................... 100% 100% 100% 100% 100% 100% 100%
January 10, 2002....................... 100 100 100 100 100 100 100
January 10, 2003....................... 100 100 100 100 100 100 100
January 10, 2004....................... 100 100 100 100 100 77 0
January 10, 2005....................... 100 100 93 73 97 77 0
January 10, 2006....................... 100 100 76 56 56 75 0
January 10, 2007....................... 100 87 62 43 29 50 0
January 10, 2008....................... 100 74 49 32 21 33 0
January 10, 2009....................... 100 62 39 24 14 22 0
January 10, 2010....................... 100 52 31 18 10 14 0
January 10, 2011....................... 100 43 24 13 7 9 0
January 10, 2012....................... 100 35 19 10 5 6 0
January 10, 2013....................... 96 27 14 7 3 2 0
January 10, 2014....................... 87 22 11 5 2 0 0
January 10, 2015....................... 78 18 8 3 0 0 0
January 10, 2016....................... 68 14 6 2 0 0 0
January 10, 2017....................... 56 10 4 0 0 0 0
January 10, 2018....................... 44 7 3 0 0 0 0
January 10, 2019....................... 36 5 2 0 0 0 0
January 10, 2020....................... 28 4 0 0 0 0 0
January 10, 2021....................... 18 2 0 0 0 0 0
January 10, 2022....................... 6 0 0 0 0 0 0
January 10, 2023....................... 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)........................ 16.66 10.11 7.90 6.34 5.89 6.21 2.31
Weighted Average Life
(in years)(1)(2)..................... 16.49 9.51 7.29 5.78 5.39 5.06 2.31
- ------------
(1) The weighted average life of the Notes is determined by:
(a) multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Class Principal Balance for
such Class of Notes.
(2) To the Initial Call Date.
S-51
52
PERCENT OF THE INITIAL NOTE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF CPR
CLASS M-2
-------------------------------------------------------
DISTRIBUTION DATE 0% 10% 15% 20% 25% 30% 40%
- -------------------------------------- ----- ----- ----- ---- ---- ---- ----
Initial Percentage.................... 100% 100% 100% 100% 100% 100% 100%
January 10, 2002...................... 100 100 100 100 100 100 100
January 10, 2003...................... 100 100 100 100 100 100 100
January 10, 2004...................... 100 100 100 100 100 100 43
January 10, 2005...................... 100 100 93 73 57 92 43
January 10, 2006...................... 100 100 76 56 41 29 43
January 10, 2007...................... 100 87 62 43 29 19 36
January 10, 2008...................... 100 74 49 32 21 13 20
January 10, 2009...................... 100 62 39 24 14 8 10
January 10, 2010...................... 100 52 31 18 10 5 3
January 10, 2011...................... 100 43 24 13 7 3 0
January 10, 2012...................... 100 35 19 10 5 0 0
January 10, 2013...................... 96 27 14 7 3 0 0
January 10, 2014...................... 87 22 11 5 0 0 0
January 10, 2015...................... 78 18 8 3 0 0 0
January 10, 2016...................... 68 14 6 1 0 0 0
January 10, 2017...................... 56 10 4 0 0 0 0
January 10, 2018...................... 44 7 2 0 0 0 0
January 10, 2019...................... 36 5 0 0 0 0 0
January 10, 2020...................... 28 4 0 0 0 0 0
January 10, 2021...................... 18 0 0 0 0 0 0
January 10, 2022...................... 6 0 0 0 0 0 0
January 10, 2023...................... 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)....................... 16.66 10.10 7.88 6.31 5.43 5.18 4.64
Weighted Average Life
(in years)(1)(2).................... 16.49 9.51 7.29 5.76 4.94 4.76 3.43
- ------------
(1) The weighted average life of the Notes is determined by:
(a) multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Class Principal Balance for
such Class of Notes.
(2) To the Initial Call Date.
S-52
53
PERCENT OF THE INITIAL NOTE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF CPR
CLASS B-1
---------------------------------------------------------
DISTRIBUTION DATE 0% 10% 15% 20% 25% 30% 40%
- ----------------- ----- ----- ----- ----- ----- ---- ----
Initial Percentage............ 100% 100% 100% 100% 100% 100% 100%
January 10, 2002.............. 100 100 100 100 100 100 100
January 10, 2003.............. 100 100 100 100 100 100 100
January 10, 2004.............. 100 100 100 100 100 100 100
January 10, 2005.............. 100 100 93 73 57 43 90
January 10, 2006.............. 100 100 76 56 41 29 34
January 10, 2007.............. 100 87 62 43 29 19 8
January 10, 2008.............. 100 74 49 32 21 13 3
January 10, 2009.............. 100 62 39 24 14 8 0
January 10, 2010.............. 100 52 31 18 10 5 0
January 10, 2011.............. 100 43 24 13 7 1 0
January 10, 2012.............. 100 35 19 10 4 0 0
January 10, 2013.............. 96 27 14 7 0 0 0
January 10, 2014.............. 87 22 11 5 0 0 0
January 10, 2015.............. 78 18 8 1 0 0 0
January 10, 2016.............. 68 14 6 0 0 0 0
January 10, 2017.............. 56 10 3 0 0 0 0
January 10, 2018.............. 44 7 0 0 0 0 0
January 10, 2019.............. 36 5 0 0 0 0 0
January 10, 2020.............. 28 2 0 0 0 0 0
January 10, 2021.............. 18 0 0 0 0 0 0
January 10, 2022.............. 6 0 0 0 0 0 0
January 10, 2023.............. 0 0 0 0 0 0 0
Weighted Average Life (in
years)(1)................... 16.66 10.07 7.85 6.26 5.28 4.74 4.81
Weighted Average Life (in
years)(1)(2)................ 16.49 9.51 7.29 5.76 4.83 4.35 4.21
- ------------
(1) The weighted average life of the Notes is determined by:
(a) multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Class Principal Balance for
such Class of Notes.
(2) To the Initial Call Date.
S-53
54
PERCENT OF THE INITIAL NOTE PRINCIPAL BALANCE
AT THE RESPECTIVE PERCENTAGES OF CPR
CLASS B-2
-------------------------------------------------------
DISTRIBUTION DATE 0% 10% 15% 20% 25% 30% 40%
- ----------------- ----- ----- ----- ---- ---- ---- ----
Initial Percentage...................... 100% 100% 100% 100% 100% 100% 100%
January 10, 2002........................ 100 100 100 100 100 100 100
January 10, 2003........................ 100 100 100 100 100 100 100
January 10, 2004........................ 100 100 100 100 100 100 100
January 10, 2005........................ 100 100 93 73 57 43 23
January 10, 2006........................ 100 100 76 56 41 29 13
January 10, 2007........................ 100 87 62 43 29 19 8
January 10, 2008........................ 100 74 49 32 21 13 0
January 10, 2009........................ 100 62 39 24 14 8 0
January 10, 2010........................ 100 52 31 18 10 2 0
January 10, 2011........................ 100 43 24 13 7 0 0
January 10, 2012........................ 100 35 19 10 0 0 0
January 10, 2013........................ 96 27 14 6 0 0 0
January 10, 2014........................ 87 22 11 0 0 0 0
January 10, 2015........................ 78 18 8 0 0 0 0
January 10, 2016........................ 68 14 4 0 0 0 0
January 10, 2017........................ 56 10 0 0 0 0 0
January 10, 2018........................ 44 7 0 0 0 0 0
January 10, 2019........................ 36 2 0 0 0 0 0
January 10, 2020........................ 28 0 0 0 0 0 0
January 10, 2021........................ 18 0 0 0 0 0 0
January 10, 2022........................ 5 0 0 0 0 0 0
January 10, 2023........................ 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)......................... 16.65 10.02 7.79 6.20 5.19 4.56 4.08
Weighted Average Life
(in years)(1)(2)...................... 16.49 9.51 7.29 5.75 4.78 4.21 3.83
- ------------
(1) The weighted average life of the Notes is determined by:
(a) multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date,
(b) adding the results, and
(c) dividing the sum by the initial respective Class Principal Balance for
such Class of Notes.
(2) To the Initial Call Date.
S-54
55
The paydown scenarios for the Notes set forth in the foregoing tables are
subject to significant uncertainties and contingencies (including those
discussed above under "Prepayment and Yield Considerations"). As a result, there
can be no assurance that any of the foregoing paydown scenarios and the Modeling
Assumptions on which they were made will prove to resemble the actual
performance of the Home Loans and the Notes, or that the actual weighted average
lives of the Notes will not vary substantially from those set forth in the
foregoing tables, which variations may be shorter or longer, and which
variations may be greater with respect to later years. Furthermore, it is not
expected that the Home Loans will prepay at a constant rate or that all of the
Home Loans will prepay at the same rate. Moreover, the Home Loans actually
included in the Home Loan Pool, the payment experience of such Home Loans and
certain other factors affecting the payments on the Notes will not conform to
the Modeling Assumptions made in preparing the above tables. In fact, the
characteristics and payment experience of the Home Loans will differ in many
respects from such Modeling Assumptions. See "The Home Loan Pool" herein. To the
extent that the Home Loans actually included in the Home Loan Pool have
characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the Notes are likely to have weighted average
lives that are shorter or longer than those set forth in the foregoing tables.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Brown & Wood LLP, for federal income tax purposes, the
Notes will be characterized as debt, and the Trust will not be a business entity
classified as a corporation or taxable mortgage pool (or a publicly traded
partnership) treated as a corporation. Each Noteholder, by the acceptance of a
Note, will agree to treat the Notes as indebtedness for federal income tax
purposes. See "Certain Federal Income Tax Consequences" in the Prospectus for
additional information concerning the application of federal income tax laws to
the Trust and the Notes.
Certain of the Notes may be treated as having been issued with original
issue discount. As a result, holders of such Notes may be required to recognize
income with respect to such Notes in advance of the receipt of cash attributable
to that income. For purposes of determining the amount and rate of accrual of
OID and market discount, the Trust intends to assume that there will be
prepayments on the Home Loans at a rate equal to 20% CPR. No representation is
made as to whether the Home Loans will prepay at the foregoing rate or any other
rate. See "Prepayment and Yield Considerations -- Weighted Average Lives" herein
and "Certain Federal Income Tax Considerations -- Taxation of Debt
Securities -- Interest and Acquisition Discount" in the Prospectus.
ERISA CONSIDERATIONS
Except as described below, the Notes may be purchased by, on behalf of or
with plan assets of a pension employee benefit or other plan or an individual
retirement account (a "Plan") subject to ERISA or Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code"). A fiduciary of a Plan must
determine that the purchase of a Note is consistent with its fiduciary duties
under ERISA and does not result in a nonexempt prohibited transaction as defined
in Section 406 of ERISA or Section 4975 of the Code. For additional information
regarding treatment of the Notes under ERISA, See "ERISA Considerations" in the
Prospectus.
The Notes may not be purchased with the assets of a Plan if the Transferor,
the Servicer, the Indenture Trustee, the Owner Trustee or any of their
affiliates (a) has investment or administrative discretion with respect to such
Plan assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets, for a fee and pursuant to an
agreement or understanding that such advice (i) will serve as a primary basis
for investment decisions with respect to such Plan assets and (ii) will be based
on the particular investment needs for such Plan; or (c) is an employer
maintaining or contributing to such Plan.
S-55
56
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement
(the "Underwriting Agreement"), the Depositor has agreed to sell to each of the
Underwriters named below (collectively, the "Underwriters"), and each of the
Underwriters has severally agreed to purchase, the principal amount of Notes set
forth opposite its name in the tables below:
COUNTRYWIDE SECURITIES
CLASS OF NOTES CORPORATION BEAR, STEARNS & CO. INC.
- -------------- ---------------------- ------------------------
Class A-1.................... $ 51,859,000 $ 51,859,000
Class A-2.................... $ 14,074,500 $ 14,074,500
Class A-3.................... $ 2,384,000 $ 2,384,000
Class A-4.................... $ 5,906,000 $ 5,906,000
Class A-5.................... $ 3,113,500 $ 3,113,500
Class M-1.................... $ 11,373,000 $ 11,373,000
Class M-2.................... $ 7,961,000 $ 7,961,000
Class B-1.................... $ 7,961,000 $ 7,961,000
Class B-2.................... $ 2,843,500 $ 2,843,500
------------ ------------
Total.............. $107,475,500 $107,475,500
============ ============
The Depositor has been advised that the Underwriters propose initially to
offer the Notes to the public at the respective offering prices set forth on the
cover hereof and to certain dealers at such prices less a selling concession not
to exceed the percentage of the Note denomination set forth below, and that the
Underwriters may allow and such dealers may reallow a reallowance discount not
to exceed the percentage of the Note denomination set forth below:
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS M-1 CLASS M-2 CLASS B-1 CLASS B-2
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Concessions.......... 0.07500% 0.15000% 0.22500% 0.30000% 0.37500% 0.45000% 0.52500% 0.60000% 0.00000%
Reallowances......... 0.05000% 0.10000% 0.15000% 0.20000% 0.25000% 0.30000% 0.35000% 0.40000% 0.00000%
After the initial public offering, such prices, concessions and
reallowances may be changed.
Until the distribution of the Notes is completed, rules of the Commission
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase such Classes of Notes. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize the
price of the Notes. Such transactions consist of bids of purchase for the
purpose of pegging, fixing or maintaining the price of such Classes of Notes.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Depositor nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Notes. In addition,
neither the Depositor nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
The Depositor has been advised by each Underwriter that it presently
intends to make a market in the Notes; however, it is not obligated to do so,
any market-making may be discontinued at any time, and there can be no assurance
that an active public market for the Notes will develop or, if it does develop,
that it will continue.
The Depositor is an affiliate of Bear, Stearns & Co. Inc.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Act.
S-56
57
LEGAL INVESTMENT MATTERS
The Notes will not constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Accordingly, many
institutions with legal authority to invest in "mortgage related securities" may
not be legally authorized to invest in the Notes.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Notes or to purchase Notes
representing more than a specified percentage of the investor's assets.
Investors should consult their own legal advisors in determining whether and to
what extent the Notes constitute legal investments for such investors.
RATINGS
It is a condition to the issuance of the Notes that (i) the Class A Notes
be rated "AAA" by each of Fitch, Inc. ("Fitch") and Standard and Poor's Ratings
Services, a division of The MacGraw-Hill Companies, Inc. ("S&P") and "Aaa" by
Moody's Rating Services ("Moody's", and together with Fitch and S&P, the "Rating
Agencies"), (ii) the Class M-1 Notes be rated "AA" by each of Fitch and S&P and
"Aa2" by Moody's, (iii) the Class M-2 Notes be rated "A" by each of Fitch and
S&P and "A2" by Moody's, (iv) the Class B-1 Notes be rated "BBB" by each of
Fitch and S&P and "Baa2" by Moody's, and (v) the Class B-2 Notes will be rated
"BBB-" by each of Fitch and S&P.
The ratings on the Notes address the likelihood of the receipt by
Noteholders of all payments on the Home Loans to which they are entitled. The
ratings on the Notes also address the structural, legal and issuer-related
aspects associated with the Notes, including the nature of the Home Loans. In
general, the ratings on the Notes address credit risk and not prepayment risk.
The ratings on the Notes do not represent any assessment of the likelihood that
principal prepayments of the Home Loans will be made by borrowers or the degree
to which the rate of such prepayments might differ from that originally
anticipated. As a result, the initial ratings assigned to the Notes do not
address the possibility that Noteholders might suffer a lower than anticipated
yield in the event of principal payments on the Notes resulting from rapid
prepayments of the Home Loans, or in the event that the Trust is terminated
prior to the applicable Maturity Dates of the Notes.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to any
of the Notes by the Rating Agencies are subsequently lowered for any reason, no
person or entity is obligated to provide any additional support or credit
enhancement with respect to such Notes.
LEGAL OPINIONS
In addition to the legal opinions described in the Prospectus, certain
legal matters relating to the issuance of the Notes will be passed upon for the
Depositor by Brown & Wood LLP, New York, New York. Brown & Wood LLP will also
pass on certain federal income tax matters. Stroock & Stroock & Lavan LLP, New
York, New York, will pass upon certain legal matters on behalf of the
Underwriters. Silver, Freedman & Taff, LLP, Washington, DC, will pass upon
certain legal matters on behalf of the Transferor.
S-57
58
INDEX OF TERMS
acceleration..................... S-38
Accrual Period................... S-30
actuarial interest............... S-16
Administration Agreement......... S-15
Applied Realized Loss Amount..... S-36
Available Collection Amount...... S-30
Book-Entry Notes................. S-27
Certificate...................... S-27
CHLTC............................ S-15
Class A Principal Payment
Amount......................... S-32
Class B-1 Principal Payment
Amount......................... S-33
Class B-2 Principal Payment
Amount......................... S-33
Class M-1 Principal Payment
Amount......................... S-32
Class M-2 Principal Payment
Amount......................... S-32
clearing agency.................. S-27
clearing corporation............. S-27
Code............................. S-55
Collection Account............... S-39
Combined loan-to-value-ratio..... S-16
Constant Prepayment Rate......... S-45
CPR.............................. S-45
Credit Score..................... S-17
Current Interest................. S-31
Cut-Off Date Principal Balance... S-15
Defective Home Loan.............. S-23
Depository....................... S-27
Determination Date............... S-30
DTC.............................. S-27
EFSG............................. S-23
ERISA............................ S-6
Events of Default................ S-37
Excess Cashflow.................. S-34
Excess Overcollateralization
Amount......................... S-37
Extra Principal Payment Amount... S-33
FDIC............................. S-13
Fitch............................ S-57
forward-looking statements....... S-14
Global Securities................ A-1
Home Loan File................... S-38
Home Loan Pool................... S-18
Home Loan Rate................... S-16
Home Loans....................... S-15
Indenture Events of Default...... S-37
Indenture Trustee Fee............ S-40
Indirect Participants............ S-27
Initial Call Date................ S-37
Interest Carry Forward Amount.... S-31
Interest Funds................... S-30
Modeling Assumptions............. S-45
Moody's.......................... S-57
Mortgage Loan Purchase
Agreement...................... S-15
mortgage related securities...... S-6
Note Owners...................... S-27
Note Payment Account............. S-40
Noteholders...................... S-27
Notes............................ S-27
OC Floor......................... S-34
Original Pool Principal
Balance........................ S-18
Originator....................... S-16
Overcollateralization Amount..... S-34
Participants..................... S-27
Plan............................. S-55
Pool Principal Balance........... S-15
prepayment....................... S-45
Principal Balance................ S-15
Principal Funds.................. S-32
Principal Payment Amount......... S-32
Purchase Price................... S-23
Radian........................... S-23
Rating Agencies.................. S-57
Realized Loss.................... S-36
Record Date...................... S-27
Remaining Excess Cashflow........ S-34
Required Overcollateralization
Amount......................... S-34
Rules............................ S-28
S&P.............................. S-57
Sale and Servicing Agreement..... S-15
Securities....................... S-27
Seller........................... S-15
Servicer......................... S-23
Servicer Events of Default....... S-25
Servicing Fee.................... S-39
Servicing Fee Rate............... S-39
Servicing Advance................ S-39
Servicing Compensation........... S-39
SMMEA............................ S-57
step down........................ S-37
Stepdown Date.................... S-34
Subordinated Notes............... S-27
Transfer and Servicing
Agreements..................... S-15, S-38
Transferor....................... S-23
Trigger Event.................... S-34
Trust Agreement.................. S-27
U.S. Person...................... A-3
Underwriters..................... S-56
Underwriting Agreement........... S-56
Unpaid Realized Loss Amount...... S-37
weighted average life............ S-42
Weighted Average Life with
Optional Redemption............ S-45
S-58
59
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Notes (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through DTC and, in the case
of the Notes, Euroclear or Clearstream. The Global Securities will be tradable
as home market instruments in both the European and U.S. domestic markets.
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Euroclear and Clearstream will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e. seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Euroclear or Clearstream and DTC
Participants holding Global Securities will be effected on a
delivery-against-payment basis through the respective depositaries of Euroclear
and Clearstream (in such capacity) and as DTC participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect participants in DTC. As a result, Euroclear and Clearstream will
hold positions on behalf of their participants through their respective
depositaries, which in turn will hold such positions in accounts as DTC
participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to similar issues on pass-through
certificates. Investors' securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Euroclear or
Clearstream accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payments in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish the time of the trade where both the purchaser's and seller's accounts
are located to ensure that settlement can be made on the desired value date.
Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to similar issues
of pass-through certificates in same-day funds.
Trading between Euroclear and/or Clearstream Participants. Secondary
market trading between Euroclear participants or Clearstream participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC seller and Euroclear or Clearstream purchaser. When
Global Securities are to be transferred from the account of a DTC participant to
the account of a Euroclear participant or a Clearstream participant, the
purchaser will send instructions to Euroclear or Clearstream through a
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Euroclear participant or Clearstream participant at least one business day prior
to settlement. Euroclear or Clearstream will instruct the respective depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date. Payment will then
be made by the respective depositary to the DTC participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the Euroclear
participant's or Clearstream participant's account. The Global Securities credit
will appear the next day (European time) and the cash debit will be back-valued
to, and the interest on the Global Securities will accrue from, the value date;
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Euroclear or Clearstream cash debit will be valued instead as of the actual
settlement date.
Euroclear participants and Clearstream participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to pre-position
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Euroclear or Clearstream. Under
this approach, they may take on credit exposure to Euroclear or Clearstream
until the Global Securities are credited to their accounts one day later.
As an alternative, if Euroclear or Clearstream has extended a line of
credit to them, Euroclear participants or Clearstream participants can elect to
pre-position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Euroclear participants or Clearstream
participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Euroclear participant's or Clearstream participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of Euroclear participants or
Clearstream participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC participant a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Euroclear or Clearstream seller and DTC purchaser. Due to
time zone differences in their favor, Euroclear participants and Clearstream
participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC participant. The seller will send
instructions to Euroclear or Clearstream through a Euroclear participant or
Clearstream participant at least one business day prior to settlement. In these
cases, Euroclear or Clearstream will instruct the respective Depositary, as
appropriate, to deliver the bonds to the DTC participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date. The
payment will then be reflected in the account of the Euroclear participant or
Clearstream participant the following day, and receipt of the cash proceeds in
the Euroclear participant's or Clearstream participant's account, would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Euroclear participant or Clearstream
participant have a line of credit with its respective clearing system and elect
to be in debit in anticipation or receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft charges incurred over that
one-day period. If settlement is not completed on the intended value date (i.e.,
the trade fails), receipt of the cash proceeds in the Euroclear participant's or
Clearstream participant's account would instead be valued as of the actual
settlement date. Finally, day traders that use Euroclear or Clearstream and that
purchase Global Securities from DTC participants for delivery to Euroclear
participants or Clearstream participants, should note that these trades would
automatically fail on the sale
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side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Euroclear or Clearstream for one day (until the
purchase side of the day trade is reflected in their Euroclear or
Clearstream accounts) in accordance with the clearing system's
customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Euroclear or
Clearstream account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the Euroclear
participant or Clearstream participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Notes holding Notes through Cedel or Euroclear (or
through DTC if the holder has an address outside the U.S.) will be subject to
the 30% U.S. withholding tax that generally applies to payments of interest
(including original issue discount) on registered debt issued by U.S. Persons,
unless (i) each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business in the
chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8BEN). Beneficial owners of Notes
that are non-U.S. Persons can obtain a complete exemption from the withholding
tax by filing a signed Form W-8BEN (Certificate of Foreign Status). In Addition,
Non-U.S. Persons that are Noteholders residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form W-8BEN (Ownership, Exemption or
Reduced Rate Certificate). If the information shown on Form W-8BEN changes, a
new Form W-8BEN must be filed within 30 days of such change.
Exemption for non-U.S. persons with effectively connected income (Form
W-8ECI). A non-U.S. person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form W-8ECI (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business in
the United States).
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Noteholder or, in the
case of a Form W-8BEN or a Form W-8ECI filer, an agent thereof, files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8BEN and Form W-8ECI are effective for three calendar
years.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any state or the District of Columbia (other than a partnership
that is not treated as a United States person under any applicable Treasury
regulations), (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the
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extent provided in regulations, certain trusts in existence on August 20, 1996
and treated as United States persons prior to such date that elect to continue
to be so treated also shall be considered U.S. Persons. This summary does not
deal with all aspects of U.S. Federal income tax withholding that may be
relevant to Noteholders who are not U.S. Persons. Investors are advised to
consult their own tax advisors for specific tax advice concerning their holding
and disposing of Notes.
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PROSPECTUS
ASSET-BACKED SECURITIES
(ISSUABLE IN SERIES)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
- ----------------------------
CONSIDER CAREFULLY THE RISK THE SECURITIES
FACTORS BEGINNING ON PAGE 3
OF THIS PROSPECTUS. Bear Stearns Asset Backed Securities, Inc., as depositor,
will sell the securities, which may be in the form of
The securities represent asset-backed certificates or asset-backed notes. Each issue
obligations of the trust of securities will have its own series designation and will
only and do not represent evidence either:
an interest in or
obligation of the - ownership interests in certain assets in a trust fund or
depositor, the seller, the
master servicer or any of - debt obligations secured by certain assets in a trust
their affiliates. fund.
This prospectus may be used Each series of securities will consist of one or more
to offer and sell the classes. Each class of securities will represent the
securities only if entitlement to a specified portion of future interest
accompanied by a prospectus payments and a specified portion of future principal
supplement. payments on the assets in the related trust fund. In each
case, the specified portion may equal from 0% to 100%. A
series may include one or more classes of securities that
are senior in right of payment to one or more other classes.
One or more classes of securities may be entitled to receive
distributions of principal, interest or both prior to one or
more other classes, or before or after certain specified
events have occurred. The related prospectus supplement will
specify each of these features.
- ----------------------------
THE TRUST 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:
- closed-end and/or revolving home equity loans secured by senior or
subordinate liens on one- to four-family residential or mixed-use
properties;
- home improvement installment sales contracts and installment loan
agreements that are either unsecured or secured by senior or subordinate
liens on one- to four-family residential or mixed-use properties or by
purchase money security interests in the related home improvements; and
- private asset backed securities.
Each trust fund may be subject to early termination in certain
circumstances.
MARKET FOR THE SECURITIES
No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been issued and
sold, there can be no assurance that a resale market will develop.
OFFERS OF THE SECURITIES
Offers of the Securities are made through Bear, Stearns & Co. Inc. and the
other underwriters listed in the related prospectus supplement.
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.
September 13, 2000
64
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in the following
documents:
- - this prospectus, which provides general information, some of which may not
apply to a particular series; and
- - the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series. If the
prospectus supplement contains information about a particular series that
differs from the information contained in this prospectus, you should rely on
the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and
the accompanying prospectus supplement. We have not authorized anyone to provide
you with information that is different from that contained in this prospectus
and the accompanying prospectus supplement. The information in this prospectus
is accurate only as of the date of this prospectus.
Each prospectus supplement generally will include the following information
with respect to the related series of securities:
- the principal amount, interest rate and authorized denominations of each
class of securities;
- information concerning the home equity loans, home improvement contracts
and/or private securities in the related trust fund;
- information concerning the seller or sellers of the home equity loans,
home improvement contracts and/or private securities and information
concerning any servicer;
- the terms of any credit enhancement with respect to particular classes of
the securities;
- information concerning other trust fund assets, including any reserve
fund;
- the final scheduled distribution date for each class of securities;
- 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;
- information about any REMIC or FASIT tax elections for some or all of the
trust fund assets; and
- particulars of the plan of distribution for the securities.
If you require additional information, the mailing address of our principal
executive offices is Bear Stearns Asset Backed Asset 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 "The Trust Funds -- Incorporation of Certain Information by
Reference" beginning on page 85 of this prospectus.
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RISK FACTORS
You should consider the following information carefully, since it
identifies certain significant sources of risk associated with an investment in
the securities.
LIMITED LIQUIDITY
No market will exist for the securities of any series 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, it might not provide you with liquidity of
investment or continue for the life of the securities.
LIMITED ASSETS FOR MAKING PAYMENTS
The securities of each series will be payable solely from the assets of the
related trust fund, including any credit enhancement that may be applicable to
certain classes. 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 series of 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,
certain 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
- all payments then due on the related securities have been made, and
- 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 the related trust fund or
the 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:
- funds obtained from enforcing any similar obligation of the originator of
the loan, or
- monies from any reserve fund established to pay for loan repurchases.
LIMITED PROTECTION AGAINST LOSSES
Credit enhancement is intended to reduce the effect of delinquent payments
or loan losses on those classes of securities that have the benefit of the
credit enhancement. Nevertheless, the amount of any credit enhancement is
subject to the limits described in the related prospectus supplement. Moreover,
the amount of credit enhancement may decline or be depleted under certain
circumstances before the related securities are paid in full. As a result,
securityholders may suffer losses.
YOUR YIELDS ON THE SECURITIES MAY VARY
The timing of principal payments on the securities of a series will be
affected by a number of factors, including the following:
- 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;
- the method by which payments of principal are allocated among the classes
of securities of that series as specified in the related prospectus
supplement;
- if any party has an option to terminate the related trust early, the
effect of the exercise of the option;
- the rate and timing of defaults and losses on the assets in the related
trust fund;
- repurchases of assets in the related trust fund as a result of material
breaches of
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representations and warranties made by the depositor or a seller; and
- 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.
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
securities of the related series. 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.
SOME LOANS REQUIRE BALLOON PAYMENTS
Certain of the underlying loans may not be fully amortizing over their
terms to maturity and may require a substantial principal payment (i.e., a
"balloon" payment) at their stated maturity. Loans of this type involve a
greater degree of risk than fully amortizing loans since the related borrower
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 DIFFERENTLY
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.
PROPERTY VALUES MAY BE INSUFFICIENT
If the 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. 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:
- an overall decline in the residential real estate markets where the
properties are located;
- failure of borrowers to maintain their properties adequately; and
- 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.
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. It may also include 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.
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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.
PRE-FUNDING MAY ADVERSELY AFFECT YOUR INVESTMENT
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. As a result, the yield to maturity on your
investment may be adversely affected.
BANKRUPTCY LAWS MAY ADVERSELY AFFECT 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
- require certain disclosures to the borrowers regarding the terms of the
loans;
- 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
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consumer credit protection act, in the extension of credit;
- regulate the use and reporting of information related to the borrower's
credit experience; and
- require additional application disclosures, limit changes that may be
made to the loan documents without the borrower's consent and restrict a
lender's ability to declare a default or to suspend or reduce a
borrower's credit limit to certain enumerated events.
Certain loans are also subject to federal laws 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.
Certain home improvement contracts are subject to federal laws that protect
the borrower from defective or incomplete work by a contractor. These laws
permit the borrower to withhold payment if the work does not meet the quality
and durability standards agreed to between the borrower and the contractor.
These laws have the effect of subjecting 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.
FINANCIAL INSTRUMENTS MAY NOT PERFORM AS EXPECTED
As described under "Enhancement -- Financial Instruments," 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 such a class 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
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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
Limit on Liquidity of Securities. Securities issued in book-entry form may
have only limited liquidity in the resale market, since investors may be
unwilling to purchase securities for which they cannot obtain physical
instruments.
Limit on Ability to Transfer or Pledge. Transactions in book-entry
securities can be effected only through The Depository Trust Company (DTC), its
participating organizations, its indirect participants and certain banks. As a
result, your ability to transfer or pledge securities issued in book-entry form
may be limited.
Delays in Distributions. You may experience some delay in the receipt of
distributions on book-entry securities since the distributions will be forwarded
by the trustee to DTC for 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.
SECURITY RATINGS ARE NOT RECOMMENDATIONS
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:
- any decrease in the adequacy of the value of the trust fund assets or any
related credit enhancement, or
- 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. (the "Depositor") will establish
a trust fund (each, a "Trust Fund") for each series (a "Series") of its
Asset-Backed Notes (the "Notes") and of its Asset-Backed Certificates (the
"Certificates").
Each Series of Notes will be issued pursuant to an indenture (each, an
"Indenture") between the Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to 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 related servicer (the "Servicer") will also enter into a Servicing
Agreement (each, a "Servicing Agreement") with respect to the Loans.
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The Certificates will also be issued in Series pursuant to separate
agreements (each, a "Pooling and Servicing Agreement" or a "Trust Agreement")
among the Depositor, the related Servicer (if the Trust Fund includes Loans) and
the related Trustee A form of Pooling and Servicing Agreement has been filed as
an exhibit to the Registration Statement of which this prospectus forms a part.
A Series may consist of both Notes and Certificates. We refer to both Notes and
Certificates in this prospectus as "Securities."
The seller or sellers named in the related Prospectus Supplement
(collectively, the "Seller"), from which the Depositor will have purchased
certain of the assets 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 related Securities.
The following summaries describe certain provisions in the Pooling and
Servicing Agreement or Trust Agreement, in the case of a Series of Certificates,
and the Indenture and the Servicing Agreement, in the case of a Series of Notes
(collectively, the "Agreements") common to each Series of Securities. The
summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, the provisions of the Agreements and the
Prospectus Supplement relating to each Series of Securities. Where particular
provisions or terms used in the Agreements are referred to, the actual
provisions (including definitions of terms) are incorporated in this prospectus
by reference as part of such summaries.
Each Series of Securities will consist of one or more classes (each, a
"Class"), one or more of 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 the
distribution dates specified in the Prospectus Supplement (each, a "Distribution
Date") 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 (each, a "Holder"). However, payments may be made by wire
transfer (at the expense of the Holder requesting payment by wire transfer) in
certain circumstances described in the Prospectus Supplement. In addition 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 the Holder of that
Security 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 an account
(each, a "Collection Account") established for a particular Series with the
Trustee (or with the Servicer in the name of the Trustee):
- all payments with respect to the Primary Assets (as defined below) for a
Series, together with reinvestment income thereon;
- 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 (each, a
"Rating Agency") deposited in one or more reserve funds established in
the name of the Trustee (each, a "Reserve Fund"); and
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- amounts available pursuant to any other credit enhancement.
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. Those amounts thereafter will be deposited into the
separate distribution account (each, a "Distribution Account") established for
that Series and will be available to make payments on the Securities of that
Series 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:
- closed-end and/or revolving home equity loans (the "Mortgage Loans"),
secured by senior or subordinate liens on one- to four-family residential
or mixed-use properties;
- home improvement installment sales contracts and installment loan
agreements (the "Home Improvement Contracts"), which are either unsecured
or secured generally by subordinate liens on one- to four-family
residential or mixed-use properties, or by purchase money security
interests in the related home improvements (the "Home Improvements"); and
- securities (the "Private Securities") backed or secured by Mortgage
Loans, Contracts and/or Home Improvement Contracts (the "Underlying
Loans").
The Mortgage Loans and the Home Improvement Contracts are collectively
referred to in this prospectus as the "Loans". The residential or mixed-use
properties that secure the Mortgage 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, at any time the Asset Value of the Primary Assets will be equal to
- the product of the Asset Value Percentage as set forth in the Indenture
and
- the lesser of
(a) the stream of remaining regularly scheduled payments on the Primary
Assets, net, unless otherwise provided in the related Prospectus
Supplement, of certain amounts payable as expenses, together with
income earned on each such scheduled payment received through the
day preceding the next Distribution Date at the Assumed Reinvestment
Rate, if any, discounted to present value at the highest interest
rate on the Notes of that Series over periods equal to the interval
between payments on the Notes, and
(b) the then-outstanding principal balance of the Primary Assets.
Unless otherwise specified in the related Prospectus Supplement, the
initial Asset Value of the Primary Assets will be at least equal to the
principal amount of the Notes of the related Series at the date of issuance.
The "Assumed Reinvestment Rate," if any, for a Series will be the highest
rate permitted by the Rating Agencies or a rate insured by means of a surety
bond, guaranteed investment contract or reinvestment agreement or other
arrangement satisfactory to the Rating Agencies. If the Assumed Reinvestment
Rate is insured in this way, the related Prospectus Supplement will set forth
the terms of the arrangement.
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, or will be entitled to receive
interest payment amounts calculated in the method described, in the related
Prospectus Supplement.
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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 such
Distribution Date.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding that Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made to
the Holders of the related Securities on which principal is then payable, to the
extent set forth in the related Prospectus Supplement. The payments will be made
in a total amount determined as specified in the related 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, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The "Final Scheduled Distribution Date" with respect to each Class of a
Series of Notes is the date no later than which the total principal balance of
that Class will be fully paid, and with respect to each Class of a Series of
Certificates is the date on which the principal balance of that 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 will be used to make distributions that reduce the outstanding
principal amount of the 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 in the Trust
Fund. No assurance can be given as to the actual prepayment experience with
respect to a 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
Securities of that Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (the "Special
Redemption Date") if, as a consequence of prepayments on the related 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 amount available for the payment of
interest that will have accrued on those Securities (the "Available Interest
Amount") through the designated interest accrual date specified in the related
Prospectus Supplement is less than the amount of interest that will have accrued
on those Securities to that date. In this event and as further described in the
Prospectus Supplement, the Trustee will redeem a principal amount of outstanding
Securities of that 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 that Series of Securities outstanding immediately
after the redemption.
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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 to redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series on any Distribution Date under the circumstances, if
any, specified in the 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 related Prospectus Supplement
will have the option to cause an early termination of the 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 such redemption, purchase or
termination must be given by the Depositor or the Trustee prior to the related
date. The redemption, purchase or repurchase price will be set forth in the
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 (the "Code").
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
WEIGHTED AVERAGE 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 Private 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 a 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 such Prospectus
Supplement, including assumptions that prepayments on the Loans (or Underlying
Loans relating to the Private Securities, as applicable) included in the related
Trust Fund are made at rates corresponding to various percentages of the
prepayment standard or model specified in the Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans (or Underlying
Loans relating to the Private Securities, as applicable) included in the related
Trust Fund will conform to any level of any prepayment standard or model
specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job-related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do 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
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interest rates on the Loans (or Underlying Loans) for a Series, those loans are
likely to prepay at rates higher than if prevailing interest rates remain at or
above the interest rates borne by those 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 the
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.
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:
- the Primary Assets;
- amounts available from the reinvestment of payments on the Primary Assets
at the Assumed Reinvestment Rate, if any, specified in the related
Prospectus Supplement;
- any credit enhancement ("Enhancement") in the form of an irrevocable
letter of credit, surety bond, insurance policy or other form of credit
support;
- any Mortgaged Property or Home Improvement that secured a Loan but which
is acquired by foreclosure or deed in lieu of foreclosure or repossession
"REO Property"); and
- the amount, if any, initially deposited into the Collection Account or
Distribution Account(s) for a Series as specified in the related
Prospectus Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless the Prospectus Supplement indicates otherwise,
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 of Notes
in the case of a default with respect to that Series of Notes and may not
proceed against any assets of the Depositor or the related Trust Fund not
pledged to secure those Notes.
The Primary Assets for a Series will be sold by the Seller to the Depositor
or purchased by the Depositor in the open market or in privately negotiated
transactions (which may include transactions with affiliates) and will be
transferred by the Depositor to the Trust Fund. Loans relating to a Series will
be serviced by the Servicer (which may be the Seller) 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 (each, 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:
- 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;
- to issue the Securities;
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- to make payments and distributions on the Securities; and
- to perform certain related activities.
No Trust Fund is expected to have any source of capital other than its
assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Loans and Private Securities, as and to the extent the related
Prospectus Supplement specifies.
THE LOANS
Mortgage Loans. The Primary Assets for a Series may consist, in whole or
in part, of closed-end home equity loans (the "Closed-End Loans") and/or
revolving home equity loans or certain balances forming a part of the revolving
loans (the "Revolving Credit Line Loans" and, together with the Closed-End
Loans, the "Mortgage Loans") secured by mortgages, primarily on one- to
four-family residential or mixed-use properties, that may be subordinated to
other mortgages on the same Mortgaged Property. The Mortgage Loans may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
The full principal amount of a Closed-End Loan is advanced at origination
of the loan and generally is repayable in equal (or substantially equal)
installments of an amount sufficient to fully amortize such loan at its stated
maturity. Unless otherwise described in the related Prospectus Supplement, the
original terms to stated maturity of Closed-End Loans will not exceed 360
months. Principal amounts on a Revolving Credit Line Loan may be drawn down (up
to a maximum amount as set forth in the related Prospectus Supplement) or repaid
under each Revolving Credit Line Loan from time to time, but may be subject to a
minimum periodic payment. Except to the extent provided in the related
Prospectus Supplement, the Trust Fund will not include any amounts borrowed
under a Revolving Credit Line Loan after the date designated in the Prospectus
Supplement as the cut-off date (the "Cut-off Date"). As more fully described in
the related Prospectus Supplement, interest on each Revolving Credit Line Loan,
excluding introductory rates offered from time to time during promotional
periods, is computed and payable monthly on the average daily Principal Balance
of that Loan. Under certain circumstances, under either a Revolving Credit Line
Loan or a Closed-End Loan, a borrower may choose an interest-only payment option
under which 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 paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance of
the loan.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans have been originated in significant volume only during the past few
years and the Depositor is not aware of any publicly available studies or
statistics on the rate of prepayment of such loans. Generally, home equity loans
are not viewed by borrowers as permanent financing. Accordingly, the Mortgage
Loans may experience a higher rate of prepayment than traditional first mortgage
loans. On the other hand, because home equity loans such as the Revolving Credit
Line Loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments to be lower than, or similar
to, those of traditional fully-amortizing first mortgage loans. The prepayment
experience of the related Trust Fund may be affected by a wide variety of
factors, including general economic conditions, prevailing interest rate levels,
the availability of alternative financing and homeowner mobility and the
frequency and amount of any future draws on any Revolving Credit Line Loans.
Other factors that might be expected to affect the prepayment rate of a pool of
home equity mortgage loans or home improvement contracts include the amounts of,
and interest rates on, the underlying first mortgage loans, and the use of first
mortgage loans as long-term financing for home purchase and subordinate mortgage
loans as shorter-term financing for a variety of purposes, including home
improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional fixed-rate first mortgage loans. In addition, any
future limitations on the right of borrowers to deduct interest payments on home
equity loans for federal income tax purposes may
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further increase the rate of prepayments of the Mortgage Loans. Moreover, the
enforcement of a "due-on-sale" provision (as described below) will have the same
effect as a prepayment of the related Mortgage Loan. See "Certain Legal Aspects
of the Loans -- Due-on-Sale Clauses in Mortgage Loans."
Collections on Revolving Credit Line Loans may vary for a number of
reasons, including those listed below.
- 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.
- 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.
- A borrower may fail to make the required periodic payment.
- Collections on the Mortgage Loans may vary due to seasonal purchasing and
the payment habits of borrowers.
The Mortgage Loans will be secured by "Single Family Properties" (i.e.,
one- to four-family residential housing, including condominium units and
cooperative dwelling units) and mixed-use properties. Mixed-use properties will
consist of structures of no more than three stories that include one-to four-
residential dwelling units and space used for retail, professional or other
commercial uses. Such uses, which will not involve more than 50% of the space in
the structure, may include doctor, dentist or law offices, real estate agencies,
boutiques, newsstands, convenience stores or other similar types of uses
intended to cater to individual customers as specified in the related Prospectus
Supplement. The properties may be located in suburban or metropolitan districts.
Any such non-residential use will be in compliance with local zoning laws and
regulations. The Single Family Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses, individual
units in planned unit developments and other attached dwelling units. Each
Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Loan. Attached dwellings may include owner-occupied structures
where each borrower owns the land upon which the unit is built, with the
remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on cooperative 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
- a representation by the borrower at origination of the Mortgage 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
- 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 (the "Home Improvement Contracts") originated by a
home improvement contractor in the ordinary course of business. As specified
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in the related Prospectus Supplement, the Home Improvement Contracts will either
be 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 (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. As used in this prospectus, the term "Property" includes
the Mortgaged Properties and the Home Improvements.
Additional Information. The selection criteria that will apply with
respect to the Loans, including, but not limited to, the combined loan-to-value
ratios or loan-to-value ratios, as applicable, original terms to maturity and
delinquency information, will be specified in the related Prospectus Supplement.
The Loans for a Series may include Loans that do not amortize their entire
Principal Balance by their stated maturity in accordance with their terms and
require a balloon payment of the remaining Principal Balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Loans for a Series may include Loans that do
not have a specified stated maturity.
The Loans will be conventional contracts or contracts insured by the
Federal Housing Administration (the "FHA") or partially guaranteed by the
Veterans Administration (the "VA"). Loans designated in the related Prospectus
Supplement as insured by the FHA will be insured by the FHA 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 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 mortgagor to
HUD) or by accepting assignment of the loan from the Servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the Loan and HUD must have rejected any request for relief from the
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.
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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 of 1944, as amended,
permits a veteran (or in certain instances, the spouse of a veteran) to obtain a
mortgage loan guaranty by the VA covering mortgage financing of the purchase of
a one- to four-family dwelling unit at interest rates permitted by the VA. The
program has no mortgage loan limits, requires no down payment from the purchaser
and permits the guarantee of mortgage loans of up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
increase in the amount of indebtedness, but in no event will the amount payable
on the guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to 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 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 related Prospectus Supplement for each Series will provide information
with respect to the Loans that are Primary Assets as of the Cut-off Date,
including, among other things, and to the extent relevant:
- the aggregate unpaid Principal Balance of the Loans;
- 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;
- the range and average Principal Balance of the Loans;
- 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;
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- the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios for the Loans, as applicable;
- the percentage (by Principal Balance as of the Cut-off Date) of Loans
that accrue interest at adjustable or fixed interest rates;
- any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the Loans;
- 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;
- the geographic distribution of any Mortgaged Properties securing the
Loans;
- 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;
- the lien priority of the Loans;
- the delinquency status and year of origination of the Loans;
- whether such Loans are Closed-End Loans and/or Revolving Credit Line
Loans; and
- in the case of Revolving Credit Line Loans, the general payments and
credit line terms of those Loans and other pertinent features.
The related Prospectus Supplement will also specify any other limitations
on the types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Depositor at the time the Securities are initially offered, 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 and to be filed with the Commission within 15
days after the initial issuance of the Securities.
PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities that include:
- pass-through certificates representing beneficial interests in loans of
the type that would otherwise be eligible to be Loans (the "Underlying
Loans") or
- collateralized obligations secured by Underlying Loans.
The pass-through certificates or collateralized obligations will have previously
been
- offered and distributed to the public pursuant to an effective
registration statement, or
- purchased in a transaction not involving any public offering from a
person that is not an affiliate of the issuer of the Private 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 Securities were acquired from the issuer or from its
affiliate, whichever is later.
Although individual Underlying Loans may be insured or guaranteed by the
United States or an agency or instrumentality thereof, they need not be, and the
Private Securities themselves will not be insured or guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (each, a "PS
Agreement"). The seller/servicer of the Underlying Loans will have entered into
the PS Agreement with the trustee under such PS Agreement (the "PS Trustee").
The PS Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be
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serviced by a servicer (the "PS Servicer") directly or by one or more
sub-servicers who may be subject to the supervision of the PS Servicer.
The sponsor of the Private Securities (the "PS Sponsor") will be
- a financial institution or other entity engaged generally in the business
of lending;
- a public agency or instrumentality of a state, local or federal
government; or
- a limited purpose corporation organized for the purpose of, among other
things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts.
If so specified in the Prospectus Supplement, the PS Sponsor may be an
affiliate of the Depositor. The obligations of the PS Sponsor generally will be
limited to certain representations and warranties that it makes with respect to
the assets conveyed by it to the related trust. Unless otherwise specified in
the related Prospectus Supplement, the PS Sponsor will not have guaranteed any
of the assets conveyed to the related trust or any of the Private Securities
issued under the PS Agreement.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. The Underlying Loans will be secured by mortgages on Mortgaged
Properties.
Credit Support Relating to Private Securities. Credit support in the form
of reserve funds, subordination of other private securities issued under the PS
Agreement, guarantees, cash collateral accounts, security policies or other
types of credit support may be provided with respect to the Underlying Loans or
with respect to the Private Securities themselves. The type, characteristics and
amount of credit support will be a function of certain characteristics of the
Underlying Loans and other factors and will have been established for the
Private Securities on the basis of requirements of the nationally recognized
statistical rating organization that rated the Private Securities.
Additional Information. The Prospectus Supplement for a Series for which
the Primary Assets include Private Securities will specify, to the extent
relevant and to the extent such information is reasonably available to the
Depositor and the Depositor reasonably believes such information to be reliable:
- the total approximate principal amount and type of the Private Securities
to be included in the Trust Fund for that Series;
- certain characteristics of the Underlying Loans, including
(a) the payment features of the Underlying Loans (i.e., whether they
are Closed-End Loans and/or Revolving Credit Line Loans, whether
they are fixed rate or adjustable rate and whether they provide for
fixed level payments or other payment features);
(b) the approximate aggregate Principal Balance, if known, of the
Underlying Loans insured or guaranteed by a governmental entity;
(c) the servicing fee or range of servicing fees for the Underlying
Loans;
(d) the minimum and maximum stated maturities of the Underlying Loans
at origination;
(e) the lien priority of the Underlying Loans; and
(f) the delinquency status and year of origination of such Underlying
Loans;
- the maximum original term to stated maturity of the Private Securities;
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- the weighted average term to stated maturity of the Private Securities;
- the pass-through or certificate rate or range of rates for the Private
Securities;
- the PS Sponsor, the PS Servicer (if other than the PS Sponsor) and the PS
Trustee for the Private Securities;
- certain characteristics of any credit support such as reserve funds,
security policies or guarantees relating to the Underlying Loans or to
the Private Securities themselves;
- the terms on which Underlying Loans may, or are required to, be purchased
prior to their stated maturity or the stated maturity of the Private
Securities; and
- the terms on which Underlying Loans may be substituted for those
originally underlying the Private Securities.
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 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 and to be filed with the SEC within 15 days of the initial
issuance of such Securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee, or the
Servicer in the name of the Trustee, for each Series of Securities for receipt
of any cash specified in the related Prospectus Supplement to be initially
deposited therein by the Depositor, all amounts received on or with respect to
the Primary Assets and, unless otherwise specified in the related Prospectus
Supplement, income earned thereon. Certain amounts on deposit in such Collection
Account and certain amounts available pursuant to any Enhancement, as provided
in the related Prospectus Supplement, will be deposited into the applicable
Distribution Account, which will also be established by the applicable Trustee
for each such Series of Securities, for distribution to the related Holders.
Unless otherwise specified in the related Prospectus Supplement, the applicable
Trustee will invest the funds in the Collection Account and the Distribution
Account(s) in Eligible Investments maturing, with certain exceptions, not later,
in the case of funds in the Collection Account, than the day preceding the date
such funds are due to be deposited into the Distribution Account(s) or otherwise
distributed and, in the case of funds in the Distribution Account(s), than the
day preceding the next Distribution Date for the related Series of Securities.
"Eligible Investments" include, among other investments, obligations of the
United States and certain agencies thereof, federal funds, certificates of
deposit, commercial paper, demand and time deposits and banker's acceptances,
certain repurchase agreements of United States government securities and certain
guaranteed investment contracts, in each case acceptable to the Rating Agencies.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any deposit agreement or minimum principal payment
agreement that may be specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for the related Series. If so
specified, on the Closing Date for the Series, a portion of the proceeds of the
sale of the related Securities (such amount, the "Pre-Funded Amount") will be
deposited into the Pre-Funding Account and may be used to purchase additional
Primary Assets during the period of time specified in the related Prospectus
Supplement (the "Pre-Funding Period"). In no case will the Pre-Funded Amount
exceed 50% of the 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, and the same representations and
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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, such
amount will be applied in the manner specified in the related Prospectus
Supplement to prepay the Notes and/or the Certificates of the applicable Series.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the Closing Date for the
Series, a portion of the proceeds of the sale of the Securities of the Series
will be deposited into the Capitalized Interest Account and used to fund the
excess, if any, of
- the sum of
(i) the amount of interest accrued on the Securities of the Series and
(ii) if specified in the related Prospectus Supplement, certain fees or
expenses during the Pre-Funding Period,
over
- the amount of interest available from the Primary Assets in the Trust
Fund.
Any amounts on deposit in the Capitalized Interest Account at the end of
the Pre-Funding Period that are not necessary for such purposes will be
distributed to the person specified in the related Prospectus Supplement.
ENHANCEMENT
If 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 a security policy, issue subordinated
securities or obtain any other form of enhancement or combination thereof
(collectively, "Enhancement") in favor of the Trustee on behalf of the Holders
of the related Series or designated Classes of the Series from an institution or
by other means acceptable to the Rating Agencies. The Enhancement will support
the payment of principal of and interest on the Securities, and may be applied
for certain other purposes to the extent and under the conditions set forth in
the Prospectus Supplement. Enhancement for a Series may include one or more of
the forms described below, or such other form as may be specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, any
Enhancement may be structured so as to protect against losses relating to more
than one Trust Fund, in the manner described in that Prospectus Supplement.
SUBORDINATED SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of subordinated Securities. The rights of the
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
If specified in the related Prospectus Supplement, 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 (the "Pool
Insurance Policy") for the Loans in the related Trust Fund. The Pool Insurance
Policy will cover any loss (subject to the limitations described in a related
Prospectus Supplement) by reason of default, but will not cover the portion of
the Principal Balance of any Loan that
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is required to be covered by any primary mortgage insurance policy. The amount
and terms of any such coverage will be set forth in the related Prospectus
Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard insurance policy (or any flood insurance policy,
if applicable) required to be maintained with respect to 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
(i) the cost of repair or replacement of the Property, or
(ii) 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 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 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 under clause (i) in
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 under clause (ii) in 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 "Certain 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. Such 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.
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RESERVE FUNDS
If the Prospectus Supplement relating to a Series of Securities so
specifies, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for that Series or for the benefit of
any provider of Enhancement with respect to that Series (each, a "Reserve Fund")
cash, a letter or letters of credit, cash collateral accounts, Eligible
Investments, or other instruments meeting the criteria of the Rating Agencies in
the amount specified in such Prospectus Supplement. In the alternative or in
addition to such an initial deposit, a Reserve Fund for a Series may be funded
over time through application of all or a portion of the excess cash flow from
the Primary Assets for 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 applicable
Trustee to make payments on the Securities of the related Series, to pay
expenses, to reimburse any provider of Enhancement 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 applicable
Trustee in Eligible Investments maturing no later than the day specified in the
related Prospectus Supplement.
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 pursuant to 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 certain 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 applicable
Trustee for such Series of Securities will enter into a deposit agreement with
the entity specified in such Prospectus Supplement on or before the sale of the
related Series of Securities. The purpose of a deposit agreement would be to
accumulate available cash for investment so that such cash, together with income
thereon, can be applied to future distributions on one or more Classes of
Securities. The Prospectus Supplement for a Series of Securities pursuant to
which a deposit agreement is used will contain a description of the terms of
such deposit agreement.
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:
- to convert the payments on some or all of the Loans and Private
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;
- to provide payments if any index rises above or falls below specified
levels; or
- 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.
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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
Customary servicing functions with respect to Loans comprising the Primary
Assets in a Trust Fund will be provided by the Servicer directly, pursuant to
the related Servicing Agreement or Pooling and Servicing Agreement, as the case
may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Agreement for a Series and any applicable Enhancement, follow such collection
procedures as it follows with respect to comparable loans held in its own
portfolio. Consistent with the above, the Servicer may, in its discretion, (i)
waive any assumption fee, late payment charge, or other charge in connection
with a Loan and (ii) to the extent provided in the related Agreement, arrange
with a borrower a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on a Loan.
If the related Prospectus Supplement so provides, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
(each, an "Escrow Account") with respect to Loans in which payments by borrowers
to pay 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 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 Account to the extent required by law, to repair or otherwise protect the
related Property and to clear and terminate such Escrow Account. The Servicer
will be responsible for the administration of the Escrow Accounts and generally
will make advances to such accounts when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless the related Prospectus Supplement specifies otherwise, the Trustee
or the Servicer will establish a separate account (the "Collection Account") in
the name of the Trustee. Unless the related Prospectus Supplement provides
otherwise, the Collection Account will be 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 that
rates the related the Securities of that Series at levels satisfactory to
each Rating Agency; or
- in an account or accounts the deposits in which are insured to the
maximum extent available by the Federal Deposit Insurance Corporation or
that are secured in a manner meeting requirements established by each
Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested in Eligible Investments. If so
specified in the related Prospectus Supplement, the Servicer will be entitled to
receive as additional compensation any interest or other income earned on funds
in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series, on the business day following the
Closing Date, all scheduled payments of principal and interest on the Primary
Assets ("Scheduled Payments") due after the related Cut-off Date but received by
the Servicer on or
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before the Closing Date, and thereafter, within two business days after the date
of receipt thereof, the following payments and collections received or made by
it (other than, unless otherwise provided in the related Prospectus Supplement,
in respect of principal of and interest on the related Primary Assets due on or
before the Cut-off Date):
(i) All payments in respect of principal, including prepayments, on the
Primary Assets;
(ii) All payments in respect of interest on the Primary Assets after
deducting therefrom, at the discretion of the Servicer (but only to
the extent of the amount permitted to be withdrawn or withheld from
the Collection Account in accordance with the related Agreement), the
fee payable to the Servicer (the "Servicing Fee") in respect of such
Primary Assets;
(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or the related Property, 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 pursuant to the terms of the applicable loan documents or
otherwise pursuant to law, net of related liquidation expenses (such
net amount, the "Liquidation Proceeds"), exclusive of, in the
discretion of the Servicer (but only to the extent of the amount
permitted to be withdrawn from the Collection Account in accordance
with the related Agreement), the Servicing Fee, if any, in respect
of the related Primary Asset;
(iv) All proceeds under any title insurance, hazard insurance policy or
other insurance policy covering any such Primary Asset, other than
proceeds to be applied to the restoration or repair of the related
Property or released to the borrower in accordance with the related
Agreement;
(v) All amounts required to be deposited therein from any Reserve Fund
for the Series pursuant to the related Agreement;
(vi) 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 ("Advances"); and
(vii) 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:
(i) to reimburse itself for Advances made by it in connection with that
Series pursuant to the related Agreement; provided, that the
Servicer's right to reimburse itself is limited to amounts received
on or in respect of particular Loans (including, for this purpose,
Liquidation Proceeds and 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;
(ii) 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;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection
with the restoration of damaged Property and, in the event deposited
into the Collection Account and not previously withheld, and to the
extent that Liquidation Proceeds after such reimbursement exceed the
Principal Balance of the related Loan, together with accrued and
unpaid interest thereon to the Due Date for 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;
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(iv) in the event it has elected not to pay itself the Servicing Fee out
of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Loan prior to the deposit
of 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 such Scheduled Payment,
late payment or other recovery, to the extent permitted by the
related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary Asset or
related REO 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;
(vii) to make payments to the Trustee of the Series for deposit into the
related Distribution Account, if any, or for remittance to the
Holders of the Series in the amounts and in the manner provided for
in the related Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits into the Collection Account for a
Series any amount not required to be deposited therein, 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 any 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
particularized in each policy. Because the standard hazard insurance policies
relating to the Loans will be underwritten by different hazard insurers and will
cover Properties located in various states, 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
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hazard insurance policy or other form of Enhancement will adversely affect
distributions to Holders. When a Property securing a Loan is located in a flood
area identified by HUD pursuant to the Flood Disaster Protection Act of 1973, as
amended, the Servicer will be required to cause flood insurance to be maintained
with respect to 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 (i) the actual cash value (i.e., replacement cost
less physical depreciation) of the Property, including the improvements, if any,
damaged or destroyed or (ii) such proportion of the loss, without deduction for
depreciation, as the amount of insurance carried bears to the specified
percentage of the full replacement cost of 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 (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding Principal Balance of the related Loan. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also maintain
on REO Property 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 any those 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 that
assigns a rating to the related Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each Loan or related REO Property. This blanket policy may contain a
deductible clause, in which case the Servicer will be required, in the event
that there has been a loss that would have been covered by 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
(i) such restoration or foreclosure will increase the Liquidation Proceeds of
the related Loan available to the Holders after reimbursement to itself for its
expenses and (ii) its expenses will be recoverable either through Liquidation
Proceeds or Insurance Proceeds. Notwithstanding anything to the contrary herein,
in the case of a Trust Fund for which a REMIC election has been made, the
Servicer will be required to liquidate any REO Property by
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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,
if applicable, will have no ability to do so and neither the Servicer nor the
Depositor will be required to do so.
The Servicer may arrange with the borrower on a defaulted Loan a change in
the terms of such 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 obligor, 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 the 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, or excess proceeds
following disposition of Property in connection with defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Loans, including, without limitation, the payment of the fees and expenses
of each applicable Trustee and independent accountants, payment of Security
Policy and insurance policy premiums, if applicable, and the cost of credit
support, if any, and payment of expenses incurred in preparation of reports to
Holders.
When 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
such shortfalls in a month exceeds the Servicing Fee for such month, a shortfall
to Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses 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 thereunder has been exhausted, the related Holders will
suffer a loss to the extent that Liquidation Proceeds, after reimbursement of
the
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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 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
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 (i) such exceptions as the firm believes to be immaterial and (ii) 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 (defined below) 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
- services similar loans in the ordinary course of its business;
- is reasonably satisfactory to the Trustee;
- has a net worth of not less than the amount specified in the Prospectus
Supplement;
- would not cause any Rating Agency's rating of the related Securities 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
- 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
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obligations to a wholly-owned subsidiary or affiliate, the subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the 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 therein, each Agreement will
provide that neither the Servicer nor any director, officer, employee or agent
of the Servicer will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment.
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 certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, the
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the 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. Such 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 or cause to be delivered to
the Trustee (or, if specified in the Prospectus Supplement, a custodian on
behalf of the Trustee (the "Custodian")), as to each Mortgage 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 (each, a
"Mortgage") with evidence of recording indicated thereon (except for any
Mortgage not returned from the public recording office, in which case a copy of
such Mortgage will be delivered, together with a certificate that the original
of such Mortgage was delivered to such recording office), and an assignment of
the Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold those documents in trust for the
benefit of the Holders.
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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 or cause to be
delivered to the Trustee (or the Custodian), as to each Home Improvement
Contract, the original Home Improvement Contract and copies of related documents
and instruments and, other than 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. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Home Improvement
Contracts without notice of such assignment, the interest of Holders in the Home
Improvement Contracts could be defeated. See "Certain Legal Aspects of the
Loans -- The Home Improvement Contracts" in this prospectus.
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:
- the original principal amount,
- its unpaid Principal Balance as of the Cut-off Date,
- the current interest rate,
- the current Scheduled Payment of principal and interest,
- the maturity date, if any, of the related note, and
- if the Loan is an adjustable rate Loan, the lifetime rate cap, if any,
and the current index.
Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the PS Trustee (or its nominee or
correspondent). The PS Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the PS Trustee will not be in possession of
or be assignee of record of any underlying assets for a Private Security. See
"The Trust Funds -- Private Securities" in this prospectus. Each Private
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 Private Security conveyed to the Trust Fund. In the Agreement, the
Depositor will represent and warrant to the PS Trustee regarding the Private
Securities that:
- the information contained in the Private Securities schedule is true and
correct in all material respects;
- immediately prior to the conveyance of the Private Securities, the
Depositor had good title, and was their sole owner (subject to any
retained interest);
- there has been no other sale by the Private Securities; and
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- there is no existing lien, charge, security interest or other encumbrance
(other than any retained interest) on the Private Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee, within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date), to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, (or within 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 the related Primary Asset or any property acquired in respect
thereof from the Trustee. Unless otherwise specified in the related Prospectus
Supplement, the repurchase shall be effected at a price equal to the:
(a) the lesser of
(i) the Principal Balance of the Primary Asset, and
(ii) the Trust Fund's federal income tax basis in the Primary Asset;
plus
(b) 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;
provided, however, the purchase price shall not be limited in (i) above to the
Trust Fund's federal income tax basis, if the repurchase at a price equal to the
Principal Balance of 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 (the "Deleted
Primary Asset") and substitute in its place one or more other Primary Assets
(each, a "Qualifying Substitute Primary Asset"); provided, however, that (i)
with respect to a Trust Fund for which no REMIC election is made, the
substitution must be effected within 120 days of the date of initial issuance of
the Securities and (ii) with respect to a Trust Fund for which a REMIC election
is made, after a specified time period, the Trustee must have received a
satisfactory opinion of counsel that such substitution will not cause the Trust
Fund to lose its status as a REMIC or otherwise subject the Trust Fund to a
prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will, on the date of substitution,
- have 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),
- have an interest rate not less than (and not more than 2% greater than)
the interest rate of the Deleted Primary Asset,
- have a remaining term-to-stated maturity not greater than (and not more
than two years less than) that of the Deleted Primary Asset; and
- comply with all of the representations and warranties set forth in the
applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
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The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a 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 such 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 -- Limited Assets for Making Payments" 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 any such proceeding.
REPORTS TO HOLDERS
The applicable Trustee or other entity specified in the related Prospectus
Supplement will prepare and forward to each Holder on each Distribution Date, or
as soon thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of the Securities
following the distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on the Securities;
(iii) the amount of
(a) any overdue accrued interest included in such distribution,
(b) any remaining overdue accrued interest with respect to the
Securities, or
(c) any current shortfall in amounts to be distributed as accrued
interest to Holders of such Securities;
(iv) the amount of
(a) any overdue payments of scheduled principal included in the
distribution,
(b) any remaining overdue principal amounts with respect to the
Securities,
(c) any current shortfall in receipt of scheduled principal payments on
the related Primary Assets or
(d) any realized losses or Liquidation Proceeds to be allocated as
reductions in the outstanding principal balances of the Securities;
(v) the amount received under any related Enhancement, and the remaining
amount available under the Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
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(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the applicable Trustee, unless otherwise specified in the related
Prospectus Supplement, will furnish to each Holder of record at any time during
the calendar year:
- the total of the amounts reported pursuant to clauses (i), (ii) and
(iv)(d) above for the calendar year, and
- 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 such reports only to the entity or its nominee
that is the registered holder of the global certificate that evidences such
book-entry securities. Beneficial owners will receive reports from the
participants and indirect participants of the applicable book-entry system in
accordance with the policies and procedures of such entities.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, "Events of Default" under the
Pooling and Servicing Agreement for each Series of Certificates relating to
Loans include
- 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;
- 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
- 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.
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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:
- a default for thirty (30) days or more in the payment of any principal of
or interest on any Note of the Series;
- 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;
- 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;
- certain events of bankruptcy, insolvency, receivership or liquidation of
the Depositor or the Trust Fund; and
- 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
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(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:
(a) the Holders of 100% of the total amount of the then-outstanding Notes
of the Series consent to such sale;
(b) 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
(c) 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 66K% 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 such an 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 the Holders of the outstanding Notes of affected thereby.
THE TRUSTEES
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee or Indenture Trustee, as the case may be, for each
Series of Securities will be set forth in the related Prospectus Supplement.
Entities serving as Trustee may have normal banking relationships with the
Depositor or the Servicer. In addition, for the purpose of meeting the legal
requirements of certain local jurisdictions, each Trustee will have the power to
appoint co-trustees or separate trustees. In the event of 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
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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 such 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 (i) if that Trustee ceases to be eligible to continue as
such under the related Agreement, (ii) if that Trustee becomes insolvent or
(iii) by the Holders of Securities having more than over 50% of the total voting
rights of the Securities in the Trust Fund upon 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
(i) to cure any ambiguity,
(ii) to correct any defective provisions or to correct or supplement any
provision therein,
(iii) to add to the duties of the Depositor, the applicable Trustee or the
Servicer,
(iv) to add any other provisions with respect to matters or questions
arising under such Agreement or related Enhancement,
(v) to add or amend any provisions of such Agreement as required by a
Rating Agency in order to maintain or improve the rating of the
Securities (it being understood that none of the Depositor, the
Seller, the Servicer or any Trustee is obligated to maintain or
improve such rating), or
(vi) to comply with any requirements imposed by the Code;
provided, however, that any such amendment (other than pursuant to clause (vi)
above) will not adversely affect in any material respect the interests of any
Holders of the Series, as evidenced by an opinion of
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counsel delivered to the Trustee. Unless otherwise specified in the Prospectus
Supplement, any such 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 applicable Rating Agency rating 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
each 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 66K% of the total outstanding principal amount of the Securities of
the Series (or, if only certain Classes are affected by the amendment, 66K% 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 such amendment
(a) reduce the amount or delay the timing of payments on any Security
without the consent of the Holder of the Security; or
(b) reduce the aforesaid 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 related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, (which request is accompanied by a copy of the communication such
Holders propose to transmit), the 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 Classes 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, who may be an affiliate of
the Depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to the Agreement under 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
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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, to, 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
those 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.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that are general in nature. Because
certain legal aspects are governed by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete or reflect
the laws of any particular state, or encompass the laws of all states in which
the properties securing the Loans are situated.
MORTGAGES
The Loans for a Series will, and certain Home Improvement Contracts for a
Series may, be secured by either mortgages or deeds of trust or deeds to secure
debt (such Mortgage Loans and Home Improvement Contracts are hereinafter
referred to in this section as "mortgage loans"), depending upon the prevailing
practice in the state in which the property subject to a mortgage loan is
located. The filing of a mortgage, deed of trust or deed to secure debt creates
a lien or title interest upon the real property covered by 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.
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FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, foreclosure also may be
accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the borrower-trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower, or any person having
a junior encumbrance on the real estate may, during a reinstatement period, cure
the default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property, recorded and sent
to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised 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
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and 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, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party
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purchasers at the sale have in determining the exact status of title and because
the physical condition of the property may have deteriorated during the
foreclosure proceedings, it is uncommon for a third party to purchase the
property at a foreclosure sale. Rather, it is common for the lender to purchase
the property from the trustee or referee for an amount that may be equal to the
unpaid principal amount of the mortgage note secured by the mortgage or deed of
trust plus accrued and unpaid interest and the expenses of foreclosure, in which
event the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty Insurance Proceeds.
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations, an
owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or arrange
for the transportation, disposal or treatment of hazardous substances, at
off-site locations may also be held liable if there are releases or threatened
releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against such property. Under CERCLA, such
a lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act (the "SWDA") provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the management"
of the facility in question or is found not to have held its interest primarily
to protect a security interest, the lender may forfeit its secured creditor
exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency (the
"EPA") in April 1992 attempted to clarify the activities in which lenders could
engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The
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rule was struck down in 1994 by the United States Court of Appeals for the
District of Columbia Circuit in Kelley ex rel State of Michigan v. Environmental
Protection Agency, 15 F.3d 1100 (D.C Cir. 1994), reh'g denied, 25 F.3d 1088,
cert. denied sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another
EPA regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of the SWDA. That regulation has not been struck down.
On September 30, 1996, Congress enacted the Asset Conservation, Limited
Liability and Deposit Insurance Protection Act (ACA) which amended both CERCLA
and the SWDA to provide additional clarification regarding the scope of the
lender liability exemptions under the two statutes. Among other things, the 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, the 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 (i) exercises
decision-making control over environmental compliance related to the facility
such that the lender has undertaken responsibility for hazardous substance
handling or disposal practices related to the facility or (ii) exercises control
at a level comparable to that of a manager of the facility such that the lender
has assumed or manifested responsibility for (a) overall management of the
facility encompassing daily decision-making with respect to environmental
compliance or (b) overall or substantially all of the operational functions (as
distinguished from financial or administrative functions) of the facility other
than the function of environmental compliance. The 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.
The 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.
The 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, such persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with environmental cleanup and related actions may be substantial. Moreover,
some state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing a
release or threatened release at a property pledged as collateral for one of the
Loans would be imposed on the Trust Fund, and thus occasion a loss to the
Holders, therefore depends on the specific factual and legal circumstances at
issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of
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foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser at a foreclosure sale, or of any purchaser from the lender subsequent
to foreclosure or sale under a deed of trust. Consequently, the practical effect
of a right of redemption is to force the lender to retain the property and pay
the expenses of ownership until the redemption period has run. In some states,
there is no right to redeem property after a trustee's sale under a deed of
trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The Mortgage Loans comprising or underlying the Primary Assets included in
the Trust Fund for a Series will be secured by mortgages or deeds of trust,
which may be second or more junior mortgages to other mortgages held by other
lenders or institutional investors. The rights of the Trust Fund (and therefore
of the Holders), as mortgagee under a junior mortgage, are subordinate to those
of the mortgagee under the senior mortgage, including the prior rights of the
senior mortgagee to receive hazard insurance and condemnation proceeds and to
cause the property securing the mortgage loan to be sold upon default of the
mortgagor, thereby extinguishing the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior loan in full and, in some states, may
cure 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 such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property that appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a
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personal action against the borrower on the debt without first exhausting such
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 laws, the Federal
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 law, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Moreover, a court
with federal bankruptcy jurisdiction may permit a debtor through a
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 bankruptcy code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted mortgage loan. In addition, substantive requirements are
imposed upon lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
laws include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal laws impose
specific statutory liabilities upon lenders who originate loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or
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litigation in many states, and in some cases, typically involving single family
residential mortgage transactions, their enforceability has been limited or
denied. In any event, the Garn-St. Germain Depository Institutions Act of 1982
(the "Garn-St. Germain Act") preempts state constitutional, statutory and case
law that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to certain
exceptions. As a result, due-on-sale clauses have become generally enforceable
except in those states whose legislatures exercised their authority to regulate
the enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain Act,
which ended in all cases not later than October 15, 1982, and (ii) originated by
lenders other than national banks, federal savings institutions and federal
credit unions. FHLMC has taken the position in its published mortgage servicing
standards that, out of a total of eleven "window period states," five states
(Arizona, Michigan, Minnesota, New Mexico and Utah) have enacted statutes
extending, on various terms and for varying periods, the prohibition on
enforcement of due-on-sale clauses with respect to certain categories of window
period loans. Also, the Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations, upon the late charges a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Office of Thrift Supervision (the
"OTS") prohibit the imposition of a prepayment penalty or equivalent fee for or
in connection with the acceleration of a loan by exercise of a due-on-sale
clause. A mortgagee to whom a prepayment in full has been tendered may be
compelled to give either a release of the mortgage or an instrument assigning
the existing mortgage. The absence of a restraint on
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prepayment, particularly with respect to mortgage loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirements of
such mortgage loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The OTS, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by adopting,
before April 1, 1983, a state law, or by certifying that the voters of such
state have voted in favor of any provision, constitutional or otherwise, which
expressly rejects an application of the federal law. Fifteen states adopted such
a law prior to the April 1, 1983 deadline. In addition, even where Title V is
not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
THE HOME IMPROVEMENT CONTRACTS
General
The Home Improvement Contracts, other than those Home Improvement Contracts
that are unsecured or secured by mortgages on real estate, generally are
"chattel paper" or constitute "purchase money security interests," each as
defined in the Uniform Commercial Code (the "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 Home
Improvement Contracts to the Trustee or 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 Home Improvement 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 Home
Improvement Contracts without notice of such assignment, the Trustee's interest
in the contracts could be defeated.
Security Interests in Home Improvements
The Home Improvement Contracts that are secured by the Home Improvements
financed thereby grant to the originator of such contracts a purchase money
security interest in such Home Improvements to secure all or part of the
purchase price of such Home Improvements and related services. A financing
statement generally is not required to be filed to perfect a purchase money
security interest in consumer goods. 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 such collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in 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 such characterization,
upon incorporation of such materials into the related property, will not be
secured by a purchase money security interest in the Home Improvement being
financed.
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Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real estate
law, a creditor can repossess a Home Improvement securing a 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 10 to 30 days depending on the state, prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting such a sale. The
law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit that the debtor may redeem it at or before the
resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgement from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgement.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract that is the seller of goods that gave rise to the transaction (and
certain related lenders and assignees) to transfer the contract free of notice
of claims by the debtor thereunder. 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 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 would be covered
if they satisfy certain conditions, among other things, governing the terms of
any prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT SALES CONTRACTS
The Loans may also consist of installment sales contracts. Under an
installment sales contract (each, an "Installment Sales Contract") the seller
(hereinafter referred to in this section as the "lender") retains legal title to
the property and enters into an agreement with the purchaser (hereinafter
referred to in this
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section as the "borrower") for the payment of the purchase price, plus interest,
over the term of such contract. Only after full performance by the borrower of
the contract is the lender obligated to convey title to the property to the
purchaser. As with mortgage or deed of trust financing, during the effective
period of the Installment Sales Contract, the borrower is generally responsible
for maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance policy premiums associated with the property.
The method of enforcing the rights of the lender under an Installment Sales
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender in
such a situation does not have to foreclose in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Sales Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Sales Contracts from the harsh consequences of
forfeiture. Under those statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the Installment Sales Contract may
be reinstated upon full payment of the default amount and the borrower may have
a post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Sales Contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an Installment Sales
Contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a Loan
included in a Trust Fund for a Series is relieved pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940, none of the Trust Fund, the Servicer, the
Depositor nor any Trustee will be required to advance such amounts, and any
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
Soldiers' and Sailors' Civil Relief Act of 1940 will be allocated to each Class
of Securities of the Series that is entitled to receive interest in respect of
such Loans (or Underlying Loans) in proportion to the interest that each such
Class of Securities would have otherwise been entitled to receive in respect of
such Loans (or Underlying Loans) had the interest shortfall not occurred.
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THE DEPOSITOR
The Depositor was incorporated in the State of Delaware in June 1995, and
is a wholly-owned subsidiary of The Bear Stearns Companies Inc. The Depositor's
principal executive offices are located at 245 Park Avenue, New York, New York
10167. Its telephone number is (212) 272-4095.
The Depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts,
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments ("Depositor Securities"). 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 certain first
or junior mortgages on real estate or manufactured housing and any and all other
commercial transactions and commercial, sovereign, student or consumer loans or
indebtedness, In connection therewith or otherwise, 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 such 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 Series of Securities for one or more of the following purposes:
- to purchase the related Primary Assets,
- to repay indebtedness incurred to obtain funds to acquire such Primary
Assets,
- to establish any Reserve Funds described in the related Prospectus
Supplement and
- to pay costs of structuring and issuing the Securities, including the
costs of obtaining any Enhancement.
If so specified in the related Prospectus Supplement, the purchase of the
Primary Assets for a Series may be effected by an exchange of Securities with
the Seller of such Primary Assets.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated material federal income
tax consequences of the purchase, ownership, and disposition of the Securities
and is based on the opinion of Brown & Wood LLP, Morgan, Lewis & Bockius LLP or
such other counsel so designated in the Prospectus Supplement, special counsel
to the Depositor (in such capacity, "Tax Counsel"). The summary is based upon
the provisions of the Code, the regulations promulgated thereunder, including,
where applicable, proposed regulations, and the judicial and administrative
rulings and decisions now in effect, all of which are subject to change or
possible differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change, and
such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the Code. Prospective investors may wish to
consult their own tax advisers
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concerning the federal, state, local and any other tax consequences as relates
specifically to such investors in connection with the purchase, ownership and
disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit (a "REMIC") under the
Code; (iii) the Securities represent an ownership interest in some or all of the
assets included in the Trust Fund for a Series; or (iv) an election is made to
treat the Trust Fund relating to a particular Series of Certificates as a
partnership; or (v) an election is made to treat the Trust Fund relating to a
particular Series of Securities as a Financial Asset Securitization Investment
Trust ("FASIT") under the Code. The Prospectus Supplement for each Series of
Securities will specify how the Securities will be treated for federal income
tax purposes and will discuss whether a REMIC election, if any, will be made
with respect to such Series.
As used herein, the term "U.S. Person" means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States, any state thereof or the District of
Columbia (other than a partnership that is not treated as a United States person
under any applicable Treasury regulations), an estate whose income is subject to
U.S. federal income tax regardless of its source of income, or a trust if a
court within the United States is able to exercise primary supervision of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust. Notwithstanding the preceding sentence, to
the extent provided in regulations, certain trusts in existence on August 20,
1996 and treated as United States persons prior to such date that elect to
continue to be treated as United States persons shall be considered U.S. Persons
as well.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent otherwise provided in
the related Prospectus Supplement, if the Securities are regular interests in a
REMIC ("Regular Interest Securities") or represent interests in a grantor trust,
Tax Counsel is of the opinion that: (i) Securities held by a domestic building
and loan association will constitute "loans . . . secured by an interest in real
property" within the meaning of Code section 7701(a)(19)(C)(v); and (ii)
Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code section 856(c)(4)(A) and interest on
Securities will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
section 856(c)(3)(B).
Interest and Acquisition Discount. In the opinion of Tax Counsel, Regular
Interest Securities are generally taxable to Holders in the same manner as
evidences of indebtedness issued by the REMIC. Stated interest on the Regular
Interest Securities will be taxable as ordinary income and taken into account
using the accrual method of accounting, regardless of the Holder's normal
accounting method. Interest (other than original issue discount) on Securities
(other than Regular Interest Securities) that are characterized as indebtedness
for federal income tax purposes will be includible in income by Holders thereof
in accordance with their usual methods of accounting. Securities characterized
as debt for federal income tax purposes and Regular Interest Securities will be
referred to hereinafter collectively as "Debt Securities."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at a
discount may, be issued with "original issue discount" ("OID"). The following
discussion is based in part on the rules governing OID, which are set forth in
Sections 1271-1275 of the Code and the Treasury regulations issued thereunder on
February 2, 1994 and amended on June 11, 1996 (the "OID Regulations"). A Holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a Holder of a Debt Security must
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include such OID in gross income as ordinary interest income as it accrues under
a method taking into account an economic accrual of the discount. In general,
OID must be included in income in advance of the receipt of the cash
representing that income. The amount of OID on a Debt Security will be
considered to be zero if it is less than a de minimis amount determined under
the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that Class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular Class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such Class will be treated as
the fair market value of such Class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security Holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
"qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below); provided, that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. 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 such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method Holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
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Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price at
maturity.
The Internal Revenue Service (the "IRS") issued final regulations (the
"Contingent Payment Regulations") governing the calculation of OID on
instruments having contingent interest payments. The Contingent Payment
Regulations, represent the only guidance regarding the views of the IRS with
respect to contingent interest instruments and specifically do not apply for
purposes of calculating OID on debt instruments subject to Code Section
1272(a)(6), such as the Debt Security. Additionally, the OID Regulations do not
contain provisions specifically interpreting Code Section 1272(a)(6). Until the
Treasury issues guidance to the contrary, the applicable Trustee intends to base
its computation on Code Section 1272(a)(6) and the OID Regulations as described
in this Prospectus. However, because no regulatory guidance currently exists
under Code Section 1272(a)(6), there can be no assurance that such methodology
represents the correct manner of calculating OID.
The Holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such original issue discount. The amount of OID
includible in income by a Holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals or OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events that have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of OID required to be included in income by a Holder of a
Pay-Through Security to take into account prepayments with respect to the Loans
at a rate that is slower than the Prepayment Assumption. Although OID will be
reported to Holders of Pay-Through Securities based on the Prepayment
Assumption, no representation is made to Holders that Loans will be prepaid at
that rate or at any other rate.
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The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the IRS were to require
that OID be accrued without such adjustments, the rate of accrual of OID for a
Class of Regular Interest Securities could increase.
Certain Classes of Regular Interest Securities may represent more than one
Class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the applicable Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the purposes
of computing OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include OID
in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax Counsel,
Holders will be required to report income with respect to the related Securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the Loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
Holder of such a Security in any period could significantly exceed the amount of
cash distributed to such Holder in that period. The Holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Securities is reduced
as a result of a Loan default. However, the timing and character of such losses
or reductions in income are uncertain and, accordingly, Holders of Securities
should consult their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under "-- Tax Status as a Grantor Trust; General" herein) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC or on Loans underlying Pass-Through
Securities ("Interest Weighted Securities"). The Trustee intends to take the
position that all of the income derived from an Interest Weighted Security
should be treated as OID and that the amount and rate of accrual of such OID
should be calculated by treating the Interest Weighted Security as a Compound
Interest Security. However, in the case of Interest Weighted Securities that are
entitled to some payments of principal and that are Regular Interest Securities,
the Internal Revenue Service could assert that income derived from an Interest
Weighted Security should be calculated as if the Security were a security
purchased at a premium equal to the excess of the price paid by such Holder for
such Security over its stated principal amount, if any. Under this approach, a
Holder would be entitled to amortize such premium only if it has in effect an
election under Section 171 of the Code with respect to all taxable debt
instruments held by such Holder, as described below. Alternatively, the IRS
could assert that an Interest Weighted Security should be taxable under the
rules governing bonds issued with contingent payments. Such treatment may be
more likely in the case of Interest Weighted Securities that are Stripped
Securities as described below. See "-- Tax Status as a Grantor Trust -- Discount
or Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in the case
of Debt Securities bearing interest at a rate that varies directly, according to
a fixed formula, with an objective index, it appears that (i) the yield to
maturity of such Debt Securities and (ii) in the case of Pay-Through Securities,
the present value of all payments remaining to be made on such Debt Securities,
should be calculated as if the interest index remained at its value as of the
issue date of such Securities. Because the proper method of adjusting accruals
of OID on a variable rate Debt Security is uncertain, Holders of variable rate
Debt Securities should consult their own tax advisers regarding the appropriate
treatment of such Securities for federal income tax purposes.
Market Discount. In the opinion of Tax Counsel, a purchaser of a Security
may be subject to the market discount rules of Sections 1276-1278 of the Code. A
Holder that acquires a Debt Security with
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more than a prescribed de minimis amount of "market discount" (generally, the
excess of the principal amount of the Debt Security over the purchaser's
purchase price) will be required to include accrued market discount in income as
ordinary income in each month, but limited to an amount not exceeding the
principal payments on the Debt Security received in that month and, if the
Securities are sold, the gain realized. Such market discount would accrue in a
manner to be provided in Treasury regulations but, until such regulations are
issued, such market discount would in general accrue either (i) on the basis of
a constant yield (in the case of a Pay-Through Security, taking into account a
prepayment assumption) or (ii) in the ratio of (a) in the case of Securities (or
in the case of a Pass-Through Security, as set forth below, the Loans underlying
such Security) not originally issued with original issue discount, stated
interest payable in the relevant period to total stated interest remaining to be
paid at the beginning of the period or (b) in the case of Securities (or, in the
case of a Pass-Through Security, as described below, the Loans underlying such
Security) originally issued at a discount, OID in the relevant period to total
OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A Holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. In the opinion of Tax Counsel, a Holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the Security at a premium, which it may
elect to amortize as an offset to interest income on such Security (and not as a
separate deduction item) on a constant yield method. Although no regulations
addressing the computation of premium accrual on securities similar to the
Securities have been issued, the legislative history of the 1986 Act indicates
that premium is to be accrued in the same manner as market discount.
Accordingly, it appears that the accrual of premium on a Class of Pay-Through
Securities will be calculated using the prepayment assumption used in pricing
such Class. If a Holder makes an election to amortize premium on a Debt
Security, such election will apply to all taxable debt instruments (including
all REMIC regular interests and all pass-through certificates representing
ownership interests in a trust holding debt obligations) held by the Holder at
the beginning of the taxable year in which the election is made, and to all
taxable debt instruments acquired thereafter by such Holder, and will be
irrevocable without the consent of the IRS. Purchasers who pay a premium for the
Securities should consult their tax advisers regarding the election to amortize
premium and the method to be employed.
On December 30, 1997, the IRS issued final regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. The
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6). 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 a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the Holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market
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discount that such Holder of the Debt Security acquires during the year of the
election or thereafter. Similarly, a Holder of a Debt Security that makes this
election for a Debt Security that is acquired at a premium will be deemed to
have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such Holder owns or acquires.
The election to accrue interest, discount and premium on a constant yield method
with respect to a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Tax Counsel, if a REMIC election is made with
respect to a Series of Securities, then the arrangement by which the Securities
of that Series are issued will be treated as a REMIC as long as all of the
provisions of the applicable Agreement are complied with and the statutory and
regulatory requirements are satisfied. Securities will be designated as "Regular
Interests" or "Residual Interests" in a REMIC, as specified in the related
Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, in the opinion of
Tax Counsel (i) Securities held by a domestic building and loan association will
constitute "a regular or a residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's
assets consist of cash, government securities, "loans secured by an interest in
real property," and other types of assets described in Code Section
7701(a)(19)(C)); and (ii) Securities held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(4)(A),
and income with respect to the Securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B) (assuming, for both
purposes, that at least 95% of the REMIC's assets are qualifying assets). If
less than 95% of the REMIC's assets consist of assets described in (i) or (ii)
above, then a Security will qualify for the tax treatment described in (i) or
(ii) in the proportion that such REMIC assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of Tax Counsel, all of the expenses of a
REMIC will be taken into account by Holders of the Residual Interest Securities.
In the case of a "single class REMIC," however, the expenses will be allocated,
under Treasury regulations, among the Holders of the Regular Interest Securities
and the Holders of the Residual Interest Securities on a daily basis in
proportion to the relative amounts of income accruing to each Holder on that
day. In the case of a Holder of a Regular Interest Security who is an individual
or a "pass-through interest holder" (including certain pass-through entities but
not including real estate investment trusts), such expenses will be deductible
only to the extent that such expenses, plus other "miscellaneous itemized
deductions" of the Holder, exceed 2% of such Holder's adjusted gross income. In
addition, for taxable years beginning after December 31, 1990, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to
such a Holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and that is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise specified in the related
Prospectus Supplement, the expenses of the REMIC will be allocated to Holders of
the related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the Holders of residual interests. As described above, the
regular
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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 such year and thereafter. In that event,
such 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 (i) the gross income produced by the REMIC's assets, including stated
interest and any original issue discount or market discount on loans and other
assets, and (ii) deductions, including stated interest and original issue
discount accrued on Regular Interest Securities, amortization of any premium
with respect to Loans, and servicing fees and other expenses of the REMIC. A
Holder of a Residual Interest Security that is an individual or a "pass-through
interest holder" (including certain pass-through entities, but not including
real estate investment trusts) will be unable to deduct servicing fees payable
on the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such Holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
such Holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which Holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the Holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See "Taxation of Debt Securities" above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day.
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The Holders of Residual Interest Securities will generally be responsible for
the payment of any such taxes imposed on the REMIC. To the extent not paid by
such Holders or otherwise, however, such taxes will be paid out of the Trust
Fund and will be allocated pro rata to all outstanding Classes of Securities of
such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
In the opinion of Tax Counsel, the Holder of a Certificate representing a
residual interest (a "Residual Interest Security") will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which such Holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the Holders (on such
day) of the Residual Interest Securities in proportion to their respective
holdings on such day.
In the opinion of Tax Counsel, the Holder of a Residual Interest Security
must report its proportionate share of the taxable income of the REMIC whether
or not it receives cash distributions from the REMIC attributable to such income
or loss. The reporting of taxable income without corresponding distributions
could occur, for example, in certain REMIC issues in which the loans held by the
REMIC were issued or acquired at a discount, since mortgage prepayments cause
recognition of discount income, while the corresponding portion of the
prepayment could be used in whole or in part to make principal payments on REMIC
Regular Interests issued without any discount or at an insubstantial discount
(if this occurs, it is likely that cash distributions will exceed taxable income
in later years). Taxable income may also be greater in earlier years of certain
REMIC issues as a result of the fact that interest expense deductions, as a
percentage of outstanding principal on REMIC Regular Interest Securities, will
typically increase over time as lower yielding Securities are paid, whereas
interest income with respect to loans will generally remain constant over time
as a percentage of loan principal.
In any event, because the Holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a Holder may take into account currently is limited to the
Holder's adjusted basis at the end of the calendar quarter in which such loss
arises. A Holder's basis in a Residual Interest Security will initially equal
such Holder's purchase price, and will subsequently be increased by the amount
of the REMIC's taxable income allocated to the Holder, and decreased (but not
below zero) by the amount of distributions made and the amount of the REMIC's
net loss allocated to the Holder. Any disallowed loss may be carried forward
indefinitely, but may be used only to offset income of the REMIC generated by
the same REMIC. The ability of Holders of Residual Interest Securities to deduct
net losses may be subject to additional limitations under the Code, as to which
such Holders should consult their tax advisers.
Distributions. In the opinion of Tax Counsel, distributions on a Residual
Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a Holder of a Residual Interest Security. If the amount of such payment
exceeds a Holder's adjusted basis in the Residual Interest Security, however,
the Holder will recognize gain (treated as gain from the sale of the Residual
Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel, a Holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the amount
realized and such Holder's adjusted basis in the Residual Interest Security at
the time of such sale or exchange. A Holder's adjusted basis in a Residual
Certificate generally equals the cost of such Residual Certificate increased by
the taxable income of the REMIC that was included in the income of such Residual
Certificate Holder and decreased by distributions received thereon by such
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Residual Certificateholder. Except to the extent provided in regulations, which
have not yet been issued, any loss upon disposition of a Residual Interest
Security will be disallowed if the selling Holder acquires any residual interest
in a REMIC or similar mortgage pool within six months before or after such
disposition. In that event, the loss will be used to increase such 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 such Holder's federal income tax return. Further, if the
Holder of a Residual Interest Security is an organization subject to the tax on
unrelated business income imposed by Code Section 511, such Holder's excess
inclusion income will be treated as unrelated business taxable income of such
Holder. In addition, under Treasury regulations yet to be issued, if a real
estate investment trust, a regulated investment company, a common trust fund, or
certain cooperatives were to own a Residual Interest Security, a portion of
dividends (or other distributions) paid by the real estate investment trust (or
other entity) would be treated as excess inclusion income. If a Residual
Security is owned by a foreign person, excess inclusion income is subject to tax
at a rate of 30%, which may not be reduced by treaty, is not eligible for
treatment as "portfolio interest" and is subject to certain additional
limitations. See "Tax Treatment of Foreign Investors." The Small Business Job
Protection Act of 1996 has eliminated the special rule permitting Section 593
institutions ("thrift institutions") to use net operating losses and other
allowable deductions to offset their excess inclusion income from Residual
Interest Securities that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
1995, except with respect to Residual Interest Securities continuously held by a
thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual Holder. First, alternative minimum taxable income
for such residual Holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
Holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual Holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Day multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest at the beginning of each calendar quarter will equal its issue price
(calculated in a manner analogous to the determination of the issue price of a
Regular Interest), increased by the aggregate of the daily accruals for prior
calendar quarters, and decreased (but not below zero) by the amount of loss
allocated to a Holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "-- Restrictions on Ownership and
Transfer of Residual Interest Securities" and "-- Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in
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Section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
Sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income. Accordingly, the applicable Pooling and Servicing
Agreement will prohibit Disqualified Organizations from owning a Residual
Interest Security. In addition, no transfer of a Residual Interest Security will
be permitted unless the proposed transferee shall have furnished to the Trustee
an affidavit representing and warranting that it is neither a Disqualified
Organization nor an agent or nominee acting on behalf of a Disqualified
Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. 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. However, a safe harbor exists under which a transferor is presumed to
lack such knowledge provided that two conditions are met: (i) 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 (ii) 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 (i) the present value of the expected future
distributions on the Residual Interest Security at least equals the product of
the present value of the anticipated excess inclusions and the highest rate of
tax for the year in which the transfer occurs and (ii) the transferor reasonably
expects that the transferee will receive distributions from the REMIC at or
after the time at which the taxes accrue on the anticipated excess inclusions in
an amount sufficient to satisfy the accrued taxes. If a transfer of a Residual
Interest is disregarded, the transferor would be liable for any federal income
tax imposed upon taxable income derived by the transferee from the REMIC. A
similar type of limitation exists with respect to certain transfers of residual
interests by foreign persons to United States persons. See "-- Tax Treatment of
Foreign Investors."
Proposed Treasury regulations issued on February 4, 2000 (the "New Proposed
Regulations") 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 (i) any
consideration given to the transferee to acquire the interest, (ii) future
distributions on the interest, and (iii) 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.
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that the IRS recently finalized regulations (the "Final
Mark-to-Market Regulations"), which provide that a REMIC Residual Interest
Security acquired after January 3, 1995 cannot be marked-to-
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market. Prospective purchasers of a REMIC Residual Interest Security should
consult their tax advisors regarding the possible application of the Mark to
Market Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As further specified in the related Prospectus Supplement, if a
REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a Holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("Stripped Securities"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
In the opinion of Tax Counsel, each Holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the applicable Trustee and the Servicer
and similar fees (collectively, the "Servicing Fee")), at the same time and in
the same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and paid
directly its share of the Servicing Fees. In the case of Pass-Through Securities
other than Stripped Securities, such income will consist of a pro rata share of
all of the income derived from all of the Loans and, in the case of Stripped
Securities, such income will consist of a pro rata share of the income derived
from each stripped bond or stripped coupon in which the Holder owns an interest.
The Holder of a Security will generally be entitled to deduct such Servicing
Fees under Section 162 or Section 212 of the Code to the extent that such
Servicing Fees represent "reasonable" compensation for the services rendered by
the applicable Trustee and the Servicer (or third parties that are compensated
for the performance of services). In the case of a noncorporate Holder, however,
Servicing Fees (to the extent not otherwise disallowed, e.g., because they
exceed reasonable compensation) will be deductible in computing such Holder's
regular tax liability only to the extent that such fees, when added to other
miscellaneous itemized deductions, exceed 2% of adjusted gross income and may
not be deductible to any extent in computing such Holder's alternative minimum
tax liability. In addition, for taxable years beginning after December 31, 1990,
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation in taxable years beginning after 1990)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross income
over the applicable amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the Holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values, determined
as of the time of purchase of the Securities. In the typical case, the Trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
Loan as having a fair market value proportional to the share of the aggregate
Principal Balances of all of the Loans that it represents, since the Securities,
unless otherwise specified in the related Prospectus Supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a Pass-Through Security allocated to a
Loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the Principal
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Balance of the Loan allocable to the Security, the interest in the Loan
allocable to the Pass-Through Security will be deemed to have been acquired at a
discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a Holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Certificate, rather than with respect to the
Security. A Holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "-- Taxation of Debt Securities Market Discount"
and "-- Premium" above.
In the case of market discount on a Pass-Through Security attributable to
Loans originated on or before July 18, 1984, the Holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Loans, a right to receive only
principal payments on the Loans, or a right to receive certain payments of both
interest and principal. Certain Stripped Securities ("Ratio Strip Securities")
may represent a right to receive differing percentages of both the interest and
principal on each Loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. Section 1286
of the Code applies the OID rules to stripped bonds and stripped coupons. For
purposes of computing original issue discount, a stripped bond or a stripped
coupon is treated as a debt instrument issued on the date that such stripped
interest is purchased with an issue price equal to its purchase price or, if
more than one stripped interest is purchased, the ratable share of the purchase
price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees (the "excess
servicing fee") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan's
Principal Balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be treated
as market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Loan by Loan basis, which could result in some Loans being
treated as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made that take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities, which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
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unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a Holder with respect to the underlying Loans as payments on a
single installment obligation. The IRS could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the applicable Trustee intends, absent contrary authority, to report income to
Holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each non-Interest Weighted
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped principal payments; (ii) the
non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted Stripped
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities, there
is no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans' character is not carried over to the
Securities in such circumstances. Pass-Through Securities will be, and, although
the matter is not free from doubt, Stripped Securities should be considered to
represent "real estate assets" within the meaning of Section 856(c)(4)(A) of the
Code, and "loans secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; and interest income attributable to the
Securities should be considered to represent "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Section 856(c)(3)(B) of the Code. Reserves or funds underlying the Securities
may cause a proportionate reduction in the above-described qualifying status
categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, in the opinion of Tax Counsel, a Holder's tax
basis in its Security is the price such Holder pays for a Security, plus amounts
of original issue or market discount included in income and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a Security, measured by the difference between the amount realized and the
Security's basis as so adjusted, will generally be capital gain or loss,
assuming that the Security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the Security is 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 Regular Interest Security will be taxable
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as ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the Holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such Holder's holding period, over the amount of ordinary income
actually recognized by the Holder with respect to such Regular Interest
Security.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a Holder
of a REMIC Residual Security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the Holder of a Security (i) fails to furnish the applicable Trustee with its
taxpayer identification number (the "TIN"); (ii) furnishes the applicable
Trustee an incorrect TIN; (iii) fails to report properly interest, dividends or
other "reportable payments" as defined in the Code; or (iv) under certain
circumstances, fails to provide the applicable Trustee or such Holder's
securities broker with a certified statement, signed under penalty of perjury,
that the TIN provided is its correct number and that the Holder is not subject
to backup withholding. Backup withholding will not apply, however, with respect
to certain payments made to Holders, including payments to certain exempt
recipients (such as exempt organizations) and to certain Nonresidents (as
defined below). Holders should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The applicable Trustee will report to the Holders and to the Servicer for
each calendar year the amount of any "reportable payments" during such year and
the amount of tax withheld, if any, with respect to payments on the Securities.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations"), which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
2000, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
("Nonresidents"), in the opinion of Tax Counsel, such interest will normally
qualify as portfolio interest (except where (i) the recipient is a holder,
directly or by attribution, of 10% or more of the capital or profits interest in
the issuer, or (ii) the recipient is a controlled foreign corporation to which
the issuer is a related person) and will be exempt from federal income tax. Upon
receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from such interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer to withhold at a 30% rate (unless such
rate were reduced or eliminated by an applicable tax treaty) on, among other
things, interest and other fixed or determinable, annual or periodic income paid
to Nonresidents. Holders of Pass-Through Securities and Stripped Securities,
including Ratio Strip Securities, however, may be subject to withholding to the
extent that the Loans were originated on or before July 18, 1984.
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Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to Holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income does
not qualify for exemption from United States withholding tax as "portfolio
interest." It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a Holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations that would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest Holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See "-- Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST FUND AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a partnership
will not be an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the Trust
Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. In such a circumstance, Tax Counsel is, except
as otherwise provided in the related Prospectus Supplement, of the opinion that
the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
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interest" under the OID Regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
Series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of Tax Counsel, the Notes
will not be considered issued with OID. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued in
accordance with such Noteholder's method of tax accounting. Under the OID
Regulations, a Holder of a Note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are made
on the Note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a Note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A Holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis Holder of a Short-Term Note (and certain cash method
Holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis Holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis Holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a Noteholder
sells a Note, the Holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the Holder's adjusted tax
basis in the Note. The adjusted tax basis of a Note to a particular Noteholder
will equal the Holder's cost for the Note, increased by any market discount,
acquisition discount, OID and gain previously included by such Noteholder in
income with respect to the Note and decreased by the amount of bond premium (if
any) previously amortized and by the amount of principal payments previously
received by such Noteholder with respect to such Note. Any such gain or loss
will be capital gain or loss if the Note was held as a capital asset, except for
gain representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made (or
accrued) to a Noteholder who is a nonresident alien, foreign corporation or
other non-United States person (a "foreign person") generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person (i) is not actually or constructively a "10
percent shareholder" of the Trust Fund or the Seller (including a Holder of 10%
of the outstanding Certificates) or a "controlled foreign corporation" with
respect to which the Trust Fund or the Seller is a "related person" within the
meaning of the Code and (ii) provides the Trustee or other person who is
otherwise required to withhold U.S. tax with respect to the Notes with an
appropriate statement (on Form W-8 or a similar form), signed under penalties of
perjury, certifying that the beneficial owner of the Note is a foreign person
and providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
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organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax; provided, that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each Holder of a Note (other than an exempt Holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the Holder's name,
address, correct federal taxpayer identification number and a statement that the
Holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the Holder, and remit the
withheld amount to the IRS as a credit against the Holder's federal income tax
liability.
The New Regulations described herein make certain modifications to the
backup withholding and information reporting rules. The New Regulations
generally will be effective for payments made after December 31, 2000, subject
to certain transition rules. Prospective investors are urged to consult their
own tax advisors regarding the New Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Tax Counsel, the IRS successfully asserted that one or more of the Notes did
not represent debt for federal income tax purposes, the Notes might be treated
as equity interests in the Trust Fund. If so treated, the Trust Fund might be
taxable as a corporation with the adverse consequences described above (and the
taxable corporation would not be able to reduce its taxable income by deductions
for interest expense on Notes recharacterized as equity). Alternatively, and
most likely in the view of Tax Counsel, the Trust Fund might be treated as a
publicly traded partnership that would not be taxable as a corporation because
it would meet certain qualifying income tests. Nonetheless, treatment of the
Notes as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain Holders. For example, income to certain tax-
exempt entities (including pension funds) would be "unrelated business taxable
income," income to foreign Holders generally would be subject to U.S. tax and
U.S. tax return filing and withholding requirements, and individual Holders
might be subject to certain limitations on their ability to deduct their share
of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
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Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single Class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the opinion
of Tax Counsel, the Trust Fund will not be subject to federal income tax.
Rather, in the opinion of Tax Counsel, each Certificateholder will be required
to separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are allocable
to the partners in accordance with the Code, Treasury regulations and the
partnership agreement (here, the Trust Agreement and related documents). The
Trust Agreement will provide, in general, that the Certificateholders will be
allocated taxable income of the Trust Fund for each month equal to the sum of
(i) the interest that accrues on the Certificates in accordance with their terms
for such month, including interest accruing at the Pass-Through Rate for such
month and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the Loans
that corresponds to any excess of the principal amount of the Certificates over
their initial issue price; (iii) prepayment premium payable to the
Certificateholders for such month; and (iv) any other amounts of income payable
to the Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Depositor.
Based on the economic arrangement of the parties, in the opinion of Tax Counsel,
this approach for allocating Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, in the opinion of Tax Counsel, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis Holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
Holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of expenses
of the Trust Fund (including fees to the Servicer but not interest expense)
would be miscellaneous itemized deductions. Such deductions might be disallowed
to the individual in whole or in part and might result in such Holder being
taxed on an amount of income that exceeds the amount of cash actually
distributed to such Holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
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Discount and Premium. It is believed that the Loans were not issued with
OID, and, therefore, the Trust Fund should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less than
the remaining Principal Balance of the Loans at the time of purchase. If so, in
the opinion of Tax Counsel, the Loan will have been acquired at a premium or
discount, as the case may be. (As indicated above, the Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. In the opinion of Tax Counsel, under Section 708
of the Code, the Trust Fund will be deemed to terminate for federal income tax
purposes if 50% or more of the capital and profits interests in the Trust Fund
are sold or exchanged within a 12-month period. Pursuant to final Treasury
regulations issued May 9, 1997 under Section 708 of the Code, if such a
termination occurs, the Trust Fund (the "old partnership") would be deemed to
contribute its assets to a new partnership (the "new partnership") in exchange
for interests in the new partnership. Such interests would be deemed distributed
to the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the Certificates sold. A Certificateholder's tax basis in a Certificate will
generally equal the Holder's cost increased by the Holder's share of Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the Certificates
and the amount realized on a sale of a Certificate would include the Holder's
share of the Notes and other liabilities of the Trust Fund. A Holder acquiring
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Certificates, and, upon sale or other disposition of
some of the Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the Holder's share of
unrecognized accrued market discount on the Loans would generally be treated as
ordinary income to the Holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a Holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling
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Certificateholder had. The tax basis of the Trust Fund's assets will not be
adjusted to reflect that higher (or lower) basis unless the Trust Fund were to
file an election under Section 754 of the Code. In order to avoid the
administrative complexities that would be involved in keeping accurate
accounting records, as well as potentially onerous information reporting
requirements, the Trust Fund will not make such election. As a result,
Certificateholders might be allocated a greater or lesser amount of Trust Fund
income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to Holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-l information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, Holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (a) the name, address and identification number of such person,
(b) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization or any wholly owned agency or
instrumentality of either of the foregoing, and (c) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign Holders that are taxable as corporations
and 39.6% for all other foreign Holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures. In
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determining a Holder's withholding status, the Trust Fund may rely on IRS Form
W-8, IRS Form W-9 or the Holder's certification of nonforeign status signed
under penalties of perjury.
Each foreign Holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign Holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign Holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
Holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code. The New Regulations described herein make
certain modifications to the backup withholding and information reporting rules.
The New Regulations will generally be effective for payments made after December
31, 2000, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations described in "Certain
Federal Income Tax Considerations," potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities ("FASIT
Securities") effective on September 1, 1997. On February 4, 2000, the IRS and
Treasury issued proposed Treasury regulations on 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 such Series, and which Securities of such
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Series will be designated as Regular Securities, and which, if any, will be
designated as Ownership Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (a) the composition of the FASIT's assets and (b) the nature of
the Holders' interest in the FASIT are met on a continuing basis and (iii) the
Trust Fund is not a regulated company as defined in Section 851(a) of the Code.
However, the qualification as a FASIT of any Trust Fund for which a FASIT
election is made (a "FASIT Trust") 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 FASIT Trust for which a FASIT election is made
at any particular time after the issuance of securities by the FASIT 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 (the "FASIT Qualification Test").
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as REMIC regular interests if issued by a
REMIC (generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only type rate, (iii)
foreclosure property, (iv) certain hedging instruments (generally, interest and
currency rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks associated with being
the obligor on FASIT interests, (v) contract rights to acquire qualifying debt
instruments or qualifying hedging instruments, (vi) FASIT regular interests and
(vii) REMIC regular interests. Permitted assets do not include any debt
instruments issued by the Holder of the FASIT's ownership interest or by any
person related to such Holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more Classes of regular interests or (ii) a single Class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its Holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5% and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interest (i.e., certain qualified
floating rates and weighted average rates). See "Certain Federal Income Tax
Considerations -- Taxation of Debt Securities -- Variable Rate Debt Securities."
If a FASIT Security fails to meet one or more of the requirements set out
in clauses (iii), (iv) or (v) above, but otherwise meets the above requirements,
it may still qualify as a type of regular interest known as a "High-Yield
Interest." In addition, if a FASIT Security fails to meet the requirements of
clause (vi), but the interest payable on the Security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the Security, the Security also will qualify as a
High-Yield Interest. A High-Yield Interest may be held only by domestic
corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, Holders of
High-Yield
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Interests are subject to limitations on offset of income derived from such
interest. See "Certain Federal Income Tax Considerations -- FASIT
Securities -- Tax Treatment of FASIT Regular Securities -- Treatment of
High-Yield Interests."
Anti-Abuse Rule. Under proposed Treasury regulations, the 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 will 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 (the "New Arrangement") is determined under general federal
income tax principles. The holder of the FASIT Ownership Security is treated as
exchanging the New Arrangement's assets for an amount equal to their value and
gain recognized is treated as gain from a prohibited transaction that is subject
to the 100 percent tax, without exception. Loss, if any, is 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 cessation over its fair market value. If the
holder of the FASIT Ownership Security has a continuing economic interest in the
New Arrangement, 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 Arrangement, the
classification of which 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 Arrangement 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 case receipts and disbursements method. Except in the case of
FASIT Regular Securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Holder and a principal
payment on such Security will be treated as a return of capital to the extent
that the Holder's basis is allocable to that payment. FASIT Regular Securities
issued with original issue discount or acquired with market discount or premium
generally will treat interest and principal payments on such Securities in the
same manner described for REMIC Regular Securities. See "Certain Federal Income
Tax Considerations -- Taxation of Debt Securities," "-- Market Discount," and
"-- Premium" above. High-Yield Securities may be held only by fully taxable
domestic corporations, other FASITs, and certain securities dealers. Holders of
High-Yield Securities are subject to limitations on their ability to use current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "Certain Federal Income Tax Considerations -- Sale or
Exchange." In addition, if a FASIT Regular Security becomes wholly or partially
worthless as a result of Default and Delinquencies of the underlying assets, the
Holder of such Security should be allowed to deduct the loss sustained (or
alternatively be able to report a lesser amount of income). See "Certain Federal
Income Tax Considerations -- Taxation of Debt Instruments -- Effects of Default
and Delinquencies."
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FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c) (4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC Securities would
be so considered. See "Certain Federal Income Tax Considerations -- Taxation of
Debt Securities -- Status as Real Property Loans." In addition, FASIT Regular
Securities held by a financial institution to which Section 585 of the Code
applies will be treated as evidences of indebtedness for purposes of Section
582(c)(1) of the Code. FASIT Securities will not qualify as "Government
Securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of Holders of such interests, and the
ability of such Holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified Holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the Holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
Regular Security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Security and that have the same features as High-Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the Holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the Holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
Holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the Holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, Holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the Holders of High-Yield
Interests. See "Certain Federal Income Tax Considerations -- Treatment of
High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the Holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
Holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded semiannually.
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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 regular interest 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 Security Act of 1974, as amended ("ERISA"), and Section 4975 of the
Code, which apply only to Securities of a Series that are not divided into
subclasses. If Securities are divided into subclasses, the related Prospectus
Supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to such Securities and such subclasses of
Securities.
ERISA and Section 4975 of the Code impose requirements on employee benefit
plans and on certain other retirement plans and arrangements, including certain
individual retirement accounts and annuities, Keogh plans and collective
investment funds and separate accounts in which such plans, accounts or
arrangements are invested (collectively "Plans") subject to ERISA or to Section
4975 of the Code and on persons who are fiduciaries with respect to such Plans.
Generally, ERISA applies to investments made by Plans. Among other things, ERISA
requires in general that the assets of Plans be held in trust and that the
trustee, or other duly authorized fiduciary, have exclusive authority and
discretion to manage and control the assets of such Plans. ERISA also imposes
certain duties on persons who are fiduciaries of Plans. Under ERISA, any person
who exercises any discretionary authority or control respecting the management
or disposition of the assets of a Plan is considered to be a fiduciary of such
Plan (subject to certain exceptions not here relevant). Certain employee benefit
plans, such as governmental plans (as defined in ERISA Section 3(32)) and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in ERISA Section 3(33)), are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Securities without regard
to the ERISA considerations described above and below, subject to the provisions
of applicable 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.
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On January 5, 2000, the United States Department of Labor (the "DOL")
issued final regulations under Section 401(c) of ERISA describing a safe harbor
for insurers that issued 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 (a)
disclose certain specified information to investing Plan fiduciaries initially
and on an annual basis; (b) allow Plans to terminate or discontinue a policy on
90 days' notice to the insurer, and to elect, without penalty, (i) a lump-sum
payment, or (ii) annual installment payments over a ten-year period, with
interest; and (c) 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 ("Parties in
Interest") having certain specified relationships to a Plan, and impose
additional prohibitions where Parties in Interest are fiduciaries with respect
to such Plan. Certain Parties in Interest that participate in a prohibited
transaction may be subject to excise taxes imposed pursuant to Section 4975 of
the Code, or a penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory, regulatory or administrative exemption is available.
On November 13, 1986, the DOL issued final regulations (Labor Reg. Section
2510.3-101) concerning the definition of what constitutes the assets of a Plan
(the "Plan Asset Regulation"). Under this regulation, the underlying assets and
properties of corporations, partnerships, trusts and certain other entities in
which a Plan acquires an "equity" interest could be deemed for purposes of ERISA
to be assets of the investing Plan in certain circumstances, unless certain
exceptions apply.
Under the Plan Asset Regulation, the term "equity" interest is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the Trust Fund issues Notes that are not treated as equity
interests in the Trust Fund for purposes of the Plan Asset Regulation, a Plan's
investment in such Notes would not cause the assets of the Trust to be deemed
Plan assets. However, the Seller, the Servicer, the Special Servicer, the Backup
Servicer, the Indenture Trustee, the Owner Trustee, 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
such parties (or any affiliates thereof) has investment authority might be
deemed to be a violation of the prohibited transaction rules of ERISA and the
Code for which no exemption may be available. Accordingly, Notes may not be
purchased using the assets of any Plan if the Seller, the Servicer, the Special
Servicer, the Backup Servicer, the Indenture Trustee, the Owner Trustee, the
Underwriter, the Depositor or any of their affiliates (a) has investment or
administrative discretion with respect to such Plan assets; (b) has authority or
responsibility to give, or regularly gives, investment advice with respect to
such Plan assets for a fee and pursuant to an agreement of understanding that
such advice (i) will serve as a primary basis for investment decisions with
respect to such Plan assets and (ii) will be based on the particular investment
needs for such Plan; or (c) is an employer maintaining or contributing to such
Plan.
In addition, the Trust Fund, any underwriter, trustee, servicer,
administrator or producer of credit support or their affiliates might be
considered or might become Parties in Interest with respect to a Plan. Also, any
holder of certificates 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
such holder. In either case, the acquisition or holding of Notes by or on behalf
of such a Plan could be considered to give rise to a prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
exemptions such as: Prohibited Transaction Class Exemption ("PTCE") 84-14, which
exempts certain transactions effected on behalf of a Plan by a "qualified
professional asset manager"; PTCE 90-1, which exempts certain transactions
involving insurance company pooled separate accounts; PTCE 91-38, which exempts
certain transactions involving bank collective investment funds; PTCE 95-60,
which exempts certain transactions involving insurance company general accounts;
or PTCE 96-23, which exempts certain transactions effected on behalf of a Plan
by certain "in-house asset managers." There can be no assurance that any of
these class exemptions will apply with
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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. Each prospective purchaser or transferee of
a Note that is a Plan or a person acting on behalf or investing the assets of a
Plan shall be required to represent (or, with respect to any transfer of a
beneficial interest in a Global Note, shall be deemed to represent) to the
Indenture Trustee and the Note Registrar that the relevant conditions for
exemptive relief under at least one of the foregoing exemptions have been
satisfied.
The Plan Asset Regulation provides that, generally, the assets of a
corporation or partnership in which a Plan invests will not be deemed for
purposes of ERISA to be assets of such Plan if the equity interest acquired by
the investing Plan is a publicly-offered security, or if equity participation by
benefit plan investors is not significant. In general, publicly-offered
security, as defined in the Plan Asset Regulation, is a security that is widely
held, freely transferable and registered under the Exchange Act. 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 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 Regulation 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 Fund, then the assets of the Trust Fund
would be considered to be assets of the Plan. Because the Loans held by the
Trust Fund may be deemed Plan assets of each Plan that purchases an equity
interest, an investment in the equity interests by a Plan might be a prohibited
transaction under Sections 406 and 407 of 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 Fund to constitute prohibited transactions, unless
a statutory or administrative exemption applies.
The DOL issued to Bear, Stearns & Co. Inc., an individual exemption
(Prohibited Transaction Exemption 90-30; Exemption Application No. D-8207, 55
Fed. Reg. 21461 (1990)) (the "Underwriter Exemption"), which exempts from the
application of the prohibited transaction rules transactions relating to (1) the
acquisition, sale and holding by Plans of certain certificates representing an
interest in asset-backed pass-through trusts that hold certain types of
receivables or obligations and with respect to which Bear, Stearns & Co. Inc. is
the underwriter, or the manager or co-manager of an underwriting syndicate.
The 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:
(1) The acquisition of the certificates by a Plan is on terms
(including the price for such 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;
(2) The rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the same trust fund;
(3) The certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from any of Duff & Phelps, Inc., Fitch IBCA, Inc.,
Moody's Investors Service, Inc. and Standard & Poor's Ratings Group (each,
a "rating agency");
(4) The trustee is not an affiliate of the underwriters, the
depositor, the servicers, 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, or any of their respective
affiliates (together with the trustee, the "Restricted Group");
(5) The sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting or
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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
agreements and reimbursement of the servicers' reasonable expenses in
connection therewith; and
(6) The Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933, as amended.
Moreover, the 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: (i) such person (or its affiliate) is not an obligor with respect
to more than five percent of the fair market value of the obligations or
receivables contained in the trust; (ii) 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); (iii) in the case of an acquisition in connection
with the initial issuance of certificates, at least fifty percent of each class
of certificates in which Plans have invested is acquired by persons independent
of the Restricted Group and at least fifty percent of the aggregate interest in
the trust fund is acquired by persons independent of the Restricted Group; (iv)
a Plan's investment in certificates of any class does not exceed twenty-five
percent of all of the certificates of that class outstanding at the time of the
acquisition; and (v) immediately after the acquisition, no more than twenty-five
percent 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.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Underwriter Exemption, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans or other secured receivables supporting payments to
certificateholders, and having a value equal to no more than twenty-five percent
(25%) of the total principal amount of the certificates being offered by the
trust, to be transferred to the trust within a 90-day or three-month period
following the closing date (the "Funding Period"), instead of requiring that all
such obligations be either identified or transferred on or before the closing
date. The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to the
total principal amount of the certificates being offered (the "Funding
Limit") must not exceed twenty-five percent (25%).
(2) All obligations transferred after the closing date (the "additional
obligations") must meet the same terms and conditions for eligibility
as the original obligations used to create the trust, which terms and
conditions have been approved by 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 certificate holders or by a rating
agency.
(3) The transfer of such additional obligations to the trust during the
Funding Period must not result in the certificates to be covered by the
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.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the obligations in the trust
at the end of the 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.
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(5) In order to insure that the characteristics of the additional
obligations are substantially similar to the original obligations which
were transferred to the Trust Fund:
(i) the characteristics of the additional obligations must be monitored
by an insurer or other credit support provider that is independent
of the depositor; or
(ii) an independent accountant retained by the depositor must provide
the depositor with a letter (with copies provided to each rating
agency rating the certificates, the related underwriter and the
related trustee) stating whether or not the characteristics of the
additional obligations conform to the characteristics described in
the related prospectus or prospectus supplement and/or pooling and
servicing agreement. In preparing such letter, the independent
accountant must use the same type of procedures as were applicable
to the obligations transferred to the trust as of the closing date.
(6) The period of pre-funding must end no later than three months or 90
days after the closing date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the
pooling and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in certain permitted investments.
(8) The related prospectus or Prospectus Supplement must describe:
(i) any pre-funding account and/or capitalized interest account used in
connection with a pre-funding account;
(ii) the duration of the period of pre-funding;
(iii) the percentage and/or dollar amount of the 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.
(9) The related pooling and servicing agreement must describe the permitted
investments for the pre-funding account and/or capitalized interest
account and, if not disclosed in the related prospectus or Prospectus
Supplement, the terms and conditions for eligibility of Additional
Obligations.
The DOL has proposed amendments to the Underwriter Exemption (the "Proposed
Amendments") that, if finalized in current form, generally will be effective as
of August 23, 2000. Among other things, it is anticipated that the amended
Underwriter Exemption would permit Plans to purchase subordinated certificates
rated in any of the four highest ratings categories (provided that all other
requirements of the Underwriter Exemption are met). It is not certain if and
when the Proposed Amendments will be issued in final form, and it is not certain
that the Proposed Amendments, if finalized, will contain the same relief as is
currently proposed. Plan fiduciaries should, and other potential investors who
may be analyzing the potential liquidity of their investment may wish to,
consult with their advisors regarding the Proposed Amendments
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.
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
such investment. Moreover, each Plan fiduciary should determine whether under
the general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
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LEGAL MATTERS
The legality of the Securities of each Series, including certain material
federal income tax consequences with respect thereto, will be passed upon for
the Depositor by Brown & Wood LLP, New York, New York or Morgan, Lewis & Bockius
LLP, New York, New York.
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 such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the SEC at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. In addition, the SEC
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Depositor, that file electronically with the Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus incorporates by reference all documents and reports filed
on behalf of the Depositor 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 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 such Classes of Securities, other than the exhibits to such
documents (unless those 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 Certificates.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
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.
RATING
It is a condition to the issuance of the Securities of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally
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recognized statistical rating agency or agencies (each, a "Rating Agency")
specified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Trust Fund assets and any credit enhancement with respect to the
related Class and will reflect such Rating Agency's assessment solely of the
likelihood that the related Holders will receive payments to which such Holders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ from
that originally anticipated or the likelihood of early optional termination of
the Series of Securities. Such rating should not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agencies in the future if in their judgment circumstances so warrant.
In addition to being lowered or withdrawn due to any erosion in the adequacy of
the value of the Trust Fund assets or any credit enhancement with respect to a
Series, such rating might also be lowered or withdrawn because of, among other
reasons, an adverse change in the financial or other condition of a credit
enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating Classes of such Series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to each
such Class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of mortgage loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Loans. No assurance can be given that values of any Properties have remained
or will remain at their levels on the respective dates of origination of the
related Loans. If the residential real estate markets should experience an
overall decline in property values such that the Principal Balances of the Loans
in a particular Trust Fund and any secondary financing on the related Properties
become equal to or greater than the value of such Properties, the rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry. In additional, adverse economic
conditions (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal of and interest
on the Loans and, accordingly, the rates of delinquencies, foreclosures and
losses with respect to any Trust Fund. To the extent that such losses are not
covered by credit enhancement, such losses will be borne, at least in part, by
the Holders of one or more Classes of the Securities of the related Series.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage-related securities" within the meaning
of the Secondary Market Mortgage Enhancement Act. 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.
79
142
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Bear, Stearns &
Co. Inc. ("Bear Stearns") or one or more other firms that may be designated at
the time of each offering of such Securities. The participation of Bear Stearns
in any offering will comply with Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc. The Prospectus Supplement relating to
each Series of Securities will set forth the specific terms of the offering of
such Series of Securities and of each Class within such Series, the names of the
underwriters, the purchase price of the Securities, the proceeds to the
Depositor from such sale, any securities exchange on which the Securities may be
listed, and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to certain dealers. The place and time of delivery of each Series of
Securities will also be set forth in the Prospectus Supplement relating to such
Series. Bear Stearns is an affiliate of the Depositor.
80
143
INDEX OF DEFINED TERMS
additional obligations.............. 84
Advances............................ 27
Agreements.......................... 8
Amortizable Bond Premium
Regulations....................... 59
Asset Value......................... 10
Assumed Reinvestment Rate........... 10
Available Interest Amount........... 11
Capitalized Interest Account........ 22
Cash Flow Bond Method............... 67
CERCLA.............................. 45
Certificates........................ 8
Class............................... 9
Closed-End Loans.................... 14
Code................................ 12
Collection Account.................. 9, 26
Contingent Payment Regulations...... 56
Custodian........................... 33
Cut-off Date........................ 14
Debt Securities..................... 55
Deleted Primary Asset............... 35
Depositor........................... 8
Depositor Securities................ 53
Disqualified Organization........... 63
Distribution Account................ 9
Distribution Date................... 9
DOL................................. 81
Eligible Investments................ 21
Enhancement......................... 13, 22
EPA................................. 45
ERISA............................... 81
Escrow Account...................... 25
Events of Default................... 37, 38
FASIT............................... 54
FASIT Qualification Test............ 77
FASIT Securities.................... 76
FHA................................. 16
Final Mark-to-Market Regulations.... 65
Final Scheduled Distribution Date... 11
Funding Limit....................... 84
Funding Period...................... 84
Garn-St. Germain Act................ 48
High-Yield Interest................. 78
Holder.............................. 9
Holders............................. 41
Home Improvement Contracts.......... 10, 16
Home Improvements................... 10, 16
HUD................................. 17
Indenture........................... 8
Installment Sales Contract.......... 51
Insurance Proceeds.................. 27
Interest Weighted Securities........ 58
IRS................................. 56
Liquidation Proceeds................ 26
Loans............................... 10
Mortgage............................ 33
Mortgage Loans...................... 9
New Regulations..................... 68
Nonresidents........................ 69
Notes............................... 8
OID................................. 55
OID Regulations..................... 55
OTS................................. 49
Parties in Interest................. 81
Pass-Through Securities............. 65
Pay-Through Security................ 57
Plan Asset Regulation............... 81
Plans............................... 81
Pool Insurance Policy............... 23
Pooling and Servicing Agreement..... 8
Pre-Funded Amount................... 21
Pre-Funding Account................. 21
Pre-Funding Period.................. 21
Prepayment Assumption............... 57
Primary Assets...................... 9
Private Securities.................. 10
Property............................ 16
PS Agreement........................ 19
PS Servicer......................... 19
PS Sponsor.......................... 19
PS Trustee.......................... 19
PTCE................................ 82
Qualifying Substitute Primary
Asset............................. 35
81
144
Rating Agency....................... 9, 86
Ratio Strip Securities.............. 66
Regular Interest Securities......... 54
Regular Interests................... 59
REMIC............................... 12, 54
REO Property........................ 13
Reserve Fund........................ 9, 24
Residual Interest Security.......... 61
Residual Interests.................. 59
Revolving Credit Line Loans......... 14
Revolving Mortgage Loans............ 14
Scheduled Payments.................. 26
Securities.......................... 8
Seller.............................. 8
Servicing Fee....................... 26, 65
Short-Term Note..................... 70
Single Family Property.............. 15
Special Redemption Date............. 11
Stripped Securities................. 65
Tax Counsel......................... 53
TIN................................. 68
Title V............................. 49
Trust Agreement..................... 8, 13
Trust Fund.......................... 8
Trustee............................. 8
U.S. Person......................... 54
UCC................................. 50
Underlying Loans.................... 10, 19
Underwriter Exemption............... 83
VA.................................. 16
82
145
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
OFFERED HEREBY, NOR AN OFFER OF THE SECURITIES IN ANY STATE OR JURISDICTION IN
WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PAGE
--------------------- ----
Summary of Terms...................................... S-3
Risk Factors.......................................... S-7
Use of Proceeds....................................... S-15
Description of the Trust.............................. S-15
The Home Loan Pool.................................... S-16
The Transferor........................................ S-23
The Servicer.......................................... S-23
Description of the Notes.............................. S-27
Description of the Transfer and Servicing
Agreements.......................................... S-38
Prepayment and Yield Considerations................... S-41
Certain Federal Income Tax Consequences............... S-55
ERISA Considerations.................................. S-55
Underwriting.......................................... S-56
Legal Investment Matters.............................. S-57
Ratings............................................... S-57
Legal Opinions........................................ S-57
Index of Terms........................................ S-58
Global Clearance Settlement and Tax Documentation
Procedures.......................................... A-1
PROSPECTUS
Prospectus Supplement.................................
Available Information................................. 86
Incorporation of Certain Information by Reference..... 86
Risk Factors.......................................... 3
Description of the Securities......................... 8
The Trust Funds....................................... 13
Enhancement........................................... 22
Servicing of Loans.................................... 25
The Agreements........................................ 32
Certain Legal Aspects of the Loans.................... 42
Certain Federal Income Tax Consequences............... 53
ERISA Considerations.................................. 81
Legal Investment...................................... 88
Plan of Distribution.................................. 88
Use of Proceeds....................................... 53
Legal Matters......................................... 86
Index of Terms........................................ 89
The Depositor......................................... 53
State Tax Considerations.............................. 76
FASIT Securities...................................... 76
Financial Information................................. 86
Rating................................................ 87
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$214,951,000
COUNTRYWIDE HOME LOAN TRUST 2001-HLV1
BAY VIEW BANK, N.A.
TRANSFEROR
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
LITTON LOAN SERVICING LP
SERVICER
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PROSPECTUS SUPPLEMENT
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COUNTRYWIDE SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
JANUARY 26, 2001
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