Filed pursuant to Rule No. 424(b)(5)
Registration No.: 333-21071
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 21, 1997)
LOGO
EMPIRE FUNDING
EMPIRE FUNDING HOME LOAN OWNER TRUST 1997-2
$16,500,000 CLASS A-1 8.85% HOME LOAN ASSET BACKED NOTES
$16,500,000 CLASS A-2 7.78% HOME LOAN ASSET BACKED NOTES
$25,500,000 CLASS A-3 7.78% HOME LOAN ASSET BACKED NOTES
$11,000,000 CLASS A-4 7.67% HOME LOAN ASSET BACKED NOTES
$24,016,000 CLASS A-5 7.96% HOME LOAN ASSET BACKED NOTES
$7,000,000 CLASS A-6 7.74% HOME LOAN ASSET BACKED NOTES
$16,728,000 CLASS M-1 7.80% HOME LOAN ASSET BACKED NOTES
$15,683,000 CLASS M-2 8.03% HOME LOAN ASSET BACKED NOTES
FINANCIAL ASSET SECURITIES CORP.,
AS DEPOSITOR
EMPIRE FUNDING CORP.,
AS TRANSFEROR AND SERVICER
HOME LOAN ASSET BACKED NOTES, SERIES 1997-2
DISTRIBUTIONS PAYABLE ON THE 25TH DAY OF EACH MONTH, COMMENCING IN JUNE 1997
The Empire Funding Home Loan Owner Trust 1997-2 (the "TRUST") will be formed
pursuant to a trust agreement dated as of May 1, 1997 (the "TRUST AGREEMENT")
and entered into by Financial Asset Securities Corp., as depositor (the
"DEPOSITOR"), Wilmington Trust Company, as owner trustee (the "OWNER
TRUSTEE"), First Bank National Association, as co-owner trustee (in such
capacity, the "CO-OWNER TRUSTEE") and Empire Funding Corp. ("EMPIRE FUNDING").
The Trust will issue $132,927,000 aggregate principal amount of Home Loan
Asset Backed Notes (the "NOTES") in the classes set forth above (each, a
"CLASS") pursuant to an indenture to be dated as of May 1, 1997 (the
"INDENTURE"), between the Trust and First Bank National Association, as
indenture trustee (in such capacity, the "INDENTURE TRUSTEE"). The Trust also
will issue Home Loan Asset Backed Certificates (the "CLASS B CERTIFICATES")
and instruments evidencing the residual interest in the Trust (the "RESIDUAL
INTEREST INSTRUMENTS"). The Notes are referred to herein as the "OFFERED
SECURITIES" and the Notes, Class B Certificates and the Residual Interest
Instruments are collectively referred to herein as the "SECURITIES." Only the
Notes are offered hereby.
The Trust will consist primarily of a pool (the "POOL") of closed-end,
fixed-rate home loans (the "LOANS") as described herein under "The Pool" which
are either unsecured or secured by first- and junior-lien mortgages, deeds of
trust or other similar security instruments (the "MORTGAGES"). Loans having an
aggregate unpaid principal balance as of May 1, 1997 of approximately
$104,432,425.04 (the "INITIAL LOANS") have been designated for inclusion in
the Pool. On or prior to July 31, 1997, the Trust may purchase additional
loans (the "SUBSEQUENT LOANS") having an aggregate unpaid principal balance of
up to $34,767,574.96 with amounts on deposit in an account (the "PRE-FUNDING
ACCOUNT") established for such purpose on the Closing Date.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
OFFERED SECURITIES, SEE THE INFORMATION HEREIN UNDER "RISK FACTORS" BEGINNING
ON PAGE S-14 AND IN THE PROSPECTUS BEGINNING ON PAGE 11.
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THE OFFERED SECURITIES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRUST ONLY
AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, TRANSFEROR,
SERVICER, OWNER TRUSTEE OR INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT
TO THE EXTENT PROVIDED HEREIN. NEITHER THE LOANS NOR THE OFFERED SECURITIES
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THE OFFERED SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
----------------
GREENWICH CAPITAL MARKETS, INC. CONTIFINANCIAL SERVICES CORPORATION
May 23, 1997
Distributions on the Offered Securities will be made on the 25th day of
each month or, if such day is not a business day, the next succeeding business
day (each, a "DISTRIBUTION DATE"), beginning in June 1997. The Notes will be
secured by the assets of the Trust pursuant to the Indenture. Interest on the
Classes of Notes will accrue at the above-specified fixed interest rates per
annum. On each Distribution Date, the holders of the Notes will be entitled to
receive, from and to the extent that funds are available therefor in the Note
Distribution Account, distributions with respect to interest and principal
calculated as described herein under "Description of the Offered Securities--
Distributions on the Offered Securities". Distributions of interest and
principal on the Class M-1 and Class M-2 Notes (the "MEZZANINE NOTES") will be
subordinated in priority to distributions of interest and principal,
respectively, on the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and
Class A-6 Notes (the "SENIOR NOTES") as described herein. Distributions on the
Class B Certificates will be subordinated in priority to payments due on the
Notes to the extent described herein.
The yields to maturity of any Offered Securities may vary from the
anticipated yields to the extent such Offered Securities are purchased at a
discount or a premium and to the extent the rate and timing of payments thereof
are sensitive to the rate and timing of principal payments (including
prepayments) of the Loans. Prospective purchasers of the Offered Securities
should consider, in the case of any Offered Securities to be purchased at a
discount, the risk that a lower than anticipated rate of principal payments
could result in an actual yield that is lower than the anticipated yield and, in
the case of any Offered Securities to be purchased at a premium, the risk that a
faster than anticipated rate of principal payments could result in an actual
yield that is lower than the anticipated yield.
To the extent statements contained herein do not relate to historical or
current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the distributions to be made on, or the yield of, the Offered
Securities, which risks and uncertainties are discussed under "Risk Factors" and
"Prepayment and Yield Considerations" herein. As a consequence, no assurance can
be given as to the actual distributions on, or the yield of, any Class of
Offered Securities.
There is currently no secondary market for the Offered Securities and there
can be no assurance that such a market will develop or, if it does develop, that
it will continue.
The Offered Securities are being offered by the Underwriters from time to
time in negotiated transactions or otherwise at varying prices to be determined
at the time of sale. Proceeds to the Depositor are expected to be
$140,486,965.31, plus accrued interest from May 1, 1997 to, but not including,
May 29, 1997 (the "CLOSING DATE"), before deducting issuance expenses payable by
the Depositor.
The Offered Securities are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to approval of certain legal matters by counsel. It is expected that delivery of
the Offered Securities will be made in book-entry form only through the
facilities of The Depository Trust Company (the "DEPOSITORY") on or about the
Settlement Date.
---------------------------------
This Prospectus Supplement does not contain complete information about the
offering of the Offered Securities. Additional information is contained in the
Prospectus dated May 21, 1997 (the "PROSPECTUS") which accompanies this
Prospectus Supplement and prospective purchasers are urged to read both this
Prospectus Supplement and the Prospectus in full. Sales of the Offered
Securities may not be consummated unless the purchaser has received both this
Prospectus Supplement and the Prospectus.
Upon written request, Empire Funding will make available its most recent
audited financial statements. Requests should be directed to Empire Funding
Corp., 9737 Great Hills Trail, Austin, Texas 78759 (telephone number (512) 427-
4004), Attention: Richard N. Steed, Senior Vice President.
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Securities, whether or not participating
in this distribution, may be required to deliver a Prospectus Supplement and the
Prospectus. This is in addition to the obligation of dealers to deliver the
Prospectus Supplement and the Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Securities and Exchange Commission (the "COMMISSION")
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, on or subsequent to the date of this Prospectus Supplement and
prior to the termination of the offering of the Offered Securities. The
Depositor will provide without charge to each person to whom this Prospectus
Supplement and the Prospectus are delivered, on request of such person, a copy
of any or all of the documents incorporated herein by reference other than the
exhibits to such documents (unless such exhibits are specifically incorporated
by reference in such documents). Requests should be made in writing to Craig A.
Braun, Vice President of Financial Asset Securities Corp., at 600 Steamboat
Road, Greenwich, Connecticut 06830.
AVAILABLE INFORMATION
In addition to the locations specified under "Available Information" in the
accompanying Prospectus, the Commission maintains a World Wide 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.
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SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and in the accompanying Prospectus. Certain capitalized
terms used herein are defined elsewhere in this Prospectus Supplement or in the
Prospectus.
Issuer................... Empire Funding Home Loan Owner Trust 1997-2 (the
"TRUST" or the "ISSUER"), a Delaware business trust,
will be established pursuant to a trust agreement
dated as of May 1, 1997 (the "TRUST AGREEMENT"), among
the Depositor, the Owner Trustee, the Co-Owner Trustee
and Empire Funding Corp.
Depositor................ Financial Asset Securities Corp. (the "DEPOSITOR"), a
Delaware corporation. The Depositor is an indirect
limited purpose finance subsidiary of National
Westminster Bank Plc and an affiliate of Greenwich
Capital Markets, Inc. See "The Depositor" in the
Prospectus and "Method of Distribution" herein. None
of the Depositor, National Westminster Bank Plc or any
of their affiliates or any other person or entity will
insure or guarantee or otherwise be obligated with
respect to the Offered Securities.
Transferor and Servicer.. Empire Funding Corp. ("EMPIRE FUNDING"), an Oklahoma
corporation. Pursuant to a Home Loan Purchase
Agreement dated as of May 1, 1997 (the "HOME LOAN
PURCHASE AGREEMENT"), among Empire Funding, EFC
Securitized Assets, L.C. ("EFC") and the Depositor,
Empire Funding (in such capacity, the "TRANSFEROR")
will sell the Loans to EFC which will simultaneously
sell the Loans to the Depositor. Pursuant to a Sale
and Servicing Agreement to be dated as of May 1, 1997
(the "SALE AND SERVICING AGREEMENT") among the Trust,
the Depositor, Empire Funding, the Indenture Trustee
and the Co-Owner Trustee, the Depositor will sell the
Loans to the Trust. Empire Funding will service the
Loans (in such capacity, the "SERVICER") pursuant to
the Sale and Servicing Agreement.
Indenture Trustee,
Co-Owner Trustee and
Custodian............... First Bank National Association, a national banking
association, as the indenture trustee (in such
capacity, the "INDENTURE TRUSTEE") under an Indenture
to be dated as of May 1, 1997 (the "INDENTURE")
between the Trust and the Indenture Trustee, as the
co-owner trustee (in such capacity, the "CO-OWNER
TRUSTEE") under the Trust Agreement, and as the
custodian (the "CUSTODIAN") under the Custodial
Agreement to be dated as of May 1, 1997 among the
Owner Trustee, the Indenture Trustee and the
Custodian.
Owner Trustee............ Wilmington Trust Company, a Delaware banking
corporation, as owner trustee under the Trust
Agreement (the "OWNER TRUSTEE").
Closing Date............. May 29, 1997.
Cut-Off Date............. With respect to the Initial Loans, the close of
business on April 30, 1997. With respect to the
Subsequent Loans (as defined herein), the date
specified as such in the related Subsequent Transfer
Agreement (as defined herein).
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Distribution Date........ The 25th day of each month or, if such day is not a
Business Day, the next succeeding Business Day,
commencing in June 1997 (each, a "DISTRIBUTION DATE").
Due Period............... With respect to a Distribution Date, the calendar
month immediately preceding such Distribution Date
(each, a "DUE PERIOD").
Determination Date....... The 14th calendar day of each month or, if such day is
not a Business Day, the immediately preceding Business
Day (each, a "DETERMINATION DATE").
Record Date.............. The last Business Day of the month immediately
preceding the month in which each Distribution Date
occurs (each, a "RECORD DATE").
Securities Issued:
The Notes................ The Trust will issue the Classes of Notes pursuant to
the Indenture in the respective aggregate initial
principal amounts specified on the cover hereof (each
such aggregate principal amount being the "ORIGINAL
CLASS PRINCIPAL BALANCE" for the related Class). The
Notes will be secured by the assets of the Trust
pursuant to the Indenture and, except as described
herein, will be senior in right of payment to the
Class B Certificates and the Residual Interest
Instruments. In addition, as described herein, the
Class A-1, Class A-2, Class A-3, Class A-4, Class A-5
and Class A-6 Notes (the "SENIOR NOTES") will also be
senior in right of payment to the Class M-1 and Class
M-2 Notes (the "MEZZANINE NOTES"). Interest will
accrue on the Classes of Notes at the respective
interest rates per annum set forth on the cover hereof
(as to each such Class, the "NOTE INTEREST RATE");
provided, however, that interest on the Class A-5
Notes will accrue at 8.46% per annum commencing on the
first day of the month in which the Clean-up Call Date
(as defined herein) occurs. Interest on the Notes will
accrue on the basis of a 360-day year consisting of
twelve 30-day months. See "Description of the Offered
Securities--Distributions on the Offered Securities"
herein.
The Class B
Certificates........... The Trust will issue the Class B Certificates
pursuant to the Trust Agreement in the Original Class
Principal Balance of $6,273,000. The Class B
Certificates are not being offered hereby. On the
Closing Date, the Original Class Principal Balance of
the Class B Certificates will equal the excess of the
sum of the Original Pool Principal Balance and the
Original Pre-Funded Amount (as defined herein) over
the aggregate of the Original Class Principal Balances
of all Classes of Notes. The Class B Certificates will
represent undivided ownership interests in the Trust.
Interest on the Class B Certificates will accrue at a
pass-through rate of 8.68% per annum (the "CLASS B
PASS-THROUGH RATE"). Interest on the Class B
Certificates will accrue on the basis of a 360-day
year consisting of twelve 30-day months. Payments of
interest on the Class B Certificates will generally be
subordinate in right of payment of interest on the
Notes, and payments of principal of the Class B
Certificates will generally be subordinate in right of
payment of principal of the Notes, but each will be
senior in right of payment to
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the Residual Interest Instruments. See "Description of
the Offered Securities--Distributions on the Offered
Securities" herein.
Residual Interest
Instruments............ The Trust also will issue an instrument
evidencing the residual interest in the assets of the
Trust (the "RESIDUAL INTEREST INSTRUMENTS"), which are
not being offered hereby. The Residual Interest
Instruments will have no Class Principal Balance and
will be subordinate in right of payment to the Offered
Securities and the Class B Certificates.
Priority of
Distributions:
Regular Distribution
Amount................... The Regular Distribution Amount (as defined herein)
will be distributed on each Distribution Date in the
following order of priority:
(i) to pay accrued and unpaid interest on the
Senior Notes pro rata;
(ii) sequentially, to pay accrued and unpaid
interest on the Class M-1 Notes, the Class M-2
Notes and the Class B Certificates, in that order;
(iii) first (A) to pay as principal of the Class
A-6 Notes until the Class Principal Balance
thereof is reduced to zero, an amount equal to the
Class A-6 Priority Principal Distribution Amount
and second (B) sequentially, to pay as principal
of 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, the amount necessary to reduce
the aggregate Class Principal Balance of the
Senior Notes to the Senior Optimal Principal
Balance;
(iv) sequentially, to pay as principal of the
Class M-1 and Class M-2 Notes, in that order,
until the Class Principal Balances thereof are
reduced to the Class M-1 Optimal Principal Balance
and Class M-2 Optimal Principal Balance,
respectively;
(v) to pay as principal of the Class B
Certificates, until the Class Principal Balance
thereof is reduced to the Class B Optimal
Principal Balance;
(vi) to the Class M-1 Notes, the Class M-2 Notes
and the Class B Certificates, in that order, their
respective Loss Reimbursement Deficiencies, if
any; and
(vii) any remaining amount to the Residual
Interest Instruments.
Excess Spread............ The Excess Spread (as defined herein) will be
distributed on each Distribution Date in the following
order of priority (after giving effect to all
distributions specified above under "--Regular
Distribution Amount"): (i) in an amount equal to the
Overcollateralization Deficiency Amount, if any, as
follows: (A) as principal to the Class A-6 Notes until
the Class Principal Balance thereof is reduced to
zero, an amount equal to the Class A-6 Priority Excess
Spread Distribution Amount; (B) sequentially, as
principal of 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
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thereof are reduced to zero, the amount necessary to
reduce the aggregate Class Principal Balance of the
Senior Notes to the Senior Optimal Principal Balance;
(C) sequentially, as principal of the Class M-1 and
Class M-2 Notes, in that order, until the respective
Class Principal Balances thereof are reduced to the
Class M-1 Optimal Principal Balance and Class M-2
Optimal Principal Balance, respectively; and (D) as
principal of the Class B Certificates, until the Class
Principal Balance thereof is reduced to the Class B
Optimal Principal Balance; (ii) to the Class M-1
Notes, the Class M-2 Notes and the Class B
Certificates, in that order, their respective Loss
Reimbursement Deficiencies, if any; and (iii) any
remaining amount to the Residual Interest Instruments.
Final Scheduled
Distribution Date...... The Class Principal Balance of each Class of Offered
Securities, to the extent not previously paid, will be
payable in full on the Distribution Date in September
2023 (as to each such Class, the "FINAL SCHEDULED
DISTRIBUTION DATE"), although it is anticipated that
the actual final Distribution Date for each such Class
will occur significantly earlier than the Final
Scheduled Distribution Date.
Form and Registration
of the
Offered Securities..... The Offered Securities will be issued only in book-
entry form. Persons acquiring beneficial ownership
interests in the Offered Securities ("SECURITY
OWNERS") will hold such Offered Securities through the
book-entry facilities of The Depository Trust Company
("DTC"). Transfers within DTC will be in accordance
with the usual rules and operating procedures of DTC.
So long as each Class of Offered Securities is in
book-entry form, each such Class of Offered Securities
will be evidenced by one or more certificates
registered in the name of the nominee of DTC. The
interests of such Security Owners will be represented
by book-entries on the records of DTC and
participating members thereof. No Security Owner will
be entitled to receive a definitive certificate
representing such person's interest, except in the
event that Definitive Securities are issued under the
limited circumstances described herein. All references
in this Prospectus Supplement to any Class of Offered
Securities reflect the rights of the Security Owners
of such Class only as such rights may be exercised
through DTC and its participating members so long as
such Class of Offered Securities is held by DTC. See
"Risk Factors -- Book-Entry Registration" in the
Prospectus and "Description of the Securities -- Book-
Entry Registration of Securities" in the Prospectus.
The Security Owners' interests in each Class of
Offered Securities will be held only in minimum
denominations of $25,000 and integral multiples of
$1,000 in excess thereof.
Assets of the Trust...... On the Closing Date, the Trust is expected to purchase
3,559 closed-end, fixed-rate home loans (the "INITIAL
LOANS") having an aggregate unpaid principal balance
as of the Cut-Off Date of approximately
$104,432,425.04 (the "ORIGINAL POOL PRINCIPAL
BALANCE") pursuant to the Sale and Servicing
Agreement. On or prior to July 31, 1997, the Trust
may purchase additional loans (the "SUBSEQUENT LOANS"
and, together with the Initial Loans, the "LOANS")
having an aggregate unpaid balance of up to
$34,767,574.96 (the "ORIGINAL PRE-FUNDED AMOUNT").
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The assets of the Trust will consist primarily of a
pool (the "POOL") of Loans which are either unsecured
or secured by mortgages, deeds of trust or other
similar security instruments (the "MORTGAGES"). The
assets of the Trust also will include (i) payments of
interest due in respect of the Loans after the Cut-Off
Date and principal received in respect of the Loans
after the Cut-Off Date; (ii) amounts on deposit in the
Collection Account, Note Distribution Account, Pre-
Funding Account, Capitalized Interest Account and
Certificate Distribution Account; (iii) the assignment
of all rights of the Depositor under the Home Loan
Purchase Agreement; and (iv) certain other ancillary
or incidental funds, rights and properties related to
the foregoing. See "The Trust--General" herein. The
Trust will include the unpaid principal balance of
each Loan as of the applicable Cut-Off Date (the "CUT-
OFF DATE PRINCIPAL BALANCE"). The "PRINCIPAL BALANCE"
of a Loan on any day subsequent to the Cut-Off Date is
equal to its Cut-Off Date Principal Balance minus all
principal reductions credited against the Principal
Balance of such Loan since the Cut-Off Date, including
any principal losses reported by the Servicer on
account of a modification of such Loan. With respect
to any date, the "POOL PRINCIPAL BALANCE" will be
equal to the aggregate of the Principal Balances of
the Loans as of such date.
The Loans................ All of the Loans will be closed-end, fixed-rate home
loans which are not insured or guaranteed by any
governmental agency and the related proceeds of which
were used to finance (i) property improvements, (ii)
the acquisition of personal property such as home
appliances or furnishings, (iii) debt consolidation,
(iv) the partial refinancing of residential properties
(which may include cash-out to the borrower) or (v) a
combination of property improvements, debt
consolidation and other consumer purposes. The Loans
may be (i) secured (the "MORTGAGE LOANS") by liens on
residential properties (i.e., one- to four-family
residences, condominium units and townhouses,
including investment properties) (the "MORTGAGED
PROPERTIES") that are generally junior (i.e., second
or third) in priority to one or more senior liens on
the related Mortgaged Properties or (ii) unsecured
(the "UNSECURED LOANS"). The Loans will not be insured
by primary mortgage insurance policies or any pool
insurance policy. Moreover, the Loans will not be
guaranteed by the Transferor, the Depositor or any of
their respective affiliates. A majority of the Loans
will be either Unsecured Loans or Mortgage Loans
secured by liens on Mortgaged Properties in which the
borrowers have little or no equity therein (i.e., the
related Combined Loan-to-Value Ratios exceed 100%) at
the time of origination of such Loans. See "The Pool"
herein and "The Trust Fund--The Loans" in the
Prospectus.
"COMBINED LOAN-TO-VALUE RATIO" means, with respect to
any Loan, the fraction, expressed as a percentage, the
numerator of which is the principal balance of such
Loan at origination plus, in the case of a junior lien
Loan, the aggregate outstanding principal balance of
the related senior lien loans on the date of
origination of such Loan, and the denominator of which
is the appraised value of the related Mortgaged
Property at the time of origination of such Loan
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(determined as described herein under "Empire Funding-
-Underwriting Criteria").
The Transferor will be obligated either (i) to
repurchase any Loan as to which a representation or
warranty has been breached, which breach remains
uncured for a period of 60 days and has a materially
adverse effect on the interests of the holders of the
Offered Securities in such Loan (a "DEFECTIVE LOAN"),
or (ii) to remove such Defective Loan and substitute a
Qualified Substitute Loan. As used herein, a
"QUALIFIED SUBSTITUTE LOAN" will have characteristics
that are generally the same as or substantially
similar to the characteristics of the Loan which it
replaces. The repurchase of any Loan (rather than the
replacement thereof through substitution) will result
in accelerated payments of principal distributions on
the Offered Securities. See "The Pool--Repurchase or
Substitution of Loans" herein.
Credit Enhancement....... Credit enhancement with respect to the Offered
Securities will be provided by (i) the subordination
of the right of the Residual Interest Instruments and
of certain Classes of Offered Securities to receive
distributions with respect to interest and principal
to the extent described below and (ii) the
overcollateralization feature described below. See
"Risk Factors--Adequacy of Credit Enhancement" herein.
Subordination............ The rights of the holders of the Class M-1 Notes to
receive distributions of interest on each Distribution
Date will generally be subordinated to such rights of
the holders of the Senior Notes, the rights of the
holders of the Class M-2 Notes to receive
distributions of interest on each Distribution Date
will generally be subordinated to such rights of the
holders of the Class M-1 Notes and the Senior Notes,
and the rights of the holders of the Class B
Certificates to receive distributions of interest on
each Distribution Date will generally be subordinated
to such rights of the holders of the Notes. In
addition, the rights of the holders of the Class M-1
Notes to receive distributions of principal on each
Distribution Date will generally be subordinated to
the rights of the holders of the Senior Notes to
receive distributions of interest and principal on
each Distribution Date, and the rights of the holders
of the Class M-2 Notes to receive distributions of
principal on each Distribution Date will generally be
subordinated to the rights of the holders of the
Senior Notes and the Class M-1 Notes to receive
distributions of interest and principal on each
Distribution Date. The rights of the holders of the
Class B Certificates to receive distributions of
principal on each Distribution Date will generally be
subordinated to the rights of the holders of the Notes
to receive distributions of interest and principal on
each Distribution Date. In addition, the rights of the
holders of the Residual Interest Instruments to
receive any distributions from amounts available on
each Distribution Date will be subordinated to such
rights of the holders of the Offered Securities and
the Class B Certificates. The subordination described
above is intended to enhance the likelihood of receipt
by the holders of the Notes of the full amount of
interest and principal distributions due to such
holders and to afford such holders protection against
losses on the Loans. The subordination of the Residual
Interest Instruments to the Class B Certificates is
intended to enhance the likelihood of
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receipt by the holders of the Class B Certificates of
the full amount of interest and principal
distributions due to such holders and to afford such
holders protection against losses on the Loans. See
"Description of Credit Enhancement--Subordination and
Allocation of Losses" herein.
Overcollateralization.... As of any date of determination, the
"OVERCOLLATERALIZATION AMOUNT" will equal the excess
of the sum of the Pool Principal Balance and the Pre-
Funded Amount over the aggregate of the Class
Principal Balances of the Securities. On the Closing
Date, the Overcollateralization Amount will be zero.
As a result of the application of Excess Spread in
reduction of the Class Principal Balances of the
Securities, the Overcollateralization Amount is
expected to increase over time until such amount is
equal to the Overcollateralization Target Amount.
Generally, the "OVERCOLLATERALIZATION TARGET AMOUNT"
prior to the Stepdown Date will be equal to the
greater of (x) 9% of the sum of the Original Pool
Principal Balance and the Original Pre-Funded Amount
and (y) the Net Delinquency Calculation Amount; on and
after the Stepdown Date, the Overcollateralization
Target Amount will be equal to the greater of (x) 18%
of the Pool Principal Balance as of the end of the
related Due Period and (y) the Net Delinquency
Calculation Amount (as defined herein). The
Overcollateralization Target Amount will not in any
event be less than 0.50% of the sum of the Original
Pool Principal Balance and the Original Pre-Funded
Amount or greater than the outstanding Class Principal
Balances of the Securities.
While the distribution of Excess Spread to holders of
the Offered Securities in reduction of their
respective Class Principal Balances has been designed
to produce and maintain a given level of
overcollateralization with respect to the Offered
Securities, there can be no assurance that Excess
Spread will be generated in sufficient amounts to
ensure that such overcollateralization level will be
achieved or maintained at all times. See "Description
of Credit Enhancement--Subordination and Allocation of
Losses" and "Risk Factors--Adequacy of Credit
Enhancement" herein.
Application of Allocable
Loss Amounts............ In the event that (a) the aggregate of the Class
Principal Balances of all Classes of Securities on any
Distribution Date (after giving effect to all
distributions on such date) exceeds (b) the Pool
Principal Balance as of the end of the immediately
preceding Due Period (such excess, an "ALLOCABLE LOSS
AMOUNT"), such Allocable Loss Amount will be applied,
sequentially, in reduction of the Class Principal
Balances of the Class B Certificates, the Class M-2
Notes and the Class M-1 Notes, in that order, until
the respective Class Principal Balances thereof have
been reduced to zero. Allocable Loss Amounts will not
be applied in reduction of the Class Principal Balance
of any Class of Senior Notes. Allocable Loss Amounts
applied to any applicable Class of Offered Securities
will entitle such Class to reimbursement (such
entitlement, a "LOSS REIMBURSEMENT DEFICIENCY") under
the circumstances and to the extent described
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herein. See "Description of the Offered Securities--
Application of Allocable Loss Amounts" herein.
Fees and Expenses
of the Trust............ On each Distribution Date, prior to distributions on
the Notes, amounts from the Available Collection
Amount will be distributed to pay the following
periodic fees: (1) the unpaid and accrued fees of the
Servicer (the "SERVICING COMPENSATION"), (2) the
unpaid and accrued fees of the Indenture Trustee (the
"INDENTURE TRUSTEE FEE"), (3) the unpaid and accrued
fees of the Owner Trustee (the "OWNER TRUSTEE FEE")
and (4) the unpaid and accrued fees of the Custodian
(the "CUSTODIAN FEE") (collectively, the "TRUST FEES
AND EXPENSES").
Pre-Funding Account...... On the Closing Date, $34,767,574.96 (the "ORIGINAL
PRE-FUNDED AMOUNT") was deposited in an account (the
"PRE-FUNDING ACCOUNT"), which account is in the name
of the Indenture Trustee and is part of the Trust and
will be used to acquire Subsequent Loans. During the
Pre-Funding Period (as defined below), the amount on
deposit in the Pre-Funding Account (net of investment
earnings thereon) (the "PRE-FUNDED AMOUNT") will be
reduced by the amount thereof used to purchase
Subsequent Loans in accordance with the Sale and
Servicing Agreement. The "PRE-FUNDING PERIOD" is the
period commencing on the Closing Date and ending
generally on the earlier to occur of (i) the date on
which the amount on deposit in the Pre-Funding Account
(net of any investment earnings thereon) is less than
$100,000 and (ii) July 31, 1997. On the Distribution
Date following the Due Period in which the termination
of the Pre-Funding Period occurs, if the Pre-Funded
Amount at the end of the Pre-Funding Period is less
than $100,000, any such Pre-Funded Amount will be
distributed to holders of the Classes of Notes then
entitled to receive principal on such Distribution
Date in reduction of the related Class Principal
Balances, thus resulting in a partial redemption of
the related Notes on such date. On the Distribution
Date following the Due Period in which the termination
of the Pre-Funding Period occurs, if the Pre-Funded
Amount at the end of the Pre-Funding Period is greater
than or equal to $100,000 (such event, a "PRE-FUNDING
PRO RATA DISTRIBUTION TRIGGER"), such Pre-Funded
Amount will be distributed to the holders of all
Classes of Notes and the Class B Certificates, pro
rata, based on the Original Class Principal Balances
thereof.
Capitalized Interest
Account................. On the Closing Date, a portion of the sales proceeds
of the Notes was deposited in an account (the
"CAPITALIZED INTEREST ACCOUNT") for application by the
Indenture Trustee on the Distribution Dates in June
1997, July 1997 and August 1997 to cover shortfalls in
interest on the Notes that may arise due to the
utilization of the Pre-Funding Account as described
herein. Any amounts remaining in the Capitalized
Interest Account at the end of the Pre-Funding Period
will be paid to Empire Funding.
Optional Termination..... The holders of Residual Interest Instruments exceeding
in the aggregate a 50% percentage interest therein
(the "MAJORITY RESIDUAL INTERESTHOLDERS") may, at
their option, effect an early termination of the Trust
on or after any Distribution Date on which the Pool
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Principal Balance declines to 10% or less of the sum
of the Original Pool Principal Balance and the
Original Pre-Funded Amount (the first such
Distribution Date, the "CLEAN-UP CALL DATE", by
purchasing all of the Loans at a price equal to or
greater than the Termination Price. The proceeds from
any such sale will be distributed (i) first, to the
payment of Trust Fees and Expenses, (ii) second, to
the holders of each Class of Notes in an amount equal
to the then outstanding Class Principal Balance
thereof plus all accrued and unpaid interest thereon,
(iii) third, to the holders of the Class B
Certificates in an amount equal to the then
outstanding Class Principal Balance thereof plus all
accrued and unpaid interest thereon and (iv) fourth,
to the holders of the Residual Interest Instruments,
the amount remaining, if any, after the distributions
specified in clauses (i)-(iii) above. See "Description
of the Offered Securities--Optional Termination of the
Trust" herein.
Servicing of the Loans... The Servicer will perform the loan servicing functions
with respect to the Loans pursuant to the Sale and
Servicing Agreement and will be entitled to receive a
fee (the "SERVICING FEE") and other servicing
compensation (together with the Servicing Fee, the
"SERVICING COMPENSATION"), payable monthly, as
described herein (see "Description of the Transfer and
Servicing Agreements--Servicing" herein). The Servicer
may subcontract its servicing obligations and duties
with respect to certain Loans to certain qualified
servicers pursuant to a subservicing agreement (each
such servicer, in this capacity, a "SUBSERVICER").
However, the Servicer will not be relieved of its
servicing obligations and duties with respect to any
subserviced Loans. In addition, the Servicer will be
responsible for paying the fees of any such
Subservicer.
Tax Status............... In the opinion of Tax Counsel, for Federal income tax
purposes, the Notes will be characterized as debt and
the Trust will not be characterized as an association
(or a publicly traded partnership) taxable as a
corporation. Each holder of a Note, by the acceptance
of a Note, will agree to treat the Notes as
indebtedness for Federal income tax purposes.
Alternative characterizations of the Trust are
possible, but would not result in materially adverse
tax consequences to holders of the Securities. See
"Certain Federal Income Tax Consequences" herein and
"Certain Material Federal Income Tax Considerations"
in the Prospectus for additional information
concerning the application of Federal income tax laws
to the Trust and the Offered Securities.
ERISA.................... Generally, Plans (as defined herein) that are subject
to the requirements of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and the
Internal Revenue Code of 1986, as amended (the
"CODE"), are permitted to purchase instruments like
the Notes that are debt under applicable state law and
have no "substantial equity features" without
reference to the prohibited transaction requirements
of ERISA and the Code. In the opinion of ERISA
Counsel, the Notes will be classified as indebtedness
without substantial equity features for ERISA
purposes. However, if the Notes are deemed to be
equity interests and no statutory, regulatory or
administrative exemption applies, the Trust
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will hold Plan assets by reason of a Plan's investment
in the Notes. Also, prohibited transactions could
result if the Class B Certificates or instruments
representing the Residual Interest are held by parties
in interest or disqualified persons with respect to
any Plan investing in the Notes. Accordingly, each
purchaser using assets of a Plan to acquire the Notes
will be deemed to have represented that its purchase
and holding of the Notes is covered by a class
exemption issued by the Department of Labor. Any Plan
fiduciary considering whether to purchase the Notes on
behalf of a Plan should consult with its counsel
regarding the applicability of the provisions of ERISA
and the Code and the availability of any exemptions.
See "ERISA Considerations" herein and in the
Prospectus.
Legal Investment......... The Offered Securities will NOT constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"),
because most of the Mortgages securing the Loans are
not first mortgages and many of the Loans are not
secured by mortgages. Accordingly, many institutions
with legal authority to invest in comparably rated
securities based solely on first mortgages may not be
legally authorized to invest in the Offered
Securities. See "Legal Investment Matters" herein and
"Legal Investment" in the Prospectus.
Ratings of the
Offered Securities...... It is a condition to the issuance of the Offered
Securities that each of the Senior Notes be rated
"AAA" by Standard & Poor's, a division of The McGraw-
Hill Companies ("STANDARD & POOR'S"), and Duff &
Phelps Credit Rating Co. ("DCR" and together with
Standard & Poor's, the "RATING AGENCIES"), and that
the Class M-1 Notes be rated "AA" and the Class M-2
Notes be rated "A-" by Standard & Poor's and DCR. A
security rating does not address the frequency of
principal prepayments or the corresponding effect on
yield to holders of the Offered Securities. The
security rating does not address the ability of the
Trust to acquire Subsequent Loans, any potential
redemption with respect thereto or the effect on yield
resulting therefrom. None of the Depositor,
Transferor, Servicer, Indenture Trustee, Owner
Trustee, Co-Owner Trustee or any other person is
obligated to maintain the rating on any Class of
Offered Securities.
S-13
RISK FACTORS
Prospective investors in the Offered Securities should consider the
following risk factors (as well as the factors set forth under "Risk Factors" in
the Prospectus) in connection with the purchase of Offered Securities. These
factors are intended to identify the significant sources of risk affecting an
investment in the Offered Securities. Unless the context indicates otherwise,
any numerical or statistical information presented is based upon the
characteristics of the Loans proposed to be included in the Pool as of the date
of this Prospectus Supplement.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The rates of principal payment on the Offered Securities and the aggregate
amount of distributions and yields to maturity of the Offered Securities will be
related to, among other things, the rate and timing of payments of principal on
the Loans. The rate of principal payments on the Loans will in turn be affected
by the amortization of the Loans and by the rate of principal prepayments
thereon (including for this purpose, prepayments resulting from (i) refinancing,
(ii) liquidations of the Loans due to defaults, casualties and condemnations and
(iii) repurchases by the Transferor as required pursuant to the Home Loan
Purchase Agreement). Generally, if prevailing interest rates on similar loans
fall significantly below the interest rates on the Loans, the Loans may be
subject to higher prepayment rates than if prevailing rates remain at or above
the interest rates on the Loans. Conversely, if prevailing interest rates rise
significantly above the interest rates on the Loans, the rate of prepayments may
decrease. The Loans may be prepaid by the obligors thereunder (the "OBLIGORS")
at any time. The Mortgage Loans are subject to the "due-on-sale" provisions
included therein. Prepayments, liquidations and purchases of the Loans
(including any purchase of the remaining Loans and Mortgaged Properties (title
to which has been acquired by the Trust) in connection with the optional
redemption of the Offered Securities) by the Majority Residual Interestholders
will, subject to certain conditions, result in distributions to holders of the
Offered Securities then entitled to receive principal distributions of principal
that would otherwise be distributed over the remaining terms of such Loans. In
addition, the overcollateralization provisions will result in a limited
acceleration of principal payments to the holders of the Offered Securities. See
"Description of the Offered Securities" herein. Since the rate of payment of
principal on the Loans will depend on future events and a variety of factors, no
assurance can be given as to such rate or the rate of principal prepayments.
All of the Loans may be prepaid in whole or in part at any time. Home loans
such as the Loans have been originated in significant volume only during the
past few years and none of the Transferor, the Depositor or the Servicer is
aware of any publicly available studies or statistics on the rate of prepayment
of such loans. The Trust's prepayment experience may be affected by a wide
variety of factors, including general economic conditions, interest rates, the
availability of alternative financing and homeowner mobility. In addition,
substantially all of the Loans contain due-on-sale provisions and the Servicer
intends to enforce such provisions unless (i) the Servicer, in a manner
consistent with accepted servicing practices, permits the purchaser of the
related Mortgaged Property to assume the Loan or (ii) such enforcement is not
permitted by applicable law. To the extent permitted by applicable law, such
assumption will not release the original borrower from its obligation under any
such Loan. See "Certain Legal Aspects of the Loans--Due-on-Sale Clauses" in the
Prospectus.
The extent to which the yield to maturity of an Offered Security may vary
from the anticipated yield will depend upon (i) the degree to which it is
purchased at a premium or a discount, (ii) the degree to which the timing of
distributions to holders thereof is sensitive to scheduled payments,
prepayments, liquidations, defaults, delinquencies, substitutions, modifications
and repurchases of Loans and to the distribution of Excess Spread and (iii) to
the application of Allocable Loss Amounts to certain Classes of Offered
Securities as specified herein. In the case of any Offered Security purchased at
a discount, an investor should consider the risk that a slower than anticipated
rate of principal distributions to the holders of such Offered Security
(including, without limitation, principal prepayments on the Loans) could result
in an actual yield to such investor that is lower than the anticipated yield
and, in the case of any Offered Security purchased at a premium, the risk that a
faster than anticipated rate of principal distributions to the holders of such
Offered Security (including, without limitation, principal prepayments on the
Loans) could result in an actual yield to such investor that is lower than the
anticipated yield. On each Distribution Date, until the Overcollateralization
Amount is at least equal to the Overcollaterization Target Amount, the
allocation of the Excess Spread for such Distribution Date as an additional
distribution of principal on
S-14
one or more Classes of the Offered Securities will accelerate the amortization
of such Classes of the Offered Securities relative to the amortization of the
Loans. Further, in the event that significant distributions of principal are
made to holders of the Offered Securities as a result of prepayments,
liquidations, repurchases and purchases of the Loans or distributions of Excess
Spread, there can be no assurance that holders of the Offered Securities will be
able to reinvest such distributions in a comparable alternative investment
having a comparable yield. See "Prepayment and Yield Considerations" herein.
ADEQUACY OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Offered Securities will be provided
by (i) the subordination of distributions in respect of the Residual Interest
Instruments and the Class B Certificates (as well as the subordination of
certain Classes of Offered Securities to other Classes of Offered Securities, as
described herein) and (ii) the overcollateralization feature which results from
the limited acceleration of the principal amortization of one or more Classes of
the Offered Securities relative to the amortization of the Loans by the
application of Excess Spread, as described herein. If the Loans experience
higher rates of delinquencies, defaults and losses than initially anticipated in
connection with the ratings of the Offered Securities, the amounts available
from the credit enhancement may not be adequate to cover the delays or
shortfalls in distributions to the holders of the Offered Securities that result
from such higher delinquencies, defaults and losses. If the amounts available
from the credit enhancement are inadequate, the holders of the Offered
Securities will bear the risk of any delays and losses resulting from the
delinquencies, defaults and losses on the Loans.
The rights of the holders of the Class M-1 Notes to receive distributions
of interest on each Distribution Date will generally be subordinated to such
rights of the holders of the Senior Notes, the rights of the holders of the
Class M-2 Notes to receive distributions of interest on each Distribution Date
will generally be subordinated to such rights of the holders of the Class M-1
Notes and the Senior Notes, and the rights of the holders of the Class B
Certificates to receive distributions of interest on each Distribution Date will
generally be subordinated to such rights of the holders of the Notes. In
addition, the rights of the holders of the Class M-1 Notes to receive
distributions of principal on each Distribution Date will generally be
subordinated to the rights of the holders of the Senior Notes to receive
distributions of interest and principal on each Distribution Date, and the
rights of the holders of the Class M-2 Notes to receive distributions of
principal on each Distribution Date will generally be subordinated to the rights
of the holders of the Senior Notes and the Class M-1 Notes to receive
distributions of interest and principal on each Distribution Date. In addition,
distributions of principal of the Class B Certificates will generally be
subordinated in priority of payment to the Notes. Consequently, the Class B
Certificateholders may receive no distributions of interest on a Distribution
Date until all amounts due on the Notes on account of interest on the Notes have
been distributed to the Noteholders, and may receive no distributions of
principal on a Distribution Date until all amounts due on the Notes on account
of interest and principal on the Notes have been distributed to the Noteholders.
See "Description of Credit Enhancement--Subordination and Allocation of Losses"
herein.
While the distribution of Excess Spread to the holders of the Offered
Securities in the manner specified herein has been designed to produce and
maintain a given level of overcollateralization with respect to the Offered
Securities, there can be no assurance that Excess Spread will be generated in
sufficient amounts to ensure that such overcollateralization level will be
achieved or maintained at all times. In particular, as a result of delinquencies
on the Loans during any Due Period, the amount of interest received on the Loans
during such Due Period may be less than the amount of interest distributable on
the Offered Securities on the related Distribution Date. Such an occurrence will
cause the Class Principal Balances of the Offered Securities to decrease at a
slower rate relative to the Pool Principal Balance, resulting in a reduction of
the Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount.
The holders of the Residual Interest Instruments will not be required to
refund any amounts previously distributed to such holders pursuant to the
Transfer and Servicing Agreements (as such term is defined herein), including
any distributions of Excess Spread, regardless of whether there are sufficient
funds on a subsequent Distribution Date to make a full distribution to holders
of the Offered Securities.
S-15
RISK OF HIGHER DEFAULT RATES ASSOCIATED WITH CALIFORNIA REAL PROPERTY
Since many of the Initial Loans (approximately 43.46% by Original Pool
Principal Balance) are secured by liens on Mortgaged Properties located in
California, the recent overall decline and a further overall decline in the
California residential real estate market may have adversely affected, and could
continue to affect adversely, the values of such Mortgaged Properties such that
the Principal Balances of the related Mortgage Loans, together with any primary
financing on such Mortgaged Properties, could equal or exceed the value of such
Mortgaged Properties. As the residential real estate market is influenced by
many factors, including the general condition of the economy and interest rates,
no assurances can be given that the California real estate market will not
weaken further. If the California residential real estate market should
experience an overall decline in property values after the dates of origination
of the Mortgage Loans, the rates of losses on the Mortgage Loans may be expected
to increase and may increase substantially. Because a substantial portion of the
Mortgaged Properties is in California, there is an increased risk that
earthquake damage may occur that would not be covered by any hazard insurance,
which damage could result in greater losses to the Mortgaged Properties.
ADEQUACY OF THE MORTGAGED PROPERTIES AS SECURITY FOR THE LOANS
As of the Cut-Off Date, the weighted average Combined Loan-to-Value Ratio
of the Initial Loans (excluding the Unsecured Loans) was approximately 114.79%.
As of the Cut-Off Date, 2.01% of the Initial Loans (by Original Pool Principal
Balance) were Unsecured Loans. As a result of the level of Combined Loan-to-
Value Ratios, the Mortgaged Properties may not provide adequate security for the
Loans. Even assuming that a Mortgaged Property provides adequate security for
the related Loan, substantial delays could be encountered in connection with the
liquidation of a Loan that would result in current shortfalls in distributions
to the holders of the Offered Securities to the extent such shortfalls are not
covered by the credit enhancement described herein. In addition, liquidation
expenses relating to any Defaulted Loan (such as legal fees, real estate taxes
and maintenance and preservation expenses) would reduce the liquidation proceeds
otherwise payable to the holders of the Offered Securities. In the event that
any Mortgaged Property fails to provide adequate security for the related Loan,
any losses in connection with such Loan will be borne by holders of the Offered
Securities as described herein to the extent that the credit enhancement
described herein is insufficient to absorb all such losses.
RECENT ORIGINATION OF LOANS
As of the Cut-Off Date, none of the Initial Loans was 30 days or more
delinquent in their scheduled monthly payments of principal and interest; since,
however, Initial Loans representing approximately 92.93% of the Original Pool
Principal Balance have a first scheduled monthly payment due date occurring on
or after April 1, 1997, it was not possible for such Initial Loans to have had a
scheduled monthly payment that was 30 days or more delinquent as of the Cut-Off
Date.
UNDERWRITING GUIDELINES
Pursuant to the underwriting guidelines of the Transferor, the assessment
of the creditworthiness of the related Obligor is the primary consideration in
underwriting the Loans, and with respect to any Mortgage Loans, the evaluation
of the adequacy of the value of the related Mortgaged Property or other secured
property in relation to the Loan, together with the amount of all liens senior
to the lien of the Loan, is given less consideration, and in certain cases no
consideration, in underwriting the Loans. See "Empire Funding--Underwriting
Criteria" herein. In general, the credit quality of the Loans is lower than that
of mortgage loans conforming to the underwriting guidelines of the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC") for first lien, single family mortgage loans. Accordingly,
the Loans are likely to experience higher rates of delinquencies, defaults and
losses (which rates could be substantially higher) than those rates that would
be experienced by similar types of loans underwritten in conformity with FNMA or
FHLMC underwriting guidelines for first lien, single family mortgage loans. In
addition, the losses sustained from defaulted Loans are likely to be more severe
in relation to the outstanding principal balances of such defaulted Loans,
because (i) the costs incurred in the collection and liquidation of defaulted
Loans in relation to the smaller principal balances
S-16
thereof are proportionately higher than for first lien, single family mortgage
loans, and (ii) in the case of Secured Loans, the majority of such Loans are
secured by junior liens on Mortgaged Properties in which the Obligors had no
equity (i.e., the related Combined Loan-to-Value Ratio exceeded 100%) at the
time of origination of such Loans. See "--Adequacy of Credit Enhancement" above.
Although the creditworthiness of the related Obligor is the primary
consideration in the underwriting of the Loans, no assurance can be given that
such creditworthiness will not deteriorate as a result of future economic and
social factors and lead to increased levels of delinquency and default.
Furthermore, because the adequacy of the value of the related Mortgaged Property
is given less consideration, and in certain cases no consideration, in
underwriting the Loan, no assurance can be given that in the case of Secured
Loans any proceeds will be recovered from the foreclosure or liquidation of the
related Mortgage Property. See "--Realization Upon Defaulted Mortgage Loans"
below.
In response to changes and developments in the consumer finance area as
well as the refinement of the Transferor's credit evaluation methodology, the
Transferor's underwriting requirements for certain types of home loans may
change from time to time, sometimes resulting in more stringent and sometimes in
less stringent underwriting requirements. Depending upon the date on which the
Loans were originated or purchased by the Transferor, such Loans included in the
Pool may have been originated or purchased by the Transferor under different
underwriting requirements and, accordingly, certain Loans included in the Pool
may be of a different credit quality and have different loan characteristics
from those of other Loans. Furthermore, to the extent that certain Loans were
originated or purchased by the Transferor in accordance with less stringent
underwriting requirements, such Loans may be more likely to experience higher
rates of delinquencies, defaults and losses than those Loans originated or
purchased in accordance with more stringent underwriting requirements.
SUBSEQUENT LOANS
The ability of Empire Funding to acquire or originate loans subsequent to
the date hereof and on or prior to July 31, 1997 that meet the requirements for
transfer during the Pre-Funding Period under the Sale and Servicing Agreement is
affected by a variety of factors, including interest rates, employment levels,
the rate of inflation and consumer perception of economic conditions generally.
On the Distribution Date following the Due Period in which the termination of
the Pre-Funding Period occurs, if the Pre-Funded Amount at the end of the Pre-
Funding Period is less than $100,000, any such Pre-Funded Amount will be
distributed to the holders of the Classes of Notes then entitled to receive
principal on such Distribution Date in reduction of the related Class Principal
Balances, thus resulting in a partial redemption of the related Notes on such
date. On the Distribution Date following the Due Period in which the
termination of the Pre-Funding Period occurs, if the Pre-Funded Amount at the
end of the Pre-Funding Period is greater than or equal to $100,000 (such event,
a "PRE-FUNDING PRO RATA DISTRIBUTION TRIGGER"), such Pre-Funded Amount will be
distributed to the holders of all Classes of Notes and the Class B Certificates,
pro rata, based on the Original Class Principal Balances thereof.
LIMITED HISTORICAL DELINQUENCY, LOSS AND PREPAYMENT INFORMATION
Since January 1995, the Servicer has substantially increased the volume of
its originations, purchases, sales and servicing of conventional home loans,
including additional types of home loans (e.g., debt consolidation loans and
high Combined Loan-to-Value home equity loans) and thus it has limited
historical experience with respect to the performance, including the delinquency
and loss experience and the rate of prepayments of these various types of
conventional home loans vis-a-vis its entire portfolio of loans. Accordingly,
neither the delinquency experience and loan loss and liquidation experience set
forth under "Empire Funding--Servicing Experience," herein nor the prepayment
scenarios set forth under "Prepayment and Yield Considerations--Weighted Average
Life of the Offered Securities" herein may be indicative of the performance of
the Loans included in the Pool. Prospective investors should make their
investment determination based on the Loan underwriting criteria, the
availability of the credit enhancement described herein, the characteristics of
the initial Loans and other information provided herein, and not based on any
prior delinquency experience and loan loss and liquidation experience
information set forth herein or on any rate of prepayments assumed herein.
S-17
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Substantially all of the Initial Loans that are Mortgage Loans and
substantially all of the Mortgage Loans are expected to be secured by junior
liens and the related senior liens are not included in the Pool. The primary
risk to holders of Mortgage Loans secured by junior liens is the possibility
that adequate funds will not be received in connection with a foreclosure of the
related Mortgaged Property to satisfy fully both the senior lien(s) and the
Mortgage Loan. See "Risk Factors--Nature of Mortgages" in the Prospectus. In
accordance with the loan servicing practices of the Servicer for home loans
secured by junior liens in its portfolio and based upon a determination that the
foreclosure of a defaulted junior lien Mortgage Loan may not be an economically
viable alternative, the Servicer, in most cases, will not (i) pursue the
foreclosure of the defaulted Mortgage Loan, (ii) satisfy the related senior
mortgage(s) at or prior to the foreclosure sale of the Mortgaged Property, or
(iii) advance funds to keep the related senior mortgage(s) current. The Trust
will have no source of funds to satisfy the senior mortgage(s) or make payments
due thereon and, therefore, holders of the Offered Securities should not expect
that any senior mortgage(s) will be kept current by the Trust for the purpose of
protecting any junior lien Mortgage Loan. See "Certain Legal Aspects of the
Loans--Foreclosure/Repossession" in the Prospectus.
The underwriting requirements of the Transferor generally require that a
Obligor obtain title or fire and casualty insurance as a condition to the
closing of a Mortgage Loan. However, the Transferor does not monitor the
maintenance of insurance thereafter. Accordingly, if the Mortgaged Property
suffers any uninsured hazard or casualty losses, holders of any Offered
Securities may bear the risk of loss resulting from a default by the related
Obligor to the extent such loss is not recovered by foreclosure or liquidation
proceeds on such defaulted Mortgage Loan or from amounts available from the
credit enhancement provided for the Offered Securities.
The Servicer may pursue alternative methods of servicing defaulted Mortgage
Loans to maximize proceeds therefrom, including, without limitation, the
modification of such Mortgage Loans, which, among other things, may include the
abatement of accrued interest or the reduction of a portion of the outstanding
principal balance of such Loans. The costs incurred in the collection and
liquidation of defaulted Mortgage Loans in relation to the smaller principal
balances thereof are proportionately higher than for first lien, single family
mortgage loans. Because substantially all of the Mortgage Loans had or are
expected to have Combined Loan-to-Value Ratios at the time of origination in
excess of 100%, losses sustained from defaulted Mortgage Loans are likely to be
more severe (and could be total losses) in relation to the outstanding principal
balance of such defaulted Mortgage Loans. In fact, no assurance can be given
that any proceeds, or a significant amount of proceeds, will be recovered from
the liquidation of defaulted Mortgage Loans.
UNSECURED LOANS
A default by the Obligor on an Unsecured Loan or the application of federal
bankruptcy laws and state debtor relief laws could result in such loan being
written off by the Servicer. In the event of a default of an Unsecured Loan, the
Trust and, accordingly, the holders of the Offered Securities will bear (i) the
risk of delay in distributions while a judgment against the Obligor is obtained
and (ii) the risk of loss if the judgment cannot be obtained or is not realized
upon.
NO SERVICER DELINQUENCY ADVANCES
In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. As a result of the foregoing,
the amount of interest received on the Loans during the Due Period in which such
delinquency or default occurs may be less than the amount of interest
distributable on the Offered Securities on the related Distribution Date. Such
an occurrence will cause the Class Principal Balances of the Offered Securities
to decrease at a slower rate relative to the Pool Principal Balance, resulting
in a reduction of the Overcollateralization Amount and, in some circumstances,
an Allocable Loss Amount. However, the Servicer will make such reasonable and
customary expense advances with respect to the Loans as would generally be
required in accordance with its servicing practices. See "Description of the
Transfer and Servicing Agreements--Servicing" herein.
S-18
DEPENDENCE ON SERVICER FOR SERVICING LOANS
Pursuant to the Sale and Servicing Agreement, the Servicer will perform the
daily loan servicing functions for the Loans that include, without limitation,
the collection of payments from the Obligors, the remittance of funds from such
collections for distribution to the holders of the Offered Securities, the
bookkeeping and accounting for such collections and distributions, all other
servicing activities relating to the Loans, the preparation of the monthly
servicing and remittance reports pursuant to the Sale and Servicing Agreement
and the maintenance of all records and files pertaining to such servicing
activities. Upon the Servicer's failure to remedy an Event of Default under the
Sale and Servicing Agreement, a majority of the holders of the Offered
Securities or the Indenture Trustee or the Owner Trustee may remove the Servicer
and appoint a successor servicer pursuant to the terms of the Sale and Servicing
Agreement. Absent such a replacement, the holders of the Offered Securities will
be dependent upon the Servicer adequately and timely to perform its servicing
obligations and remit to the Indenture Trustee the funds received in payment of
principal and interest on the Loans. The manner in which the Servicer performs
its servicing obligations will affect the amount and timing of the principal and
interest payments received on the Loans. The principal and interest payments
received on the Loans are the sole source of funds for the distributions due to
the holders of the Offered Securities under the Sale and Servicing Agreement.
Accordingly, the holders of the Offered Securities will be dependent upon the
Servicer's adequate and timely performance of its servicing obligations and such
performance will affect the amount and timing of distributions to the holders of
the Offered Securities. See "Empire Funding--Servicing Experience" herein.
LEGAL CONSIDERATIONS
The sale of the Loans from the Transferor, to EFC and from EFC to the
Depositor pursuant to the Home Loan Purchase Agreement will be treated by the
Transferor, EFC and the Depositor as a sale of the Loans. The Transferor will
warrant that such transfer is a sale of the Transferor's interest in the Loans.
In the event of an insolvency of the Transferor, the receiver or bankruptcy
trustee of the Transferor may attempt to recharacterize the sale of the Loans as
a borrowing by the Transferor secured by a pledge of the Loans. If the receiver
or bankruptcy trustee decided to challenge such transfer, delays in payments on
the Offered Securities and possible reductions in the amount thereof could
occur. The Depositor will warrant in the Sale and Servicing Agreement that the
transfer of the Loans to the Trust is a valid transfer to the Trust of all of
the Depositor's right, title and interest in and to the Loans.
CERTAIN OTHER LEGAL CONSIDERATIONS
The underwriting, origination, servicing and collection of the Loans are
subject to a variety of state and Federal laws, public policies and principles
of equity. Depending on the provisions of applicable law and the specific facts
and circumstances involved, violations of these laws, policies or principles may
limit the ability of the Servicer to collect all or part of the principal or
interest on the Loans, may entitle the Obligors to a refund of amounts
previously paid, and, in addition, could subject the Servicer to damages and
administrative sanctions. If the Servicer is unable to collect all or part of
the principal or interest on any Loans because of a violation of the
aforementioned laws, public policies or general principles of equity, then the
Trust may be delayed in making, or be unable to make, all distributions owed to
the holders of the Offered Securities to the extent any related losses are not
otherwise covered by amounts available from the credit enhancement provided for
the Offered Securities. Furthermore, depending upon whether damages and
sanctions are assessed against the Servicer or the Transferor, such violations
may materially impact (i) the financial ability of the Servicer to continue to
act in such capacity or (ii) the ability of the Transferor to repurchase or
replace Defective Loans. See "Risk Factors--Certain Other Legal Considerations
Regarding the Loans" in the Prospectus. The Transferor will be required to
repurchase or replace any Loan which did not comply with applicable state and
Federal laws and regulations as of the Closing Date. See "--Limitations on
Repurchase or Replacement of Defective Loans by Transferor" below.
S-19
LIMITATIONS ON LIQUIDITY OF TRANSFEROR AND SERVICER
As a result of the Transferor's increasing volume of loan originations and
purchases, and its expanding securitization activities, the Transferor requires
substantial capital to fund its operations and has operated, and expects to
continue to operate, on a negative operating cash flow basis. Currently, the
Transferor funds substantially all of its operations, including its loan
originations and purchases, from borrowings under the Transferor's lending
arrangements with certain third parties, including warehouse and residual
financing facilities. See "Empire Funding" herein. There can be no assurance
that, as the Transferor's existing lending arrangements mature, the Transferor
will have access to the financing necessary for its operations or that such
financing will be available to the Transferor on favorable terms. To the extent
that the Transferor is unable to arrange new or alternative methods of financing
on favorable terms, the Transferor may have to curtail its loan origination and
purchasing activities, which could have a material adverse effect on the
Transferor's financial condition and, in turn, its ability to service the Loans
and to repurchase any Defective Loans.
LIMITATIONS ON REPURCHASE OR REPLACEMENT OF DEFECTIVE LOANS BY TRANSFEROR
Pursuant to the Sale and Servicing Agreement, 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 Loans. If the Transferor cannot cure such breach within a specified
period of time, the Transferor is required to repurchase such Defective Loans
from the Trust or substitute other loans for such Defective Loans. Although a
significant portion of the Loans will have been acquired from unaffiliated
correspondent lenders, the Transferor will make the representations and
warranties for all such Loans. For a summary description of the Transferor's
representations and warranties, see "The Agreements--Assignment of the Trust
Fund Assets" in the Prospectus.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing or replacing any Defective
Loan(s) in the manner described above. If the Transferor repurchases, or is
obligated to repurchase, any defective home loan(s) from any other series of
asset backed securities, the financial ability of the Transferor to repurchase
any Defective Loan(s) from the Trust may be adversely affected. In addition,
other events relating to the Transferor and its home lending can occur that
would adversely affect the financial ability of the Transferor to repurchase
Defective Loans from the Trust, including, without limitation, the sale or other
disposition of all or any significant portion of its assets. If the Transferor
is unable to repurchase or replace a Defective Loan, then the Servicer, on
behalf of the Trust, will utilize customary servicing practices to recover the
maximum amount possible with respect to such Defective Loan and any resulting
loss will be borne by the holders of the Offered Securities to the extent that
such loss is not otherwise covered by amounts available from the credit
enhancement provided for the Offered Securities. See "Empire Funding" and
"Description of Credit Enhancement" herein.
LOWER CREDIT QUALITY TRUST ASSETS
Certain of the assets of the Trust underlying or securing, as the case may
be, the Offered Securities may have been made to lower credit quality Obligors
who have marginal credit and fall into one of two categories: customers with
moderate income, limited assets and other income characteristics which cause
difficulty in borrowing from banks and other traditional sources of lenders, and
customers with a derogatory credit report including a history of irregular
employment, previous bankruptcy filings, repossession of property, charged-off
loans and garnishment of wages. The average interest rate charged to these types
of borrowers is generally higher than that charged by lenders that typically
impose more stringent credit requirements. The payment experience on loans made
to these types of borrowers is likely to be different (i.e., there is a greater
likelihood of late payments or defaults and less likelihood of prepayments) from
that on loans made to borrowers with better credit histories and is likely to be
more sensitive to changes in the economic climate in the areas in which such
borrowers reside. See "Empire Funding--Underwriting Criteria" herein.
S-20
THE POOL
GENERAL
The Pool will initially consist of the Initial Loans conveyed to the Trust
on the Closing Date. All of the Initial Loans and all of the Subsequent Loans
(collectively, the "Loans") will be closed-end, fixed-rate home loans which are
not insured or guaranteed by a governmental agency and the related proceeds of
which were used to finance property improvements, the acquisition of personal
property such as home appliances or furnishings, debt consolidation, the partial
refinancing of residential properties (which may include cash-out to the
borrower) or a combination of property improvements, debt consolidation and
other consumer purposes. The Loans may be (i) secured (the "MORTGAGE LOANS")
by mortgages, deeds of trust and security deeds on residences (i.e., one- to
four-family residences, condominium units and townhouses, including investment
properties) (the "MORTGAGED PROPERTIES") that are generally junior (i.e., second
or third) in priority to one or more senior loans on the related Mortgage
Properties or (ii) unsecured (the "UNSECURED LOANS").
For a description of the underwriting criteria applicable to the Loans, see
"Empire Funding--Underwriting Criteria" herein. All of the Loans will be sold by
the Transferor to EFC and by EFC to the Depositor, which will then sell the
Loans to the Trust pursuant to the Sale and Servicing Agreement. Pursuant to the
Indenture, the Trust will pledge and assign the Loans to the Indenture Trustee
for the benefit of the holders of the Notes. The Trust will be entitled to all
payments of interest in respect of the Loans due after the Cut-Off Date and all
payments of principal in respect of the Loans received after the Cut-Off Date.
PAYMENTS ON THE LOANS
Interest on each Loan is payable monthly on the outstanding Principal
Balance thereof at a fixed rate per annum (the "LOAN RATE"). The Loans are
actuarial loans which provide that interest is charged to the related Obligors,
and payments are due from such Obligors as of a scheduled day each month which
is fixed at the time of origination. Each regular scheduled payment made by the
Obligor is, therefore, treated as containing a predetermined amount of interest
and principal. Scheduled monthly payments made by the Obligors on the Loans
either earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest. Interest accrued on each Loan will be calculated on a basis of a
360-day year consisting of twelve 30-day months.
CHARACTERISTICS OF LOANS
The following is a brief description of certain terms of the Initial Loans
included in the Pool as of the date of this Prospectus Supplement. The
Subsequent Loans are not expected to vary materially from the Initial Loans. In
addition, the Transferor will be obligated to repurchase or replace certain
Loans under certain circumstances as set forth herein under "The Transferor and
Servicer--Repurchase or Substitution of Loans." A schedule of the Initial Loans
included in the Pool as of the Closing Date will be attached to the Sale and
Servicing Agreement delivered to the Indenture Trustee upon delivery of the
Offered Securities.
The Initial Loans included in the Pool have the characteristics set forth
below and in the tables beginning on the following page. Unless otherwise
indicated, all percentages and weighted averages are percentages and weighted
averages of the Original Pool Principal Balance.
LOAN STATISTICS
As of the Cut-Off Date, the Initial Loans consisted of 3,559 Loans with the
aggregate Principal Balances totaling $104,432,425.04 (the "ORIGINAL POOL
PRINCIPAL BALANCE"). The Initial Loans bear interest at fixed Loan Rates which
range from 8.99% per annum to 18.99% per annum and have a weighted average Loan
Rate of approximately 13.725% per annum. The Cut-Off Date Principal Balances of
the Initial Loans range from $1,000.00 to $76,808.49 and average $29,343.19. As
of the Cut-Off Date, the weighted average remaining term to stated maturity of
the Initial Loans was approximately 229 months and the weighted average number
of months that have
S-21
elapsed since origination was less than one month. As of the Cut-Off Date, the
weighted average Combined Loan-to-Value Ratio of the Initial Loans which were
Mortgage Loans was approximately 114.79% and ranged from 23% to 137%. All of
the Initial Loans are fully amortizing loans having original stated maturities
of not more than 25 years. No Initial Loan is scheduled to mature later than
April 30, 2022.
As of the Cut-Off Date, approximately 97.99% of the Initial Loans (by
Original Pool Principal Balance) were Mortgage Loans secured by Mortgaged
Properties located in 42 states and the District of Columbia. As of the Cut-Off
Date, approximately 0.12%, 97.75% and 0.12% of the Initial Loans (by Original
Pool Principal Balance) were secured by first liens, second liens and third
liens, respectively, on the related Mortgaged Properties. As of the Cut-Off
Date, approximately 99.96% of the Initial Loans (by Original Pool Principal
Balance) which were Mortgage Loans were secured by Mortgaged Properties
represented by the related Obligors to be owner-occupied. As of the Cut-Off
Date, approximately 2.01% of the Initial Loans (by Original Pool Principal
Balance) were Unsecured Loans.
As of the Cut-Off Date, none of the Initial Loans was 30 days past due.
The weighted average FICO score for the Initial Loans was 674. See "Empire
Funding--Underwriting Criteria" herein.
The sum of the percentages in the following tables may not equal the total
due to rounding.
S-22
GEOGRAPHIC DISTRIBUTION OF INITIAL LOANS
AGGREGATE
CUT-OFF % OF ORIGINAL
NUMBER OF DATE PRINCIPAL POOL PRINCIPAL
STATE INITIAL LOANS BALANCE BALANCE
- --------------------- -------------- ---------------- ----------------
Alabama............... 3 $ 57,500.00 0.06%
Alaska................ 10 384,365.31 0.37
Arizona............... 183 4,544,706.34 4.35
Arkansas.............. 11 304,850.33 0.29
California............ 1,256 44,545,551.78 42.65
Colorado.............. 130 3,902,923.44 3.74
Connecticut........... 4 125,000.73 0.12
Delaware.............. 1 33,875.66 0.03
District of Columbia.. 7 208,819.18 0.20
Florida............... 465 11,127,124.11 10.65
Georgia............... 96 2,622,029.47 2.51
Idaho................. 26 789,577.07 0.76
Illinois.............. 38 915,723.87 0.88
Indiana............... 29 874,316.85 0.84
Iowa.................. 6 146,475.74 0.14
Kansas................ 16 477,792.34 0.46
Kentucky.............. 13 312,529.98 0.30
Louisiana............. 10 127,975.58 0.12
Maryland.............. 225 7,467,955.75 7.15
Massachusetts......... 8 190,488.15 0.18
Michigan.............. 22 236,381.61 0.23
Minnesota............. 108 3,209,918.79 3.07
Mississippi........... 15 292,953.45 0.28
Missouri.............. 36 790,215.47 0.76
Nebraska.............. 2 9,636.34 0.01
Nevada................ 119 3,834,671.81 3.67
New Jersey............ 3 93,165.45 0.09
New Mexico............ 15 436,793.70 0.42
New York.............. 16 413,035.07 0.40
North Carolina........ 72 1,626,218.69 1.56
Ohio.................. 11 112,050.08 0.11
Oklahoma.............. 33 429,152.23 0.41
Oregon................ 51 1,397,298.84 1.34
Pennsylvania.......... 65 1,841,057.69 1.76
South Carolina........ 27 691,048.31 0.66
Tennessee............. 22 329,922.36 0.32
Texas................. 95 701,350.33 0.67
Utah.................. 56 1,544,982.33 1.48
Virginia.............. 82 2,440,712.48 2.34
Washington............ 167 4,714,975.38 4.51
West Virginia......... 2 29,127.95 0.03
Wisconsin............. 2 32,675.00 0.03
Wyoming............... 1 65,500.00 0.06
- --------------------- -------------- ---------------- ----------------
TOTAL 3,559 $104,432,425.04 100.00%
S-23
LIEN PRIORITY
AGGREGATE CUT-
OFF DATE % OF ORIGINAL
NUMBER OF PRINCIPAL POOL PRINCIPAL
LIEN PRIORITY INITIAL LOANS BALANCE BALANCE
- -------------- --------------- ---------------- ---------------
First Lien 6 $ 125,130.97 0.12%
Second Lien 3,213 102,084,444.94 97.75
Third Lien 5 121,024.19 0.12
Unsecured 335 2,101,824.94 2.01
- -------------- --------------- ---------------- ---------------
TOTAL 3,559 $104,432,425.04 100.00%
CUT-OFF DATE INITIAL LOAN PRINCIPAL BALANCES
NUMBER AGGREGATE
OF CUT-OFF % OF ORIGINAL
RANGE OF CUT-OFF DATE INITIAL DATE PRINCIPAL POOL PRINCIPAL
PRINCIPAL BALANCES LOANS BALANCE BALANCE
- ----------------------- --------- ---------------- ----------------
$ 1,000 - $10,000 314 $ 1,754,047.86 1.68%
$10,001 - $20,000 587 9,458,050.76 9.06
$20,001 - $30,000 1,140 29,130,432.22 27.89
$30,001 - $40,000 919 32,439,490.22 31.06
$40,001 - $50,000 340 15,896,302.66 15.22
$50,001 - $60,000 170 9,620,653.59 9.21
$60,001 - $70,000 63 4,194,681.71 4.02
$70,001 - $76,808 26 1,938,766.02 1.86
- ----------------------- --------- ---------------- ----------------
TOTAL 3,559 $104,432,425.04 100.00%
As of the Cut-Off Date, the average Cut-Off Date Principal Balance of the
Initial Loans was $29,343.19.
LOAN RATES
AGGREGATE CUT-OFF % OF ORIGINAL
NUMBER OF DATE PRINCIPAL POOL PRINCIPAL
RANGE OF LOAN RATES INITIAL LOANS BALANCE BALANCE
- --------------------- -------------- ----------------- --------------
8.99% - 9.00% 33 $ 1,122,252.17 1.07%
9.01% - 9.50% 1 58,565.40 0.06
9.51% - 10.00% 75 2,721,204.47 2.61
10.01% - 10.50% 8 290,059.89 0.28
10.51% - 11.00% 73 2,606,605.82 2.50
11.01% - 11.50% 20 694,592.48 0.67
11.51% - 12.00% 278 9,390,598.88 8.99
12.01% - 12.50% 261 8,593,258.37 8.23
12.51% - 13.00% 563 14,011,170.75 13.42
13.01% - 13.50% 238 8,025,268.59 7.68
13.51% - 14.00% 585 16,777,332.63 16.07
14.01% - 14.50% 271 7,865,069.86 7.53
14.51% - 15.00% 590 16,712,453.78 16.00
15.01% - 15.50% 178 5,251,786.25 5.03
15.51% - 16.00% 222 5,842,884.41 5.59
16.01% - 16.50% 73 2,127,786.91 2.04
16.51% - 17.00% 67 1,769,359.85 1.69
17.01% - 17.50% 7 194,475.77 0.19
17.51% - 18.00% 14 335,198.76 0.32
18.01% - 18.50% 1 24,000.00 0.02
18.51% - 18.99% 1 18,500.00 0.02
- --------------------- -------------- ----------------- --------------
TOTAL 3,559 $104,432,425.04 100.00%
As of the Cut-Off Date, the weighted average Loan Rate of the Initial Loans
was approximately 13.725% per annum.
S-24
COMBINED LOAN-TO-VALUE RATIOS
AGGREGATE CUT-OFF % OF ORIGINAL
RANGE OF COMBINED NUMBER OF DATE PRINCIPAL POOL PRINCIPAL
LOAN-TO-VALUE RATIOS INITIAL LOANS BALANCES BALANCE
- --------------------- ------------- ----------------- --------------
Unsecured 335 $ 2,101,824.94 2.01%
20.01% - 25.00% 1 18,247.54 0.02
25.01% - 30.00% 2 59,719.38 0.06
35.01% - 40.00% 2 38,167.63 0.04
40.01% - 45.00% 2 27,612.97 0.03
45.01% - 50.00% 1 10,845.08 0.01
50.01% - 55.00% 1 14,821.08 0.01
55.01% - 60.00% 2 32,485.26 0.03
60.01% - 65.00% 1 17,041.00 0.02
65.01% - 70.00% 8 173,302.61 0.17
70.01% - 75.00% 11 262,887.36 0.25
75.01% - 80.00% 8 196,236.65 0.19
80.01% - 85.00% 17 450,824.85 0.43
85.01% - 90.00% 51 1,333,749.52 1.28
90.01% - 95.00% 69 1,779,313.63 1.70
95.01% - 100.00% 181 4,708,176.04 4.51
100.01% - 105.00% 261 7,756,620.94 7.43
105.01% - 110.00% 372 11,183,323.95 10.71
110.01% - 115.00% 518 16,002,663.87 15.32
115.01% - 120.00% 642 20,788,937.69 19.91
120.01% - 125.00% 1,041 36,225,179.51 34.69
125.01% - 130.00% 22 903,332.32 0.86
130.01% - 135.00% 10 322,140.42 0.31
135.01% - 137.00% 1 24,970.80 0.02
- --------------------- ------------- ----------------- --------------
TOTAL 3,559 $104,432,425.04 100.00%
As of the Cut-Off Date, the weighted average Combined Loan-to-Value Ratio of
the Initial Loans (excluding the Unsecured Loans) was approximately 114.79%.
MONTHS SINCE ORIGINATION
AGGREGATE CUT-OFF % OF ORIGINAL
LOAN AGE NUMBER OF DATE PRINCIPAL POOL PRINCIPAL
(IN MONTHS) INITIAL LOANS BALANCE BALANCE
- -------------- -------------- ----------------- --------------
less than one 1,577 $ 48,052,138.14 46.01%
1 - 3 1,924 55,034,355.53 52.70
4 - 6 42 1,060,505.69 1.02
7 - 9 15 269,960.55 0.26
10 - 10 1 15,465.13 0.01
- -------------- -------------- ----------------- --------------
TOTAL 3,559 $104,432,425.04 100.00%
As of the Cut-Off Date, the weighted average number of months since
origination of the Initial Loans was less than one month.
S-25
REMAINING TERMS TO MATURITY
AGGREGATE CUT-OFF % OF ORIGINAL
RANGE OF REMAINING TERMS NUMBER OF DATE PRINCIPAL POOL PRINCIPAL
TO MATURITY (IN MONTHS) INITIAL LOANS BALANCE BALANCE
- -------------------------- --------------- ----------------- --------------
12 2 $ 3,067.81 0.00%
19 - 24 10 26,925.14 0.03
31 - 36 29 110,546.93 0.11
43 - 48 16 54,818.25 0.05
49 - 54 1 3,772.50 0.00
55 - 60 90 716,607.90 0.69
61 - 66 1 35,000.00 0.03
67 - 72 36 197,362.51 0.19
79 - 84 38 308,701.94 0.30
91 - 96 10 104,024.40 0.10
103 - 108 2 9,052.53 0.01
109 - 114 6 74,962.70 0.07
115 - 120 335 5,815,571.96 5.57
139 - 144 43 701,389.57 0.67
151 - 156 1 33,916.24 0.03
169 - 174 7 116,316.77 0.11
175 - 180 819 23,696,816.86 22.69
229 - 234 1 16,437.75 0.02
235 - 240 1,514 48,957,027.91 46.88
259 - 264 1 24,976.04 0.02
283 - 288 1 24,430.78 0.02
295 - 300 596 23,400,698.55 22.41
- -------------------------- --------------- ----------------- --------------
TOTAL 3,559 $104,432,425.04 100.00%
As of the Cut-Off Date, the weighted average remaining term to maturity of
the Initial Loans was approximately 229 months.
S-26
ORIGINAL TERMS TO MATURITY
AGGREGATE CUT-OFF % OF ORIGINAL
ORIGINAL TERM TO NUMBER OF DATE PRINCIPAL POOL PRINCIPAL
MATURITY (IN MONTHS) INITIAL LOANS BALANCE BALANCE
- -------------------------- --------------- ----------------- --------------
12 2 $ 3,067.81 0.00%
23 1 2,700.00 0.00
24 9 24,225.14 0.02
35 2 4,355.99 0.00
36 27 106,190.94 0.10
47 2 6,348.00 0.01
48 14 48,470.25 0.05
55 1 3,772.50 0.00
59 11 41,575.41 0.04
60 79 675,032.49 0.65
66 1 35,000.00 0.03
70 14 56,268.57 0.05
72 22 141,093.94 0.14
82 4 15,499.21 0.01
84 34 293,202.73 0.28
94 2 13,975.20 0.01
96 8 90,049.20 0.09
108 2 9,052.53 0.01
117 6 47,229.34 0.05
120 335 5,843,305.32 5.60
144 43 701,389.57 0.67
156 1 33,916.24 0.03
180 826 23,813,133.63 22.80
240 1,515 48,973,465.66 46.89
260 1 24,976.04 0.02
288 1 24,430.78 0.02
300 596 23,400,698.55 22.41
- -------------------------- --------------- ----------------- --------------
TOTAL 3,559 $104,432,425.04 100.00%
As of the Cut-Off Date, the weighted average original term to maturity of the
Initial Loans was approximately 229.72 months.
FICO SCORE
AGGREGATE CUT-OFF % OF ORIGINAL
NUMBER OF DATE PRINCIPAL POOL PRINCIPAL
RANGE OF FICO SCORES INITIAL LOANS BALANCE BALANCE
- ---------------------- --------------- ----------------- ---------------
532.00 - 600.00 26 $ 715,585.47 0.69%
600.01 - 700.00 2,642 80,437,800.82 77.02
700.01 - 800.00 879 23,134,194.22 22.15
800.01 - 826.00 12 144,844.53 0.14
- ---------------------- --------------- ----------------- ---------------
TOTAL 3,559 $104,432,425.04 100.00%
As of the Cut-Off Date, the weighted average FICO score of the Initial Loans
was 674.
S-27
CONVEYANCE OF SUBSEQUENT LOANS
The Sale and Servicing Agreement permits the Trust to purchase from the
Transferor, subsequent to the date hereof and prior to July 31, 1997, Subsequent
Loans in an amount not to exceed $34,767,574.96 in aggregate Principal Balance
for inclusion in the Trust. Accordingly, the statistical characteristics of the
Pool after giving effect to the acquisition of any Subsequent Loans will likely
differ from the information specified above (which is based exclusively on the
Initial Loans).
The inclusion of Subsequent Loans in the Trust during the Pre-Funding
Period is subject to the following requirements: (i) no Subsequent Loan may be
30 or more days contractually delinquent as of the applicable Cut-Off Date; (ii)
the lien securing any such Subsequent Loan that is a Mortgage Loan must be not
lower than third priority; (iii) such Subsequent Loan must have an outstanding
Principal Balance of at least $2,500 as of the applicable Cut-Off Date; (iv) the
first payment on such Subsequent Loan must be due no later than the last day of
Due Period immediately succeeding the Due Period in which it is transferred,
unless the Transferor deposits into the Collection Account 30 days' interest on
such Subsequent Loan at the Loan Rate less the applicable Servicing Fee, in
which event the first payment on such Subsequent Loan must be due no later than
the last day of the second Due Period following the Due Period in which the
transfer occurs; (v) such Subsequent Loan is a fully amortizing loan with level
payments over a remaining term of no fewer than 10 years and no more than 25
years; (vi) such Subsequent Loan must have a fixed Loan Rate of at least 11.75%;
(vii) any such Subsequent Loan that is a Mortgage Loan must have an original
Combined Loan-to-Value Ratio of no more than 125%; and (viii) no more than 2% of
the Subsequent Loans (by Cut-Off Date Principal Balance) shall be Unsecured
Loans.
EMPIRE FUNDING
GENERAL
Empire Funding Corp. ("EMPIRE FUNDING"), the Transferor and the Servicer
under the Sale and Servicing Agreement, is an Oklahoma corporation that is a
mortgage lender engaged in the business of originating, selling and servicing
home loans generally secured by one- to four-family residential properties, with
an emphasis on non-conforming junior lien loans. Empire Funding was incorporated
in Oklahoma in 1987 and currently is licensed as a mortgage lender or
registered, as required, in 35 states.
Empire Funding has its principal offices at 9737 Great Hills Trail, Austin,
Texas 78759 (telephone number (800) 261-4898). It currently has 439 employees
including professionals and support staff.
As of March 31, 1997, Empire Funding was servicing a loan portfolio of
approximately $646 million. This loan portfolio consisted of 51,731 loans with
an average principal balance of approximately $12,496.
Empire Funding commenced servicing FHA Title I loans in 1993 and
conventional home loans in 1995. Since 1995, Empire Funding has substantially
increased the volume of conventional home loans, as well as other types of home
loans that it has originated and serviced. Accordingly, there is no
representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of the Loans.
S-28
SERVICING EXPERIENCE
The following is a general description of the Servicer's servicing policies
and procedures currently employed by the Servicer with respect to its
conventional loan portfolio. The Servicer revises such policies and procedures
from time to time to reflect changing economic and market conditions and to
comply with legal developments.
The Servicer's loan servicing activities include responding to borrower
inquiries, processing and administering loan payments, reporting and remitting
principal and interest to trustees, investors and other entities that own
interests in the loans, collecting delinquent loan payments, conducting
foreclosure proceedings and disposing of foreclosed property and otherwise
administering the loans. The Servicer utilizes a computer-based loan servicing
system. It provides payment processing and cashiering functions, automated
payoff statements, on-line collection, statement and notice mailing along with a
full range of investor reporting requirements. The Servicer's servicing systems
conform with accepted servicing standards.
Collection activity begins once a loan is 10 days delinquent (without
regard to any grace period). The focus of collection activity is understanding
the cause of, and finding a solution for, the delinquency. Collection calls are
made every other day until acceptable payment arrangements have been made. In
addition to collection calls, the servicing system generates delinquent letters
at 15 days and at 25 days of delinquency. If no contact with the borrower has
been achieved within 15 days after the first attempted phone call, or at 25 days
of delinquency, a third party property inspection company may be engaged to
visit the borrower's home to complete an exterior inspection of the property.
The inspection provides specific details about the property, including whether
the property is vacant or occupied, and a notice is left to call the Servicer's
servicing department.
Once the loan becomes 45 to 60 days delinquent, a demand notice is sent to
the borrower, via certified mail with return receipt requested. Collection
calls are continued at least every other day and additional delinquency notices
are manually ordered by the Servicer's servicing department. At 90 days of
delinquency, the status of any senior lien is verified, all tax information is
verified and a current credit report is obtained to determine if there have been
any additional liens or judgments filed against the borrower. Finally, at 120
days of delinquency, the loan file is prepared for non-performing review. All
information obtained at 90 days is updated and referred to the Servicer's Non-
Performing Loan Review Committee for determination of appropriate action which
may include negotiating a settlement or new payment plan, pursuing judgment
against the borrower, foreclosure or charge off.
Under the Sale and Servicing Agreement, the Servicer may resign from its
duties thereunder only in accordance with the terms thereof. No removal or
resignation will become effective until the Indenture Trustee or a successor
servicer has assumed the Servicer's responsibilities and obligations in
accordance therewith.
The Servicer may not assign its obligations under the Sale and Servicing
Agreement unless it first obtains the written consent of the Indenture Trustee;
provided, however, that any assignee must meet the eligibility requirements for
a successor servicer set forth in the Sale and Servicing Agreement.
Notwithstanding anything in the preceding sentence to the contrary, the Servicer
may delegate certain of its obligations to a sub-servicer pursuant to a sub-
servicing agreement. A sub-servicer must meet certain eligibility requirements,
as set forth in the Sale and Servicing Agreement, and each sub-servicing
agreement shall require that the Loans be serviced in a manner that is
consistent with the terms of the Sale and Servicing Agreement.
UNDERWRITING CRITERIA
The majority of the Initial Loans have been and the majority of the
Subsequent Loans will have been, underwritten by the Transferor pursuant to its
"Equalizer" program. Generally, the underwriting standards of the Transferor's
"Equalizer" program place a greater emphasis on the creditworthiness of the
borrower than on the underlying collateral in evaluating the likelihood that a
borrower will be able to repay a loan.
S-29
Underwriting Guidelines for "Equalizer". The Transferor's "Equalizer"
program is designed for homeowners who may have little or no equity in their
property, but who possess good to excellent credit histories and provable income
and use the proceeds for home improvements and/or debt consolidation. Under the
"Equalizer" program, the Transferor obtains credit information with respect to
each applicant from several sources and generally does not permit the ratio of
total monthly debt obligations to monthly gross income to exceed 45%.
Generally, the applicant will have a FICO score of 620 or greater. The
principal amount of the "Equalizer" loan originated or purchased by the
Transferor generally does not exceed $75,000. Other than on an exception basis,
the loans originated under the "Equalizer" program will not have a Combined
Loan-to-Value Ratio in excess of 125%. In general, the loan is secured by a
first, second or third lien on the related property. In most instances the
property is improved with an owner-occupied one- or two-family residence.
The Transferor's underwriting standards are designed to provide a program
for all qualified applicants in an amount and for a period of time consistent
with their ability to repay. All the Transferor's underwriting determinations
are made without regard to sex, marital status, race, color, religion, age or
national origin. Each application is evaluated on its individual merits,
applying the stated guidelines to ensure that each application is considered
equitably.
The "Equalizer" program allows for "stated value" (i.e., independent
verification of property values are not required) on loans of $35,000 and less.
Generally, the Transferor bases the loan decision on the creditworthiness of the
borrower, rather than the underlying collateral. However, the Transferor
reserves the right to require an appraisal or other documentation verifying
values in each and every transaction.
For loans in excess of $35,000, property values are generally substantiated
by one of the following: an appraisal dated within 12 months of application, a
FHLMC Form 704 drive-by inspection, a tax bill assessment if the value has been
established within last 12 months, or a HUD-1 statement if dated within six
months of the application. On a case by case basis, Transferor reserves the
right to accept other forms of documentation.
A credit report by an independent, nationally recognized credit reporting
agency reflecting the applicant's complete credit history is required. The
credit report typically contains information reflecting delinquencies,
repossessions, judgments, foreclosures, bankruptcies and similar instances of
adverse credit that can be discovered by a search of public records. An
applicant's recent credit report is used to evaluate the borrower's payment
record and must be current at the time of application. A lack of credit history
payment will not necessarily preclude a loan if the borrower has sufficient
equity in the property.
Generally, the Transferor requires a title report by an approved title
company or legal firm on all property securing loans it originates or purchases.
Title reports indicate the lien position of any related senior mortgage loans.
The applicant is also required to secure hazard and, in certain instances, flood
insurance in an amount sufficient to cover replacement cost or full insurable
value of the mortgaged property (or in the case of flood insurance, the maximum
amount available under the Flood Disaster Protection Act of 1973).
Generally, the Transferor has established classifications with respect to
the credit profiles of applicants based on FICO scores and debt to income
ratios. The criteria currently being used by the Transferor to classify loan
applicants are generally as follows:
LOAN AMOUNT FICO SCORE DEBT-TO-INCOME RATIO
$70,001 - $75,000 700 45%
$60,001 - $70,000 680 45%
$50,001 - $60,000 660 45%
$40,001 - $50,000 640 45%
$40,000 or less 620 45%
S-30
Currently, the Transferor allows the following compensating factors for
exceeding the maximum debt-to-income ratio by a maximum of 5 percentage points:
1) high income with substantial disposable income -- if the FICO score is
equal to or greater than 660, $2,500 in disposable income is required;
if the FICO score is less than 660, $3,000 in disposable income is
required (disposable income being defined for this purpose as gross
income less debt service); and
2) documented savings pattern.
In addition to FICO score and debt-to-income ratio parameters, the
Transferor also requires that each loan applicant be a generally acceptable
credit risk as measured by the following:
Existing mortgage loans -- Required to be current at time of application
being submitted, with generally a maximum of one 30-day late in the past 12
months.
Existing non-mortgage credit -- Minor derogatory items are acceptable. In
some cases, Letters of Explanation ("LOE's") may be required in explaining
derogatory items. Generally, collections and/or charge-offs must be
brought current with satisfactory LOE's. Installment credit histories can
show one 30-day delinquency in last 12 months and two 30-day delinquencies
in last 24 months, while revolving credit histories can show two 30-days
delinquencies in the last 12 months and three 30-day delinquencies in the
last 24 months. On a case by case basis, Transferor will allow for
deviation from these parameters if satisfactory LOE's are obtained.
In response to changes and developments in the consumer finance area as
well as the refinement of the Transferor's credit evaluation methodology, the
Transferor's underwriting requirements for certain types of home loans may
change from time to time resulting sometimes in more stringent and sometimes in
less stringent underwriting requirements. Depending upon the date on which the
Loans were originated or purchased by the Transferor, the Loans included in the
Pool may have been originated or purchased by the Transferor under different
underwriting requirements, and accordingly, certain Loans included in the Pool
may be of a different credit quality and have different loan characteristics
from those of other Loans. Furthermore, to the extent that certain Loans were
originated or purchased by the Transferor in accordance with less stringent
underwriting requirements, such Loans may be more likely to experience higher
rates of delinquencies, defaults and losses than those Loans originated or
purchased in accordance with more stringent underwriting requirements.
REPURCHASE OR SUBSTITUTION OF LOANS
The Transferor is required (i) within 60 days after discovery or notice
thereof to cure in all material respects any breach of the representations or
warranties made with respect to any Loan or as to which a document deficiency
exists (each, a "DEFECTIVE LOAN") or (ii) on or before the Determination Date
next succeeding the end of such 60 day period, to repurchase such Defective Loan
at a price (the "PURCHASE PRICE") equal to the Principal Balance of such
Defective Loan as of the date of repurchase, plus all accrued and unpaid
interest on such Defective Loan to and including the date of repurchase computed
at the Loan Rate. In lieu of repurchasing a Defective Loan, the Transferor may
replace such Defective Loan with one or more Qualified Substitute Loans. If the
aggregate outstanding principal balance of the Qualified Substitute Loan(s) is
less than the outstanding Principal Balance of the Defective Loan(s), the
Transferor will also remit for distribution to the holders of the Offered
Securities an amount (a "SUBSTITUTION ADJUSTMENT") equal to such shortfall which
will result in a prepayment of principal on the Offered Securities for the
amount of such shortfall. As used herein, a "QUALIFIED SUBSTITUTE LOAN" is a
home loan that (i) has an interest rate which differs from the Loan Rate for the
Defective Loan which it replaces (each, a "DELETED LOAN") by no more than two
percentage points in excess of such Loan Rate, (ii) has a principal balance
(after application of all payments received on or prior to the date of such
substitution) equal to or less than the Principal Balance of the Deleted Loan as
of such date, (iii) has a lien priority no lower than the Deleted Loan, (iv)
complies as of the date of substitution with each representation and warranty
set forth in the Sale and Servicing
S-31
Agreement with respect to the Loans, and (v) has a borrower with a comparable
credit grade classification to that of the Obligor with respect to the Deleted
Loan.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing Defective Loans or
substituting Qualified Substitute Loans for Defective Loans in the manner
described above. If the Transferor repurchases, or is obligated to repurchase,
Defective Loans from any additional series of asset backed securities, the
financial ability of the Transferor to repurchase Defective Loans from the Trust
may be adversely affected. In addition, other events relating to the Transferor
and its mortgage lending and consumer finance operations can occur that would
adversely affect the financial ability of the Transferor to repurchase Defective
Loans from the Trust, including, without limitation, the sale or other
disposition of all or any significant portion of its assets. If the Transferor
is unable to repurchase or replace a Defective Loan, the Transferor, 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 Loan. If the
Transferor is unable to collect all amounts due to the Trust with respect to
such Defective Loan, the resulting loss will be borne by the holders of the
Offered Securities to the extent that such loss is not otherwise covered by
amounts available from the credit enhancement provided for the Offered
Securities. See "Risk Factors--Adequacy of Credit Enhancement" and "--
Limitations on Repurchase or Replacement of Defective Loans by Transferor"
herein.
DELINQUENCY EXPERIENCE
Certain information concerning the delinquency experience on loans
originated or purchased, and serviced, by Empire Funding is set forth below.
The delinquency experience percentages set forth herein are calculated on the
basis of the total loans originated or purchased, and serviced, by Empire
Funding as of the end of the periods indicated. Since March 31, 1996 less than
1.50% of loans (by loan principal balance) in the Total Servicing Portfolio were
serviced, but not originated or purchased, by Empire Funding.
----------------------------------------------------------------------
March 31, June 30, September December March 31, April 30,
1996 1996 30, 1996 31, 1996 1997 1997
----------------------------------------------------------------------
(dollars in thousands)
Conventional Servicing Portfolio/(1)(2)/ 0.24% 0.09% 0.39% 0.80% 0.55% 0.39%
Delinquency Period:/(3)/
30-59 days delinquent...................
60-89 days delinquent................... 0.00% 0.03% 0.15% 0.20% 0.14% 0.22%
90+ days delinquent..................... 0.00% 0.00% 0.04% 0.24% 0.18% 0.11%
Total................................... 0.24% 0.12% 0.58% 1.24% 0.87% 0.72%
Conventional Servicing Portfolio at end
of period................................ $ 13,277 $ 31,498 $ 68,276 $100,369 $172,039 $236,185
Total Servicing Portfolio /(2)(4)(5)/
Delinquency Period:/(3)/
30-59 days delinquent................... 4.10% 3.66% 4.05% 4.98% 4.12% 3.37%
60-89 days delinquent................... 1.08% 1.23% 1.22% 1.43% 1.21% 1.18%
90+ days delinquent..................... 1.60% 1.66% 1.96% 2.19% 1.86% 1.71%
Total................................... 6.79% 6.56% 7.22% 8.60% 7.19% 6.26%
Total Servicing Portfolio at end of
period................................... $379,958 $436,937 $506,469 $562,345 $646,450 $715,973
(1) Empire Funding's Conventional Servicing Portfolio does not include FHA
Title I loans.
(2) Totals may not add due to rounding.
(3) The dollar amount of delinquent loans as a percentage of total dollar amount
of loans in the relevant portfolio (including loans owned by Empire Funding)
as of the date indicated.
(4) Total Servicing Portfolio includes Empire Funding's FHA Title I Servicing
Portfolio as well as its Conventional Servicing Portfolio.
(5) Since March 31, 1996 less than 1.50% of loans (by loan principal balance) in
the Total Servicing Portfolio were serviced, but not originated or
purchased, by Empire Funding.
S-32
PREPAYMENT AND YIELD CONSIDERATIONS
Except as otherwise provided herein, no principal distributions will be made
on any Class of Senior Notes (other than the Class A-6 Notes) until the Class
Principal Balance of each Class of Senior Notes having a lower numerical
designation has been reduced to zero, and no principal distributions will be
made on the Mezzanine Notes until all required principal distributions have been
made in respect of the Senior Notes. See "Description of the Offered
Securities--Distributions on the Offered Securities" herein. As the rate of
payment of principal of each Class of Notes depends primarily on the rate of
payment (including prepayments) of the Loans and the availability and amount of
Excess Spread, final payment of any Class of Notes could occur significantly
earlier than their respective Final Scheduled Distribution Dates. Holders of
the Offered Securities will bear the risk that they may not be able to reinvest
principal payments on the Offered Securities at yields at least equal to the
yield on their respective Offered Securities. No prediction can be made as to
the rate of prepayments on the Loans in either stable or changing interest rate
environments. Any reinvestment risk resulting from the rate of prepayment of
the Loans and the distribution of such payments to the holders of the Offered
Securities will be borne entirely by the holders of the Offered Securities.
The subordination of the Class B Certificates to the Notes will provide
limited protection to the Noteholders against losses on the Loans. Accordingly,
the yield on the Class B Certificates will be extremely sensitive to the
delinquency and loss experience of the Loans and the timing of any such
delinquencies and losses as well as the amount of Excess Spread from time to
time. If the actual rate and amount of delinquencies and losses experienced by
the Loans exceed the rate and amount of such delinquencies and losses assumed by
an investor, the yield to maturity on the Class B Certificates may be lower than
anticipated.
The effective yield to the holders of any Class of Offered Securities will be
lower than the yield otherwise produced by the applicable Note Interest Rate,
because the distribution of the interest accrued during each Due Period (a
calendar month consisting of thirty days) will not be made until the
Distribution Date occurring in the month following such Due Period. See
"Description of the Offered Securities--Distributions on the Offered Securities"
herein. This delay will result in funds being passed through to the holders of
the Offered Securities approximately 25 days after the end of the monthly
accrual period, during which 25-day period no interest will accrue on such
funds. As discussed in greater detail below, greater than anticipated
distributions of principal can also affect the yield on Offered Securities
purchased at a price greater or less than par.
The rate of principal payments on the Offered Securities, the aggregate amount
of each interest payment on the Offered Securities and the yield to maturity on
the Offered Securities will be directly related to and affected by the rate and
timing of principal reductions on the Loans, the application of Excess Spread to
reduce the Class Principal Balances of the Offered Securities to the extent
described herein under "Description of Credit Enhancement --
Overcollateralization," and, under certain circumstances, the delinquency rate
experienced by the Loans. The principal reductions on such Loans 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 dispositions. On or after any
Distribution Date on which the Pool Principal Balance declines to 10% or less of
the sum of the Original Pool Principal Balance and the Original Pre-Funding
Amount, the Majority Residual Interestholders may effect an early termination of
the Trust, resulting in a redemption of the Notes and prepayment of the Class B
Certificates. See "Description of the Offered Securities--Optional Termination
of the Trust" herein.
The "weighted average life" of an Offered Security 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 Offered Security is repaid. The weighted average
life of the Offered Security will be influenced by, among other factors, the
rate at which principal reductions occur on the Loans, the extent to which high
rates of delinquencies on the Loans during any Due Period result in interest
collections on the Loans in amounts less than the amount of interest
distributable on the Offered Securities, and the rate at which Excess Spread is
distributed to holders of the Offered Securities as described herein, and the
extent to which any reduction of the Overcollateralization Amount is paid to the
holders of the Residual Interest as described herein. If substantial principal
prepayments on the Loans are received from unscheduled prepayments, liquidations
or repurchases, then the distributions to the holders of the Offered Securities
S-33
resulting from such prepayments may significantly shorten the actual average
lives of the Offered Securities. If the Loans experience delinquencies and
certain defaults in the payment of principal, then the holders of the Offered
Securities will similarly experience a delay in the receipt of principal
distributions attributable to such delinquencies and defaults which in certain
instances may result in a longer actual average lives of the Offered Securities
than would otherwise be the case. However, to the extent that the Principal
Balances of Liquidated Loans are included in the principal distributions on the
Offered Securities, then the holders of the Offered Securities will experience
an acceleration in the receipt of principal distributions which in certain
instances may result in shorter actual average lives of the Offered Securities
than would otherwise be the case. Interest shortfalls on the Loans due to
principal prepayments in full and curtailments and any resulting shortfalls in
amounts distributable on the Offered Securities will be covered to the extent of
amounts available from the credit enhancement provided for the Offered
Securities. See "Risk Factors--Adequacy of Credit Enhancement" herein.
The rate and timing of principal reductions on the Loans will be influenced by
a variety of economic, geographic, social and other factors. These factors may
include changes in Obligors' housing needs, job transfers, unemployment,
Obligors' 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. Each of the Loans may be assumed, with
the Transferor's consent, upon the sale of the Mortgaged Property. Certain of
the Loans contain prepayment penalty provisions which generally obligate the
related Obligor to pay a penalty in connection with a prepayment of the
Obligor's Loan. The Servicer, in its discretion, may elect to enforce or
abstain from enforcing any prepayment penalty. The Servicer has no obligation
to enforce prepayment penalties and will exercise its rights to enforce them to
the extent it deems appropriate. The Servicer is entitled to retain all
prepayment penalties to the extent it collects the penalties from Obligors. Any
enforcement by the Servicer of the prepayment penalties contained in the Loans
may have an effect on the decisions of Obligors to prepay their Loans and may
affect the weighted average lives of the Notes.
Generally, the rate of prepayment on a pool of fixed-rate loans is affected by
prevailing market interest rates for similar types of loans of a comparable term
and risk level. If prevailing interest rates were to fall significantly below
the respective Loan Rates on the Loans, the rate of prepayment (and refinancing)
would be expected to increase. Conversely, if prevailing interest rates were to
rise significantly above the respective Loan Rates on the Loans, the rate of
prepayment on the Loans would be expected to decrease. In addition, depending
on prevailing market interest rates, the future outlook for market interest
rates and economic conditions generally, some borrowers may sell or refinance
mortgaged properties in order to realize their equity in the mortgaged
properties, if any, to meet cash flow needs or to make other investments. In
addition, any future limitations on the rights of borrowers to deduct interest
payments on mortgage loans for Federal income tax purposes may result in a
higher rate of prepayment on the Loans. The Transferor makes no representations
as to the particular factors that will affect the prepayment of the Loans, as to
the relative importance of such factors, or as to the percentage of the
Principal Balances of the Loans that will be paid as of any date.
Distributions of principal to holders of the Offered Securities at a faster
rate than anticipated will increase the yields on Offered Securities purchased
at discounts but will decrease the yields on Offered Securities purchased at
premiums, which distributions of principal may be attributable to scheduled
payments and prepayments of principal on the Loans and to the application of
Excess Spread. The effect on an investor's yield due to distributions of
principal to the holders of the Offered Securities (including, without
limitation, prepayments on the Loans) occurring at a rate that is faster (or
slower) than the rate anticipated by the investor during any period following
the issuance of the Offered Securities will not be entirely offset by a
subsequent like reduction (or increase) in the rate of such distributions of
principal during any subsequent period.
The rate of delinquencies and defaults on the Loans, and the recoveries, if
any, on Defaulted Loans and foreclosed properties, will also affect the rate and
timing of principal payments on the Loans and, accordingly, the weighted average
lives of the Offered Securities, and could cause a delay in the payment of
principal or a slower rate of principal amortization to the holders of Offered
Securities. Certain factors may influence such delinquencies and defaults,
including origination and underwriting standards, Combined 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 few data are
available with respect to the rate of default on home loans similar to the
Loans. In general,
S-34
the rate of default on junior lien loans with high Combined Loan-to-Value Ratios
may be higher than that of junior lien home loans with lower Combined Loan-to-
Value Ratios, or first lien loans, secured by comparable properties.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the Loans will be affected by the general economic condition of the region of
the country in which the related Mortgaged Properties are located or the related
Obligors are residing. See "The Pool" herein. The risk of delinquencies and
loss 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.
Because principal distributions generally are paid to certain Classes of
Offered Securities before other Classes, holders of the Classes of Mezzanine
Notes bear a greater risk of losses from delinquencies and defaults on the Loans
than holders of the Classes of Notes having earlier priorities for payment of
principal. In addition, because principal distributions generally are paid to
the Noteholders before the Certificateholders, the Certificateholders will bear
a greater risk of such delinquencies and losses than holders of the Notes. See
"Description of Credit Enhancement--Subordination and Allocation of Losses"
herein.
Although certain data have been published with respect to the historical
prepayment experience of certain residential mortgage loans, such mortgage loans
may differ in material respects from the Loans and such data may not be
reflective of conditions applicable to the Loans. No prepayment history is
generally available with respect to the Loans or similar types of loans, and
there can be no assurance that the Loans will achieve or fail to achieve any
particular rate of principal prepayment. Several factors suggest that the
prepayment experience of the Pool may be significantly different from that of a
pool of conventional first lien, single family mortgage loans with equivalent
interest rates and maturities. One such factor is that the Principal Balance of
the average Loan is substantially 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 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 the refinancing of a loan at a lower interest rate
less attractive to the borrower as the perceived impact to the borrower of such
lower interest rate on the size of the monthly payment may not be significant.
Other factors that might be expected to affect the prepayment rate of the Pool
include general economic conditions, the amounts of and interest rates on the
related senior mortgage loans, and the tendency of borrowers to use first lien
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 a substantial majority of the Loans had Combined Loan-to-Value
Ratios that exceeded 100% or were unsecured, the related Obligors will generally
have significantly less opportunity to refinance the indebtedness and,
therefore, a lower prepayment rate may be experienced by the Pool than by a pool
of first or junior lien mortgage loans that have Combined Loan-to-Value Ratios
less than 100%. Given these characteristics, the Loans may experience a higher
or lower rate of prepayment than first lien mortgage loans.
EXCESS SPREAD AND REDUCTION OF OVERCOLLATERALIZATION AMOUNT
The overcollateralization feature has been designed to accelerate the
principal amortization of the Offered Securities relative to the principal
amortization of the Loans. If on any Distribution Date, the
Overcollateralization Target Amount exceeds the Overcollateralization Amount,
any Excess Spread will be distributed to the holders of the Classes of Offered
Securities in the order and amounts specified herein under "Description of the
Offered Securities--Distributions on the Offered Securities--Distribution
Priorities." If the Overcollateralization Amount equals the
Overcollateralization Target Amount for such Distribution Date, Excess Spread
otherwise distributable to the holders of the Offered Securities as described
above will instead be distributed in respect of Loss Reimbursement Deficiencies,
if any, and thereafter to the holders of the Class B Certificates and then to
the holders of the Residual Interest. On the Stepdown Date and on each
Distribution Date thereafter as to which the Overcollateralization Amount is or,
after taking into account all other distributions to be made on such
Distribution Date, would be at least equal to the Overcollateralization Target
Amount, amounts otherwise distributable as principal to the holders of the
Offered Securities on such Distribution Date in reduction of their Class
Principal
S-35
Balances may instead be distributed in respect of the applicable Classes in
payment of their respective Loss Reimbursement Deficiencies and thereafter to
the holders of the Class B Certificates and then to the holders of the Residual
Interest, thereby reducing the rate of, and under certain circumstances
delaying, the principal amortization of the Offered Securities, until the
Overcollateralization Amount is reduced to the Overcollateralization Target
Amount. In particular, high rates of delinquencies on the Loans during any Due
Period may cause the amount of interest received on the Loans during such Due
Period to be less than the amount of interest distributable on the Offered
Securities on the related Distribution Date. Such an occurrence will cause the
Class Principal Balances of the Offered Securities to decrease at a slower rate
relative to the Pool Principal Balance, resulting in a reduction of the
Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount. As described herein, the yield to maturity on an Offered Security
purchased at a premium or a discount will be affected by the extent to which any
amounts are paid to the holders of the Class B Certificates and the Residual
Interest in lieu of payment to the holders of the Offered Securities in
reduction of their Class Principal Balances. If the actual distributions of any
such amounts to the holders of the Class B Certificates and the Residual
Interest occur sooner than anticipated by an investor who purchases an Offered
Security at a discount, the actual yield to such investor may be lower than such
investor's anticipated yield. If the actual distributions of any such amounts
to the holders of the Class B Certificates and the Residual Interest occur later
than anticipated by an investor who purchases an Offered Security at a premium,
the actual yield to such investor may be lower than such investor's anticipated
yield. The amount payable to the holders of the Class B Certificates and the
Residual Interest that would otherwise be applied in reduction of the
Overcollateralization Amount or in payment of Loss Reimbursement Deficiencies on
any Distribution Date will be affected by the Overcollateralization Target
Amount as well as by the actual default and delinquency experience of the Pool
and the principal amortization of the Pool.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the Offered Securities
will be affected by the rate and timing of principal payments (including
prepayments) in relation to the prevailing interest rates at the time of receipt
of such principal payments. For example, during periods of falling interest
rates, holders of the Offered Securities are likely to receive an increased
amount of principal payments from the Loans at a time when such holders may be
unable to reinvest such payments in investments having a yield and rating
comparable to the Offered Securities. Conversely, during periods of rising
interest rates, holders of the Offered Securities are likely to receive a
decreased amount of principal prepayments from the Loans at a time when such
holders may have an opportunity to reinvest such payments in investments having
a higher yield than, and a comparable rating to, the Offered Securities.
FINAL SCHEDULED DISTRIBUTION DATES
To the extent not previously paid, the Class Principal Balance of each Class
of Notes will be payable in full on the Final Scheduled Distribution Date for
each Class of Notes set forth in the "Summary of Terms" herein. The actual
maturity of any Class of Notes may be substantially earlier than the Final
Scheduled Distribution Date set forth herein under "Summary of Terms."
WEIGHTED AVERAGE LIVES OF THE OFFERED SECURITIES
The following information is given solely to illustrate the effect of
prepayments of the Loans on the weighted average lives of the Offered Securities
under certain stated assumptions and is not a prediction of the prepayment rate
that may actually be experienced by the 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 Offered Securities will be
influenced by the rate at which principal of the Loans is paid, which may be in
the form of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes reductions of principal, including, without limitation,
those resulting from unscheduled full or partial prepayments, refinancings,
liquidations and write-offs due to defaults, casualties or other dispositions
and substitutions and repurchases by or on behalf of the Transferor), the rate
at which Excess Spread is distributed to holders of the Offered Securities as
described herein, the delinquency rate of the Loans from time to time and the
extent to which any amounts are distributed to the holders of the Residual
Interest as described herein.
S-36
Prepayments on loans such as the Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the prepayment assumption (the "PREPAYMENT ASSUMPTION"), which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of the pool of loans for the life of such loans. A 100% Prepayment
Assumption assumes a constant prepayment rate ("CPR") of 3.0% per annum of the
outstanding principal balance of such loans in the first month of the life of
the loans and an additional approximate 1.0% (expressed as a percentage per
annum) in each month thereafter until the twelfth month; beginning in the
twelfth month and in each month thereafter during the life of the loans, a CPR
of 14.0% per annum each month is assumed. As used in the table below, a 0%
Prepayment Assumption assumes a prepayment rate equal to 0% of the Prepayment
Assumption (i.e., no prepayments). Correspondingly, a 75% Prepayment Assumption
assumes a prepayment rate equal to 75% of the Prepayment Assumption, and so
forth. The Prepayment Assumption does not purport to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of loans, including the Loans. Neither the Transferor
nor the Depositor makes any representations about the appropriateness of the
Prepayment Assumption or the CPR.
MODELING ASSUMPTIONS. For purposes of preparing the tables below, the
following assumptions (the "MODELING ASSUMPTIONS") have been made:
(i) all scheduled principal payments on the Loans are timely received on the
first day of a Due Period, which will begin on the first day of each month and
end on the thirtieth day of the month, with the first Due Period commencing on
May 1, 1997, no delinquencies or losses occur on the Loans and all Loans have a
first payment date that occurs thirty (30) days after the origination thereof;
(ii) the scheduled payments on the Loans have been calculated on the
outstanding Principal Balance (prior to giving effect to prepayments), the Loan
Rate and the remaining term to stated maturity such that the Loans will fully
amortize by their remaining term to stated maturity;
(iii) all scheduled payments of interest and principal in respect of the
Loans have been made through the Cut-Off Date;
(iv) all Loans prepay monthly at the specified percentages of the Prepayment
Assumption, no optional or other early termination of the Offered Securities
occurs (except with respect to the calculation of the "Weighted Average Life-to-
Call (Years)" figures in the following tables) and no substitutions or
repurchases of the Loans occur;
(v) all prepayments in respect of the Loans include 30 days' accrued interest
thereon;
(vi) the Closing Date for the Offered Securities is May 29, 1997 and each year
will consist of 360 days;
(vii) cash distributions are received by the holders of the Offered
Securities on the 25th day of each month, commencing in June 1997;
(viii) the Overcollateralization Target Amount will be as defined herein;
(ix) the Pre-Funding Pro Rata Distribution Trigger does not occur;
(x) the Note Interest Rate for each Class of Notes is as set forth on the
cover page hereof; provided, however, that interest on the Class A-5 Notes for
the period commencing on the first day of the month in which the Clean-up Call
Date occurs is 8.46%;
(xi) the additional fees deducted from the interest collections in respect of
the Loans include the Indenture Trustee Fee, the Custodian Fee and the Servicing
Fee;
(xii) no reinvestment income from any Account is earned and available for
distribution;
S-37
(xiii) Sub-Pool 7 (specified in the table below) is transferred to the Trust
in June 1997 with principal payments on such Loans being received by the
Servicer in June 1997 and passed through to holders of the Offered Securities on
the Distribution Date in July 1997;
(xiv) sufficient funds will be available in the Capitalized Interest Account
to cover any shortfalls in interest due to the Pre-Funding Account and the
transfer of Loans described in clause (xiii) above; and
(xv) the Pool consists of Loans having the following characteristics:
ASSUMED LOAN CHARACTERISTICS
ORIGINAL REMAINING
CUT-OFF DATE TERM TO TERM TO
PRINCIPAL MATURITY MATURITY
SUB-POOL BALANCE LOAN RATE (MONTHS) (MONTHS)
- ---------- --------------- ---------- --------- ---------
1 $ 915,738.53 13.4296% 56 55
2 541,064.45 13.7193% 78 78
3 6,003,611.59 13.3720% 120 119
4 24,548,439.44 13.7581% 179 178
5 48,973,465.66 13.8491% 240 239
6 23,450,105.37 13.5336% 300 300
7* 34,767,574.96 13.7251% 230 230
--------------- ---------- --------- ---------
$139,200,000.00 13.7251% 230 229
===============
- -----------------------
* Sub-Pool 7 represents the Original Pre-Funded Amount.
The tables on the following pages indicate at the specified percentages of the
Prepayment Assumption the corresponding weighted average lives of each Class of
Notes.
S-38
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION/(1)/
Class A-1 Notes
------------------------------------------
Date 0% 50% 75% 100% 150% 200%
- ---------------------------- ------- ------ ------ ------ ------ ------
Initial Percent............. 100% 100% 100% 100% 100% 100%
May 1998................... 45% 9% 0% 0% 0% 0%
May 1999................... 0% 0% 0% 0% 0% 0%
Weighted Average Life-
to-Maturity (Years)/(2)/.. 0.94 0.63 0.56 0.50 0.43 0.38
Weighted Average Life-
to-Call (Years)/(2)/...... 0.94 0.63 0.56 0.50 0.43 0.38
___________
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-39
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION/(1)/
Class A-2 Notes
------------------------------------------
Date 0% 50% 75% 100% 150% 200%
- ---------------------------- ------- ------ ------ ------ ------ ------
Initial Percent............. 100% 100% 100% 100% 100% 100%
May 1998................... 100% 100% 91% 73% 37% 0%
May 1999................... 97% 7% 0% 0% 0% 0%
May 2000................... 81% 0% 0% 0% 0% 0%
May 2001................... 62% 0% 0% 0% 0% 0%
May 2002................... 42% 0% 0% 0% 0% 0%
May 2003................... 21% 0% 0% 0% 0% 0%
May 2004................... 0% 0% 0% 0% 0% 0%
Weighted Average Life-
to-Maturity (Years)/(2)/.. 4.57 1.57 1.33 1.17 0.97 0.84
Weighted Average Life-
to-Call (Years)/(2)/...... 4.57 1.57 1.33 1.17 0.97 0.84
___________
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-40
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION/(1)/
Class A-3 Notes
------------------------------------------
Date 0% 50% 75% 100% 150% 200%
- ---------------------------- ------- ------ ------ ------ ------ ------
Initial Percent............. 100% 100% 100% 100% 100% 100%
May 1998................... 100% 100% 100% 100% 100% 100%
May 1999................... 100% 100% 76% 49% 0% 0%
May 2000................... 100% 63% 22% 0% 0% 0%
May 2001................... 100% 25% 0% 0% 0% 0%
May 2002................... 100% 0% 0% 0% 0% 0%
May 2003................... 100% 0% 0% 0% 0% 0%
May 2004................... 98% 0% 0% 0% 0% 0%
May 2005................... 84% 0% 0% 0% 0% 0%
May 2006................... 67% 0% 0% 0% 0% 0%
May 2007................... 47% 0% 0% 0% 0% 0%
May 2008................... 26% 0% 0% 0% 0% 0%
May 2009................... 1% 0% 0% 0% 0% 0%
May 2010................... 0% 0% 0% 0% 0% 0%
Weighted Average Life-
to-Maturity (Years)/(2)/.. 9.77 3.39 2.52 2.06 1.58 1.33
Weighted Average Life-
to-Call (Years)/(2)/...... 9.77 3.39 2.52 2.06 1.58 1.33
___________
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-41
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION/(1)/
Class A-4 Notes
------------------------------------------
Date 0% 50% 75% 100% 150% 200%
- ---------------------------- ------- ------ ------ ------ ------ ------
Initial Percent............. 100% 100% 100% 100% 100% 100%
May 1998................... 100% 100% 100% 100% 100% 100%
May 1999................... 100% 100% 100% 100% 92% 0%
May 2000................... 100% 100% 100% 62% 0% 0%
May 2001................... 100% 100% 45% 0% 0% 0%
May 2002................... 100% 79% 0% 0% 0% 0%
May 2003................... 100% 9% 0% 0% 0% 0%
May 2004................... 100% 0% 0% 0% 0% 0%
May 2005................... 100% 0% 0% 0% 0% 0%
May 2006................... 100% 0% 0% 0% 0% 0%
May 2007................... 100% 0% 0% 0% 0% 0%
May 2008................... 100% 0% 0% 0% 0% 0%
May 2009................... 100% 0% 0% 0% 0% 0%
May 2010................... 34% 0% 0% 0% 0% 0%
May 2011................... 0% 0% 0% 0% 0% 0%
Weighted Average Life-
to-Maturity (Years)/(2)/.. 12.80 5.44 3.99 3.13 2.23 1.81
Weighted Average Life-
to-Call (Years)/(2)/...... 12.80 5.44 3.99 3.13 2.23 1.81
___________
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-42
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION/(1)/
Class A-5 Notes
------------------------------------------
Date 0% 50% 75% 100% 150% 200%
- ---------------------------- ------- ------ ------ ------ ------ ------
Initial Percent............ 100% 100% 100% 100% 100% 100%
May 1998.................. 100% 100% 100% 100% 100% 100%
May 1999.................. 100% 100% 100% 100% 100% 91%
May 2000.................. 100% 100% 100% 100% 55% 0%
May 2001.................. 100% 100% 100% 75% 36% 0%
May 2002.................. 100% 100% 78% 49% 24% 0%
May 2003.................. 100% 100% 55% 40% 18% 0%
May 2004.................. 100% 75% 48% 33% 13% 0%
May 2005.................. 100% 64% 44% 31% 13% 0%
May 2006.................. 100% 58% 40% 28% 13% 0%
May 2007.................. 100% 52% 35% 24% 10% 0%
May 2008.................. 100% 46% 30% 20% 8% 0%
May 2009.................. 100% 40% 25% 16% 6% 0%
May 2010.................. 100% 34% 21% 13% 4% 0%
May 2011.................. 78% 28% 17% 10% 3% 0%
May 2012.................. 66% 23% 13% 7% 2% 0%
May 2013.................. 57% 18% 10% 5% 1% 0%
May 2014.................. 47% 14% 8% 4% 1% 0%
May 2015.................. 36% 10% 5% 3% 0% 0%
May 2016.................. 23% 6% 3% 1% 0% 0%
May 2017.................. 13% 3% 1% 0% 0% 0%
May 2018.................. 11% 2% 1% 0% 0% 0%
May 2019.................. 9% 2% 0% 0% 0% 0%
May 2020.................. 6% 1% 0% 0% 0% 0%
May 2021.................. 3% 0% 0% 0% 0% 0%
May 2022.................. 0% 0% 0% 0% 0% 0%
Weighted Average Life-
to-Maturity (Years)/(2)/.. 17.08 11.30 8.90 7.13 4.68 2.41
Weighted Average Life-
to-Call (Years)/(2)/...... 16.67 10.95 8.46 6.68 4.26 2.41
___________
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-43
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION/(1)/
Class A-6 Notes
------------------------------------------
Date 0% 50% 75% 100% 150% 200%
- ---------------------------- ------- ------ ------ ------ ------ ------
Initial Percent............. 100% 100% 100% 100% 100% 100%
May 1998................... 100% 100% 100% 100% 100% 100%
May 1999................... 100% 100% 100% 100% 100% 100%
May 2000................... 100% 100% 100% 100% 100% 73%
May 2001................... 98% 92% 87% 81% 86% 73%
May 2002................... 96% 83% 74% 69% 77% 73%
May 2003................... 92% 68% 57% 60% 62% 73%
May 2004................... 87% 49% 49% 50% 47% 51%
May 2005................... 69% 24% 31% 28% 25% 35%
May 2006................... 52% 17% 19% 15% 10% 24%
May 2007................... 36% 11% 11% 8% 4% 16%
May 2008................... 24% 7% 7% 4% 2% 11%
May 2009................... 14% 5% 4% 2% 1% 7%
May 2010................... 6% 3% 2% 1% 0% 5%
May 2011................... 2% 2% 1% 0% 0% 2%
May 2012................... 1% 1% 0% 0% 0% 0%
May 2013................... 1% 0% 0% 0% 0% 0%
May 2014................... 0% 0% 0% 0% 0% 0%
Weighted Average Life-
to-Maturity (Years)/(2)/.. 9.30 7.10 6.90 6.66 6.63 7.05
Weighted Average Life-
to-Call (Years)/(2)/...... 9.30 7.09 6.89 6.65 6.52 5.75
___________
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-44
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION/(1)/
Class M-1 Notes
------------------------------------------
Date 0% 50% 75% 100% 150% 200%
- ---------------------------- ------- ------ ------ ------ ------ ------
Initial Percent............. 100% 100% 100% 100% 100% 100%
May 1998................... 100% 100% 100% 100% 100% 100%
May 1999................... 100% 100% 100% 100% 100% 100%
May 2000................... 100% 100% 100% 100% 100% 100%
May 2001................... 100% 100% 100% 100% 79% 89%
May 2002................... 100% 100% 100% 90% 61% 53%
May 2003................... 100% 100% 94% 75% 47% 28%
May 2004................... 100% 100% 81% 62% 36% 19%
May 2005................... 100% 93% 69% 51% 27% 13%
May 2006................... 100% 82% 59% 42% 20% 9%
May 2007................... 100% 72% 50% 34% 15% 6%
May 2008................... 100% 63% 42% 27% 11% 4%
May 2009................... 100% 54% 35% 22% 8% 3%
May 2010................... 100% 46% 28% 17% 6% 1%
May 2011................... 100% 38% 22% 13% 4% 0%
May 2012................... 87% 30% 17% 10% 3% 0%
May 2013................... 75% 24% 13% 7% 2% 0%
May 2014................... 62% 19% 10% 5% 0% 0%
May 2015................... 47% 13% 7% 3% 0% 0%
May 2016................... 30% 8% 4% 1% 0% 0%
May 2017................... 17% 4% 2% 0% 0% 0%
May 2018................... 15% 3% 0% 0% 0% 0%
May 2019................... 12% 2% 0% 0% 0% 0%
May 2020................... 8% 1% 0% 0% 0% 0%
May 2021................... 4% 0% 0% 0% 0% 0%
May 2022................... 0% 0% 0% 0% 0% 0%
Weighted Average Life-
to-Maturity (Years)/(2)/.. 18.10 13.05 10.87 9.14 6.70 5.81
Weighted Average Life-
to-Call (Years)/(2)/...... 17.57 12.61 10.31 8.55 6.13 5.32
___________
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-45
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION/(1)/
Class M-2 Notes
------------------------------------------
Date 0% 50% 75% 100% 150% 200%
- ---------------------------- ------- ------ ------ ------ ------ ------
Initial Percent............. 100% 100% 100% 100% 100% 100%
May 1998................... 100% 100% 100% 100% 100% 100%
May 1999................... 100% 100% 100% 100% 100% 100%
May 2000................... 100% 100% 100% 100% 100% 100%
May 2001................... 100% 100% 100% 100% 79% 57%
May 2002................... 100% 100% 100% 90% 61% 40%
May 2003................... 100% 100% 94% 75% 47% 28%
May 2004................... 100% 100% 81% 62% 36% 19%
May 2005................... 100% 93% 69% 51% 27% 13%
May 2006................... 100% 82% 59% 42% 20% 9%
May 2007................... 100% 72% 50% 34% 15% 6%
May 2008................... 100% 63% 42% 27% 11% 4%
May 2009................... 100% 54% 35% 22% 8% 2%
May 2010................... 100% 46% 28% 17% 6% 0%
May 2011................... 100% 38% 22% 13% 4% 0%
May 2012................... 87% 30% 17% 10% 2% 0%
May 2013................... 75% 24% 13% 7% 0% 0%
May 2014................... 62% 19% 10% 5% 0% 0%
May 2015................... 47% 13% 7% 3% 0% 0%
May 2016................... 30% 8% 4% 0% 0% 0%
May 2017................... 17% 4% 0% 0% 0% 0%
May 2018................... 15% 3% 0% 0% 0% 0%
May 2019................... 12% 1% 0% 0% 0% 0%
May 2020................... 8% 0% 0% 0% 0% 0%
May 2021................... 4% 0% 0% 0% 0% 0%
May 2022................... 0% 0% 0% 0% 0% 0%
Weighted Average Life-
to-Maturity (Years)/(2)/.. 18.09 13.02 10.84 9.12 6.68 5.32
Weighted Average Life-
to-Call (Years)/(2)/...... 17.57 12.61 10.31 8.55 6.13 4.86
___________
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-46
The paydown scenarios for the Offered Securities 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 be accurate or that
the actual weighted average lives of the Offered Securities will not vary 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 unlikely that the Loans will prepay at a constant rate or
that all of the Loans will prepay at the same rate. Moreover, the Loans
actually included in the Pool, the payment experience of such Loans and certain
other factors affecting the distributions on the Offered Securities will not
conform to the Modeling Assumptions made in preparing the above tables. In
fact, the characteristics and payment experience of the Loans will differ in
many respects from such Modeling Assumptions. See "The Pool" herein. To the
extent that the Loans actually included in the Pool have characteristics and a
payment experience that differ from those assumed in preparing the foregoing
tables, the Offered Securities are likely to have weighted average lives that
are shorter or longer than those set forth in the foregoing tables. See "Risk
Factors--Yield, Prepayment and Maturity Considerations" herein.
In light of the uncertainties inherent in the foregoing paydown
scenarios, the inclusion of the weighted average lives of the Offered Securities
in the foregoing tables should not be regarded as a representation by the
Transferor, the Servicer, the Depositor, the Underwriter or any other person
that any of the foregoing paydown scenarios will be experienced.
S-47
THE TRUST
GENERAL
Empire Funding Home Loan Owner Trust 1997-2 (the "TRUST"), is a business trust
to be 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 Loans and the other assets of the Trust and
proceeds therefrom, (ii) issuing the Offered Securities, the Class B
Certificates and the Residual Interest, (iii) making payments on the Offered
Securities, the Class B Certificates and the Residual Interest and (iv) engaging
in other activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or in connection therewith.
The Class B Certificates represent an undivided ownership interest in the
Trust. The Residual Interest represents the residual interest in the assets of
the Trust. The Trust will initially be capitalized with equity equal to the
Original Class Principal Balance of the Class B Certificates. The equity of the
Trust (including the Class B Certificates and the Residual Interest), together
with the Notes, were delivered by the Trust to the Depositor as consideration
for the Loans pursuant to the Sale and Servicing Agreement.
On the Closing Date, the Trust will purchase from the Depositor Initial Loans
having an aggregate principal balance as of the Cut-Off Date of approximately
$104,432,425.04 (the "ORIGINAL POOL PRINCIPAL BALANCE") pursuant to a Sale and
Servicing Agreement dated as of May 1, 1997 (the "SALE AND SERVICING
AGREEMENT"), among the Trust, the Depositor, the Transferor, the Servicer, the
Co-Owner Trustee and the Indenture Trustee. On or prior to July 31, 1997, the
Trust may purchase additional loans (the "SUBSEQUENT LOANS" and, together with
the Initial Loans, the "LOANS") having an aggregate unpaid principal balance of
up to $34,767,574.96 (the "ORIGINAL PRE-FUNDED AMOUNT").
The assets of the Trust will consist primarily of the Pool of Loans, which are
either secured by Mortgages (the "MORTGAGE LOANS") or unsecured (the "UNSECURED
LOANS"). See "The Pool" herein. The assets of the Trust also will include (i)
payments of interest in respect of the Loans due after the Cut-Off Date and
principal received after the Cut-Off Date; (ii) amounts on deposit in the
Collection Account, Note Distribution Account, Pre-Funding Account, Capitalized
Interest Account and Certificate Distribution Account; (iii) an assignment of
the Depositor's rights under a Home Loan Purchase Agreement dated as of May 1,
1997 among the Transferor, EFC and the Depositor (the "PURCHASE AGREEMENT"); and
(iv) certain other ancillary or incidental funds, rights and properties related
to the foregoing.
The Trust will include the unpaid Principal Balance of each Loan as of its
applicable Cut-Off Date (the "CUT-OFF DATE PRINCIPAL BALANCE"). The "PRINCIPAL
BALANCE" of a Loan on any day is equal to its Cut-Off Date Principal Balance
minus all principal reductions credited against the Principal Balance of such
Loan since the Cut-Off Date, including any principal losses recorded by the
Servicer on account of a modification of such Loan. With respect to any date,
the "POOL PRINCIPAL BALANCE" will be equal to the aggregate Principal Balances
of all Loans as of such date.
The Servicer will service the Loans pursuant to the Sale and Servicing
Agreement (together with the Indenture, the Administration 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 and Co-Owner Trustee."
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THE OWNER TRUSTEE AND CO-OWNER TRUSTEE
Wilmington Trust Company will act 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 19890-0001.
Certain functions of the Owner Trustee under the Trust Agreement and the Sale
and Servicing Agreement will be performed by First Bank National Association, in
its capacity as Co-Owner Trustee under the Trust Agreement and the Sale and
Servicing Agreement, including maintaining the Certificate Distribution Account
and making distributions therefrom.
DESCRIPTION OF THE OFFERED SECURITIES
GENERAL
The Trust will issue eight Classes of Home Loan Asset Backed Notes
(collectively, the "NOTES" or the "OFFERED SECURITIES") having the designations
and aggregate initial principal amounts specified on the cover hereof pursuant
to an Indenture to be dated as of May 1, 1997 (the "INDENTURE"), between the
Trust and the Indenture Trustee. The Trust will also issue one Class of Home
Loan Asset Backed Certificates having an initial principal amount of $6,273,000
(the "CLASS B CERTIFICATES") and instruments evidencing the residual interest in
the Trust (the "RESIDUAL INTEREST") pursuant to the terms of a Trust Agreement
dated as of May 1, 1997 (the "TRUST AGREEMENT"), among the Transferor, the
Depositor, the Owner Trustee and the Co-Owner Trustee. The Notes will be
secured by the assets of the Trust pursuant to the Indenture. The Class B
Certificates will represent an undivided ownership interest in the Trust. The
Class B Certificates and the Residual Interest Instruments are not being offered
hereby.
On the 25th day of each month or, if such day is not a Business Day, the first
Business Day immediately following, commencing in June 1997 (each such date, a
"DISTRIBUTION DATE"), the Indenture Trustee or its designee and the Owner
Trustee or its designee will distribute to the persons in whose names the Notes
are registered on the last day of the month immediately preceding the month of
the related Distribution Date (each such date, a "RECORD DATE"), the portion of
the aggregate distribution to be made to each Noteholder and each
Certificateholder as described below. Prior to any termination of the book-
entry provisions, distributions on the Book-Entry Certificates will be made to
Beneficial Owners only through DTC and DTC Participants. See "Description of
the Securities--Book-Entry Registration of Securities" in the Prospectus.
Beneficial ownership interests in each Class of Notes will be held in minimum
denominations of $25,000 and integral multiples of $1,000 in excess thereof;
provided, however, that one Note of each Class may be issued in such
denomination as may be necessary to represent the remainder of the aggregate
amount of Notes of such Class.
DISTRIBUTIONS ON THE OFFERED SECURITIES
For the definitions of certain of the defined terms used in the following
subsections, see "--Related Definitions" below.
AVAILABLE COLLECTION AMOUNT. Distributions on the Offered Securities on each
Distribution Date will be made from the Available Collection Amount. The
Servicer will calculate the Available Collection Amount on the fourteenth
calendar day of each month or, if such day is not a Business Day, then the
immediately preceding Business Day (each such day, a "DETERMINATION DATE").
With respect to each Distribution Date, the "AVAILABLE COLLECTION AMOUNT" is the
sum of (i) all amounts received on the Loans or required to be paid by the
Servicer, the Transferor or the Depositor during the related Due Period
(exclusive of amounts not required to be deposited by the Servicer in the
Collection Account and amounts permitted to be withdrawn by the Indenture
Trustee from the Collection Account) as reduced by any portion thereof that may
not be withdrawn therefrom pursuant to an order of a United States bankruptcy
court of competent jurisdiction imposing a stay pursuant to Section 312 of the
United
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States Bankruptcy Code; (ii) any and all income or gain from investments in the
Collection Account; (iii) the Purchase Price paid for any Loans required to be
purchased and the Substitution Adjustment to be deposited in the Collection
Account in connection with any substitution, in each case prior to the related
Determination Date; (iv) the Capitalized Interest Amount, if any, with respect
to such Distribution Date; and (v) with respect to the final Distribution Date
or upon an early retirement of the Offered Securities arising from an optional
termination of the Trust by the Majority Residual Interestholders, the
Termination Price.
DISTRIBUTIONS OF INTEREST. Interest on the Class Principal Balance of each
Class of Notes will accrue thereon at their respective Note Interest Rates per
annum, and will be payable to the holders of the Offered Securities monthly on
each Distribution Date, commencing in June 1997. Interest on each Class of
Notes will be calculated on the basis of a 360-day year of twelve 30-day months.
Interest distributions on the Offered Securities and the Class B Certificates
will be made from the "AVAILABLE DISTRIBUTION AMOUNT", which is the Available
Collection Amount (plus, on the Distribution Date relating to the Due Period in
which the termination of the Pre-Funding Period occurred, the amount on deposit
in the Pre-Funding Account at such time) remaining after the payment of the
Trust Fees and Expenses. Interest payments will be made, first, to the Classes
of Senior Notes pro rata, second, to the Classes of Mezzanine Notes
sequentially, and, third, to the Class B Certificates. Under certain
circumstances, the amount available for interest payments could be less than the
amount of interest payable on all Classes of Offered Securities and the Class B
Certificates on any Distribution Date. In such event, each affected Class will
receive its ratable share (based upon the aggregate amount of interest due to
such Class) of the remaining amount available to be distributed as interest
after the payment of all interest due on each Class having a higher interest
payment priority. In addition, any such interest deficiency will be carried
forward as a Noteholders' Interest Carry-Forward Amount or Certificateholders'
Interest Carry-Forward Amount, as applicable, and will be distributed to holders
of each such Class of Notes or the Class B Certificates, as applicable, on
subsequent Distribution Dates to the extent that sufficient funds are available.
Any such interest deficiency could occur, for example, if delinquencies or
losses realized on the Loans were exceptionally high or were concentrated in a
particular month. No interest will accrue on any Noteholders' Interest Carry-
Forward Amount or Certificateholders' Interest Carry-Forward Amount.
DISTRIBUTIONS OF PRINCIPAL. Principal distributions will be made to the
holders of the Offered Securities and the Class B Certificates on each
Distribution Date in an amount generally equal to (i) the Regular Principal
Distribution Amount plus (ii) to the extent of the Overcollateralization
Deficiency Amount, any Excess Spread for such Distribution Date less (iii) the
excess, if any, of the Overcollateralization Amount over the
Overcollateralization Target Amount. The aggregate distributions of principal
to each Class of Notes and the Class B Certificates will not exceed the Original
Class Principal Balances thereof.
PRIORITY OF DISTRIBUTIONS
A. On each Distribution Date, the Regular Distribution Amount will be
distributed in the following order of priority:
(i) to the holders of the Senior Notes, pro rata, the applicable
portion of the Noteholders' Interest Distribution Amount required to be
distributed in respect of the Senior Notes;
(ii) sequentially, to the holders of the Class M-1 and Class M-2
Notes, in that order, the remaining portion of the Noteholders' Interest
Distribution Amount;
(iii) to the holders of the Class B Certificates, the
Certificateholders' Interest Distribution Amount for such Distribution Date;
(iv) if with respect to such Distribution Date the Pre-Funding Pro
Rata Distribution Trigger has occurred, the amount on deposit in the Pre-
Funding Account at the end of the Pre-Funding Period will be distributed as
principal to all Classes of Notes and the Class B Certificates, pro rata,
based on the Original Class Principal Balances thereof;
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(v) first (A) to pay as principal of the Class A-6 Notes until the Class
Principal Balance thereof is reduced to zero, an amount equal to the Class A-6
Priority Principal Distribution Amount and second (B) sequentially, to the
holders of 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, the amount necessary to reduce the aggregate Class Principal
Balance of the Senior Notes to the Senior Optimal Principal Balance for such
Distribution Date; provided, however, that on each Distribution Date occurring
on or after any reduction of the Class Principal Balances of the Class M-1
Notes, Class M-2 Notes and the Class B Certificates to zero through the
application of Allowable Loss Amounts, distributions shall be made among the
remaining Senior Notes pro rata and not sequentially;
(vi) sequentially, to the holders of the Class M-1 and the Class M-2
Notes, in that order, until the Class Principal Balances thereof are reduced
to the Class M-1 Optimal Principal Balance and the Class M-2 Optimal Principal
Balance, respectively, for such Distribution Date;
(vii) to the holders of the Class B Certificates, until the Class
Principal Balance thereof is reduced to the Class B Optimal Principal Balance
for such Distribution Date;
(viii) sequentially, to the Class M-1 Notes, Class M-2 Notes and the
Class B Certificates, in that order, until their respective Loss Reimbursement
Deficiencies have been paid in full; and
(ix) any remaining amount to the holders of the Residual Interest
Instruments.
B. On each Distribution Date, the Indenture Trustee will distribute the
Excess Spread, if any, in the following order of priority (in each case after
giving effect to all payments specified in paragraph A. above):
(i) in an amount equal to the Overcollateralization Deficiency Amount,
if any, as follows:
(A) as principal to the Class A-6 Notes until the Class Principal
Balance thereof is reduced to zero, an amount equal to the Class A-6
Priority Excess Spread Distribution Amount;
(B) sequentially, to the holders of 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, the
amount necessary to reduce the aggregate Class Principal Balance of
the Senior Notes to the Senior Optimal Principal Balance for such
Distribution Date;
(C) sequentially, to the holders of the Class M-1 and Class M-2
Notes, in that order, until the Class Principal Balances thereof are
reduced to the Class M-1 Optimal Principal Balance and the Class M-2
Optimal Principal Balance, respectively, for such Distribution Date;
and
(D) to the holders of the Class B Certificates, until the Class
Principal Balance thereof is reduced to the Class B Optimal Principal
Balance for such Distribution Date;
(ii) sequentially, to the Class M-1 Notes, the Class M-2 Notes and the
Class B Certificates, in that order, until their respective Loss Reimbursement
Deficiencies, if any, have been paid in full; and
(iii) any remaining amount to the holders of the Residual Interest
Instruments.
RELATED DEFINITIONS
For purposes hereof, the following terms shall have the following meanings:
BUSINESS DAY: Any day other than (i) a Saturday or a Sunday or (ii) a day on
which banking institutions in The City of New York or in the city in which the
corporate trust office of the Indenture Trustee is located or in the city
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in which the Servicer's servicing operations are primarily located are
authorized or obligated by law or executive order to be closed.
CERTIFICATEHOLDERS' INTEREST CARRY-FORWARD AMOUNT: With respect to any
Distribution Date, the excess, if any, of the Certificateholders' Monthly
Interest Distribution Amount for the preceding Distribution Date plus any
outstanding Certificateholders' Interest Carry-Forward Amount on such preceding
Distribution Date, over the amount in respect of interest that is actually
deposited in the Certificate Distribution Account on such preceding Distribution
Date.
CERTIFICATEHOLDERS' INTEREST DISTRIBUTION AMOUNT: With respect to any
Distribution Date, the sum of the Certificateholders' Monthly Interest
Distribution Amount and the Certificateholders' Interest Carry-Forward Amount;
provided, however, that on the Distribution Date, if any, on which the Class
Principal Balance of the Class B Certificates is reduced to zero through
application of the Allocable Loss Amount, the amount of the Certificateholders'
Interest Distribution Amount will be equal to the Certificateholders' Interest
Distribution Amount calculated without giving effect to this proviso, minus the
portion, if any, of the Allocable Loss Amount that otherwise would be applied to
the Classes of Mezzanine Notes on such date in the absence of this proviso.
CERTIFICATEHOLDERS' MONTHLY INTEREST DISTRIBUTION AMOUNT: With respect to any
Distribution Date, interest accrued for the related Due Period at the Class B
Pass-Through Rate on the related Class Principal Balance on the immediately
preceding Distribution Date (or, in the case of the first Distribution Date, on
the Closing Date).
CLASS A EXCESS SPREAD DISTRIBUTION: With respect to any Distribution Date, the
least of (i) the excess of (x) the Class Principal Balance of all Senior Notes
over (y) the Senior Optimal Principal Balance for such Distribution Date, (ii)
the Overcollateralization Deficiency Amount for such Distribution Date and (iii)
the Excess Spread for such Distribution Date.
CLASS A PRINCIPAL DISTRIBUTION AMOUNT: With respect to any Distribution Date,
the lesser of (i) the Regular Principal Distribution Amount and (ii) the excess
of (x) the aggregate Class Principal Balance of all Senior Notes over (y) the
Senior Optimal Principal Balance for such Distribution Date.
CLASS A-6 PRIORITY EXCESS SPREAD DISTRIBUTION AMOUNT: With respect to any
Distribution Date, the lesser of (A) the product of (x) the applicable Class A-6
Priority Percentage for such Distribution Date and (y) the Class A-6 Pro Rata
Excess Spread Distribution Amount for such Distribution Date and (B) the Class A
Excess Spread Distribution Amount.
CLASS A-6 PRIORITY PERCENTAGE: With respect to each Distribution Date, the
percentage specified below:
PRIORITY
DISTRIBUTION DATE PERCENTAGE
- -------------------------- ----------
June 1997-May 2000........ 0%
June 2000-May 2002........ 45%
June 2002-May 2003........ 80%
June 2003-May 2004........ 100%
June 2004 and thereafter.. 300%
CLASS A-6 PRIORITY PRINCIPAL DISTRIBUTION AMOUNT: With respect to any
Distribution Date, the lesser of (A) the product of (x) the applicable Class A-6
Priority Percentage for such Distribution Date and (y) the Class A-6 Pro Rata
Principal Distribution Amount for such Distribution Date and (B) the Class A
Principal Distribution Amount.
CLASS A-6 PRO RATA EXCESS SPREAD DISTRIBUTION AMOUNT: With respect to any
Distribution Date, an amount equal to the product of (x) a fraction, the
numerator of which is the Class Principal Balance of the Class A-6 Notes
immediately prior to such Distribution Date and the denominator of which is the
aggregate of the Class Principal Balances of all Senior Notes immediately prior
to such Distribution Date and (y) the Class A Excess Spread Distribution Amount.
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CLASS A-6 PRO RATA PRINCIPAL DISTRIBUTION AMOUNT: With respect to any
Distribution Date, an amount equal to the product of (x) a fraction, the
numerator of which is the Class Principal Balance of the Class A-6 Notes
immediately prior to such Distribution Date and the denominator of which is the
aggregate of the Class Principal Balances of all Senior Notes immediately prior
to such Distribution Date and (y) the Class A Principal Distribution Amount.
CLASS B OPTIMAL PRINCIPAL BALANCE: With respect to any Distribution Date
prior to the Stepdown Date, zero; and with respect to any other Distribution
Date, the Pool Principal Balance as of the related Determination Date minus the
sum of (i) the aggregate Class Principal Balance of the Notes (after taking into
account any distributions made on such Distribution Date in reduction of the
Class Principal Balances of the Notes made prior to such determination) and (ii)
the Overcollateralization Target Amount for such Distribution Date.
CLASS M-1 OPTIMAL PRINCIPAL BALANCE: With respect to any Distribution Date
prior to the Stepdown Date, zero; and with respect to any other Distribution
Date, the Pool Principal Balance as of the related Determination Date minus the
sum of (i) the aggregate Class Principal Balance of the Senior Notes (after
taking into account distributions made on such Distribution Date in reduction of
the Class Principal Balances of the Classes of Senior Notes made prior to such
determination) and (ii) the greater of (x) 31.54% of the Pool Principal Balance
as of the related Determination Date plus the Overcollateralization Target
Amount (calculated without giving effect to the proviso in the definition
thereof) for such Distribution Date and (y) 0.50% of the sum of the Original
Pool Principal Balance and the Original Pre-Funded Amount.
CLASS M-2 OPTIMAL PRINCIPAL BALANCE: With respect to any Distribution Date
prior to the Stepdown Date, zero; and with respect to any other Distribution
Date, the Pool Principal Balance as of the related Determination Date minus the
sum of (i) the aggregate Class Principal Balance of the Senior Notes (after
taking into account any distributions made on such Distribution Date in
reduction of the Class Principal Balances of the Classes of Senior Notes made
prior to such determination) plus the Class Principal Balance of the Class M-1
Notes (after taking into account any distributions made on such Distribution
Date in reduction of the Class Principal Balance of the Class M-1 Notes made
prior to such determination) and (ii) the greater of (x) 9% of the Pool
Principal Balance as of the related Determination Date plus the
Overcollateralization Target Amount (without giving effect to the proviso in the
definition thereof) for such Distribution Date and (y) 0.50% of the sum of the
Original Pool Principal Balance and the Original Pre-Funded Amount.
EXCESS SPREAD: With respect to any Distribution Date, the positive excess, if
any, of (a) the Available Distribution Amount over (b) the Regular Distribution
Amount.
INSURANCE PROCEEDS: With respect to any Distribution Date, the proceeds paid
to the Indenture Trustee or the Servicer by any insurer pursuant to any
insurance policy covering a Loan, Mortgaged Property or REO Property or any
other insurance policy that relates to a Loan, net of any expenses which are
incurred by the Indenture Trustee or the Servicer in connection with the
collection of such proceeds and not otherwise reimbursed to the Indenture
Trustee or the Servicer, but excluding the proceeds of any insurance policy that
are to be applied to the restoration or repair of the Mortgaged Property or
released to the Obligor in accordance with accepted loan servicing procedures.
LIQUIDATED HOME LOAN: Any 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 earliest of: (a) the liquidation of the related
Mortgaged Property acquired through foreclosure or similar proceedings, (b) the
Servicer's determination in accordance with customary accepted practices that no
further amounts are collectible on the Loan or (c) any portion of a scheduled
monthly payment of principal and interest is in excess of 180 days past due.
LOSS REIMBURSEMENT DEFICIENCY: As of any date of determination and as to the
Class M-1 Notes, Class M-2 Notes or the Class B Certificates, the amount of
Allocable Loss Amounts applied to the reduction of the Class Principal Balance
of such Class plus, in the case of the Class M-1 Notes and Class M-2 Notes,
interest accrued on the unreimbursed portion thereof at the applicable Note
Interest Rates through the end of the Due Period immediately preceding the date
of payment.
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NET DELINQUENCY CALCULATION AMOUNT: With respect to any Distribution Date, the
excess, if any, of (x) the product of 2.50 and the Six-Month Rolling Delinquency
Average over (y) the aggregate of the amounts of Excess Spread for the three
preceding Distribution Dates.
NET LIQUIDATION PROCEEDS: With respect to any Distribution Date, any cash
amounts received from Liquidated Home Loans, whether through trustee's sale,
foreclosure sale, disposition of Mortgaged Properties 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
from Defaulted Loans, in each case, net of any reimbursements to the Servicer
made from such amounts for any unreimbursed Servicing Compensation and Servicing
Advances made and any other fees and expenses paid in connection with the
foreclosure, conservation and liquidation of the related Liquidated Home Loans
or Foreclosure Properties.
NOTEHOLDERS' INTEREST CARRY-FORWARD AMOUNT: With respect to any Distribution
Date, the excess, if any, of the Noteholders' Monthly Interest Distribution
Amount for the preceding Distribution Date plus any outstanding Noteholders'
Interest Carry-Forward Amount on such preceding Distribution Date, over the
amount in respect of interest that is actually deposited in the Note
Distribution Account on such preceding Distribution Date.
NOTEHOLDERS' INTEREST DISTRIBUTION AMOUNT: With respect to any Distribution
Date, the sum of the Noteholders' Monthly Interest Distribution Amount and the
Noteholders' Interest Carry-Forward Amount.
NOTEHOLDERS' MONTHLY INTEREST DISTRIBUTION AMOUNT: With respect to any
Distribution Date, interest accrued for the related Due Period on each Class of
Notes at the respective Note Interest Rate for such Class on the Class Principal
Balance thereof on the immediately preceding Distribution Date (or, in the case
of the first Distribution Date, on the Closing Date), after giving effect to all
payments of principal to the Noteholders of such Class on or prior to such
preceding Distribution Date.
OVERCOLLATERALIZATION AMOUNT: With respect to any Distribution Date, the
amount equal to the excess of (a) the sum of the Pool Principal Balance and the
Pre-Funded Amount, each as of the end of the preceding Due Period, over (b) the
aggregate of the Class Principal Balances of the Securities (after giving effect
to distributions on the Securities on such Distribution Date).
OVERCOLLATERALIZATION DEFICIENCY AMOUNT: With respect to any date of
determination, the excess, if any, of the Overcollateralization Target Amount
over the Overcollateralization Amount.
OVERCOLLATERALIZATION TARGET AMOUNT: (A) With respect to any Distribution
Date occurring prior to the Stepdown Date, an amount equal to the greater of (x)
9% of the sum of the Original Pool Principal Balance and the Original Pre-Funded
Amount and (y) the Net Delinquency Calculation Amount; and (B) with respect to
any other Distribution Date, an amount equal to the greater of (x) 18% of the
Pool Principal Balance as of the end of the related Due Period and (y) the Net
Delinquency Calculation Amount; provided, however, that the
Overcollateralization Target Amount will in no event be less than 0.50% of the
sum of the Original Pool Principal Balance and the Original Pre-Funded Amount or
greater than the sum of the aggregate Class Principal Balances of all Classes of
Securities.
REGULAR DISTRIBUTION AMOUNT: With respect to any Distribution Date, the
lesser of (a) the Available Distribution Amount and (b) the sum of (i) the
Noteholders' Interest Distribution Amount, (ii) the Certificateholders' Interest
Distribution Amount, (iii) the Regular Principal Distribution Amount and (iv) if
such Distribution Date relates to the Due Period in which the Pre-Funding Period
shall have ended and at the termination of the Pre-Funding Period a Pre-Funding
Pro Rata Distribution Trigger shall have occurred, the amount on deposit in the
Pre-Funding Account on such date.
REGULAR PRINCIPAL DISTRIBUTION AMOUNT: On each Distribution Date, an amount
(but not in excess of the aggregate of the Class Principal Balances of the
Offered Securities and the Class B Certificates immediately prior to such
Distribution Date) equal to the sum of (i) each scheduled payment of principal
collected by the Servicer in the related Due Period, (ii) all full and partial
principal prepayments applied by the Servicer during such related
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Due Period, (iii) the principal portion of all Net Liquidation Proceeds,
Insurance Proceeds and Released Mortgaged Property Proceeds received during the
related Due Period, (iv) that portion of the Purchase Price of any repurchased
Loan which represents principal received prior to the related Determination
Date, (v) the principal portion of any Substitution Adjustments required to be
deposited in the Collection Account as of the related Determination Date, (vi)
if such Distribution Date relates to the Due Period in which the Pre-Funding
Period ended and at the termination of such Pre-Funding Period a Pre-Funding Pro
Rata Distribution Trigger shall not have occurred, the amount on deposit in the
Pre-Funding Account on such date, and (vii) on the Distribution Date on which
the Trust is to be terminated pursuant to the Sale and Servicing Agreement, the
Termination Price.
RELEASED MORTGAGED PROPERTY PROCEEDS: With respect to any Distribution Date,
the proceeds received by the Servicer in connection with (i) a taking of an
entire Mortgaged Property by exercise of the power of eminent domain or
condemnation or (ii) any release of part of the Mortgaged Property from the lien
of the related Mortgage, whether by partial condemnation, sale or otherwise,
which proceeds are not released to the Obligor in accordance with applicable
law, accepted mortgage servicing procedures and the Sale and Servicing
Agreement.
SENIOR OPTIMAL PRINCIPAL BALANCE: With respect to any Distribution Date prior
to the Stepdown Date, zero; with respect to any other Distribution Date, an
amount equal to the Pool Principal Balance as of the related Determination Date
minus the greater of (a) 55.58% of the Pool Principal Balance as of the related
Determination Date plus the Overcollateralization Target Amount (without giving
effect to the proviso in the definition thereof) for such Distribution Date and
(b) 0.50% of the sum of the Original Pool Principal Balance and the Original
Pre-Funded Amount.
SIX-MONTH ROLLING DELINQUENCY AVERAGE: With respect to any Distribution Date,
the average of the applicable 60-Day Delinquency Amounts for each of the six
immediately preceding Due Periods, where the 60-Day Delinquency Amount for any
Due Period is the aggregate of the Principal Balances of all Loans that are 60
or more days delinquent, in foreclosure or REO Property as of the end of such
Due Period.
STEPDOWN DATE: The first Distribution Date occurring after May 2000 as to
which:
(1) the Pool Principal Balance has been reduced to 50% of the sum of
the Original Pool Principal Balance and the Original Pre-Funded Amount;
(2) the Net Delinquency Calculation Amount is less than 9% of the sum
of the Original Pool Principal Balance and the Original Pre-Funded Amount; and
(3) the aggregate Class Principal Balance of the Senior Notes (after
giving effect to distributions of principal on such Distribution Date) will be
able to be reduced on such Distribution Date (such determination to be made by
the Indenture Trustee prior to giving effect to any distributions on such
Distribution Date) to the excess of (i) the Pool Principal Balance as of the
preceding Determination Date over (ii) the greater of (a) the sum of (1)
55.58% of the Pool Principal Balance as of the preceding Determination Date
and (2) the Overcollateralization Target Amount for such Distribution Date
(such Overcollateralization Target Amount calculated without giving effect to
the proviso in the definition thereof and calculated pursuant only to clause
(B) in the definition thereof) and (b) 0.50% of the sum of the Original Pool
Principal Balance and the Original Pre-Funded Amount.
APPLICATION OF ALLOCABLE LOSS AMOUNTS
Following any reduction of the Overcollateralization Amount to zero, any
Allocable Loss Amounts will be applied, sequentially, in reduction of the Class
Principal Balances of the Class B Certificates, the Class M-2 Notes and the
Class M-1 Notes, in that order, until their respective Class Principal Balances
have been reduced to zero. The Class Principal Balances of the Senior Notes will
not be reduced by any application of Allocable Loss Amounts. The reduction of
the Class Principal Balance of any applicable Class of Offered Securities or
Class B Certificates by the application of Allocable Loss Amounts entitles such
Class to reimbursement in an amount equal to the Loss Reimbursement Deficiency.
Each such Class of Offered Securities and Class B Certificates will be entitled
to receive
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its Loss Reimbursement Deficiency, or any portion thereof, in accordance with
the payment priorities specified herein. Payment in respect of Loss
Reimbursement Deficiencies will not reduce the Class Principal Balance of the
related Class or Classes. The Loss Reimbursement Deficiency with respect to any
Class will remain outstanding until the earlier of (x) the payment in full of
such amount to the holders of such Class and (y) the occurrence of the
applicable Final Scheduled Distribution Date (although there is no requirement
that such amounts be paid on such date).
PRE-FUNDING ACCOUNT
On the Closing Date, approximately $34,767,574.96 (the "ORIGINAL PRE-FUNDED
AMOUNT") will be deposited in an account (the "PRE-FUNDING ACCOUNT"), which
account will be in the name of the Indenture Trustee and shall be part of the
Trust and which amount will be used to acquire Subsequent Loans. During the
Pre-Funding Period, the amount on deposit in the Pre-Funding Account (net of
investment earnings thereon) (the "PRE-FUNDED AMOUNT") will be reduced by the
amount thereof used to purchase Subsequent Loans in accordance with the Sale and
Servicing Agreement. The "PRE-FUNDING PERIOD" is the period commencing on the
Closing Date and ending generally on the earlier to occur of (i) the date on
which the amount on deposit in the Pre-Funding Account (net of any investment
earnings thereon) is less than $100,000 and (ii) July 31, 1997. On the
Distribution Date following the Due Period in which the termination of the Pre-
Funding Period occurs, if the Pre-Funded Amount at the end of the Pre-Funding
Period is less than $100,000, any such Pre-Funded Amount will be distributed to
holders of the Classes of Notes and the Class B Certificates then entitled to
receive principal on such Distribution Date in reduction of the related Class
Principal Balances, thus resulting in a partial redemption of the related
Securities on such date. On the Distribution Date following the Due Period in
which the termination of the Pre-Funding Period occurs, if the Pre-Funded Amount
at the end of the Pre-Funding Period is greater than or equal to $100,000 (such
event, a "PRE-FUNDING PRO RATA DISTRIBUTION TRIGGER"), such Pre-Funded Amount
will be distributed to the holders of all Classes of Notes and the Class B
Certificates, pro rata, based on the Original Class Principal Balances thereof.
Amounts on deposit in the Pre-Funding Account will be invested in eligible
investments. All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Note Distribution
Account.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, a portion of the sales proceeds of the Notes will be
deposited in an account (the "CAPITALIZED INTEREST ACCOUNT") for application by
the Indenture Trustee on the Distribution Dates in June 1997, July 1997 and
August 1997 to cover shortfalls in interest on the Notes and the Class B
Certificates that may arise due to the utilization of the Pre-Funding Account as
described herein. Any amounts remaining in the Capitalized Interest Account at
the end of the Pre-Funding Period will be paid to Empire Funding.
OPTIONAL TERMINATION OF THE TRUST
The holders of an aggregate percentage interest in the Residual Interest in
excess of 50% (the "MAJORITY RESIDUAL INTERESTHOLDERS") may, at their option,
effect an early termination of the Trust on or after any Distribution Date on
which the Pool Principal Balance declines to 10% or less of the sum of the
Original Pool Principal Balance and the Original Pre-Funded Amount, by
purchasing all of the Loans at a price equal to or greater than the Termination
Price. The "TERMINATION PRICE" shall be an amount equal to the sum of (i) the
then outstanding Class Principal Balances of the Classes of Notes plus all
accrued and unpaid interest thereon, (ii) the then outstanding Class Principal
Balance of the Class B Certificates plus all accrued and unpaid interest
thereon, (iii) any Trust Fees and Expenses due and unpaid on such date and (iv)
any unreimbursed Servicing Advances including such Servicing Advances deemed to
be nonrecoverable. The proceeds from such sale will be distributed (i) first, to
the outstanding Trust Fees and Expenses, (ii) second, to the Servicer for
unreimbursed Servicing Advances including such Servicing Advances deemed to be
nonrecoverable, (iii) third, to the Noteholders in an amount equal to the then
outstanding Class Principal Balance of the Notes plus all accrued and unpaid
interest thereon, (iv) fourth, to the Certificateholders in an amount equal to
the then outstanding Class Principal Balance of the Class B Certificates plus
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all accrued and unpaid interest thereon and (v) fifth, to the holders of the
Residual Interest, in an amount equal to the amount of proceeds remaining, if
any, after the distributions specified in clauses (i) through (iv) above.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Offered Securities will be provided by
(i) the subordination of the right of the Residual Interest and certain Classes
of Offered Securities to receive distributions with respect to interest and
principal as described below under "--Subordination and Allocation of Losses"
and (ii) the overcollateralization feature described below under "--
Overcollateralization."
SUBORDINATION AND ALLOCATION OF LOSSES
Distributions of interest on the Notes will be made first to the Senior Notes
and then to the Mezzanine Notes, such that no interest will be paid on the
Mezzanine Notes until all required interest payments have been made on the
Senior Notes. In addition, distributions of principal of the Notes generally
will be made sequentially, such that no Class of Notes (other than the Class A-6
Notes) will receive any distributions of principal until the Class Principal
Balances of all Classes of Notes having lower numerical designations (and in the
case of the Classes of Mezzanine Notes, all Classes of Senior Notes) have
received all required distributions of principal. In addition, all Allocable
Loss Amounts applied in reduction of the Class Principal Balances of the
Mezzanine Notes will be applied first to the Class M-2 Notes and then to the
Class M-1 Notes, until their respective Class Principal Balances have been
reduced to zero. Allocable Loss Amounts will not be applied to the Classes of
Senior Notes. The rights of the holders of the Class B Certificates to receive
distributions of interest and distributions of principal on each Distribution
Date generally will be subordinated to the rights of the holders of the Notes to
receive distributions of interest and distributions of principal, respectively,
on each Distribution Date. In addition, no Allocable Loss Amounts will be
applied to the reduction of the Class Principal Balance of any Class of
Mezzanine Notes until the application thereof to the Class Principal Balance of
the Class B Certificates has reduced such Class Principal Balance to zero. The
rights of the holders of the Residual Interest to receive any distributions on
any Distribution Date generally will be subordinated to the rights of the
holders of the Offered Securities and the Class B Certificates. The
subordination described above is intended to enhance the likelihood of the
regular receipt of interest and principal due to the holders of the Classes of
Offered Securities and the Class B Certificates and to afford such holders
protection against losses on the Loans, with the greatest amount of such
enhancement and protection being provided to the Classes of Senior Notes, a
lesser amount of such enhancement and protection being provided to the Class M-1
and, in particular, the Class M-2 Notes, and the least amount of such
enhancement and protection being provided to the Class B Certificates. See "Risk
Factors--Adequacy of Credit Enhancement Limitations" herein.
On each Distribution Date, the "ALLOCABLE LOSS AMOUNT" will be equal to the
excess, if any, of (a) the aggregate of the Class Principal Balances of all
Classes of Securities (after giving effect to all distributions on such
Distribution Date) over (b) the sum of the Pool Principal Balance and the Pre-
Funded Amount, each as of the end of the preceding Due Period.
OVERCOLLATERALIZATION
As of any date of determination, the "OVERCOLLATERALIZATION AMOUNT" will equal
the excess of the sum of the Pool Principal Balance and the Pre-Funded Amount,
each as of the end of the previous Due Period over the aggregate of the sum of
the Class Principal Balances of all Classes of Notes and the Class Principal
Balance of the Class B Certificates (after giving effect to all distributions on
the Securities on such Distribution Date). On the Closing Date, the
Overcollateralization Amount will be equal to zero. A limited acceleration of
the principal amortization of the Offered Securities relative to the principal
amortization of the Loans has been designed to increase the
Overcollateralization Amount over time by making additional distributions of
principal to the holders of the Offered Securities from the distribution of
Excess Spread until the Overcollateralization Amount is at least equal to the
Overcollateralization Target Amount. The "OVERCOLLATERALIZATION TARGET AMOUNT"
for any Distribution Date occurring prior to the Stepdown Date will be equal to
the greater of (x) 9% of the sum of the Original Pool
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Principal Balance and the Original Pre-Funded Amount and (y) the Net Delinquency
Calculation Amount; with respect to any other Distribution Date, the
Overcollateralization Target Amount will be equal to the greater of (x) 18% of
the Pool Principal Balance as of the end of the related Due Period and (y) the
Net Delinquency Calculation Amount; provided, however, that the
Overcollateralization Target Amount will in no event be less than 0.50% of the
sum of the Original Pool Principal Balance and the Original Pre-Funded Amount or
greater than the sum of the aggregate Class Principal Balances of all Classes of
Securities.
If on any Distribution Date there exists an Overcollateralization Deficiency
(as defined herein), distributions of Excess Spread, if any, will be made as an
additional distribution of principal to the holders of the Offered Securities
and the Class B Certificates, to be allocated among the Classes of Notes and the
Class B Certificates in the order of priority set forth under "Description of
the Offered Securities--Distributions on the Offered Securities" herein. Such
distributions of Excess Spread are intended to accelerate the amortization of
the Class Principal Balances of all Classes of Offered Securities relative to
the amortization of the Loans, thereby increasing the Overcollateralization
Amount. The relative percentage of the aggregate of the Class Principal Balances
of the Securities to the Pool Principal Balance will decrease as a result of the
application of Excess Spread to reduce the Class Principal Balances of the
Securities.
On any Distribution Date with respect to which the Overcollateralization
Deficiency Amount is equal to zero, all or a portion of the Excess Spread may be
distributed to the holders of the Residual Interest rather than being
distributed as principal to the holders of the Securities, thereby ceasing the
acceleration of principal amortization of the Securities in relation to the
principal amortization of the Pool until such time as the Overcollateralization
Deficiency Amount is greater than zero (i.e., due to a reduction in the
Overcollateralization Amount as a result of Net Loan Losses or delinquencies or
due to an increase in the Overcollateralization Target Amount as a result of the
failure to satisfy certain delinquency criteria).
While the application of Excess Spread in the manner specified above has been
designed to produce and maintain a given level of overcollateralization, there
can be no assurance that Excess Spread will be generated in sufficient amounts
to ensure that such overcollateralization level will be achieved or maintained
at all times. In particular, a high rate of delinquencies on the Loans during
any Due Period could cause the amount of interest received on the Loans during
such Due Period to be less than the amount of interest distributable on the
Securities on the related Distribution Date. In such a case, the Class Principal
Balances of the Securities would decrease at a slower rate relative to the Pool
Principal Balance, resulting in a reduction of the Overcollateralization Amount
and, in some circumstances, an Allocable Loss Amount. See "Risk Factors--
Adequacy of Credit Enhancement" herein.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, Sale and
Servicing Agreement, the Administration Agreement and the Trust Agreement
(collectively, the "TRANSFER AND SERVICING AGREEMENTS"). Forms of certain of the
Transfer and Servicing Agreements have been filed as exhibits to the
Registration Statement. Copies of the Transfer and Servicing Agreements will be
filed with the Commission following the issuance of the Offered Securities. 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 headings "The Agreements"
in the Prospectus, to which description reference is hereby made.
SALE AND ASSIGNMENT OF THE LOANS
On the Closing Date, all of the Transferor's right, title and interest in and
to the Initial Loans will be sold, conveyed, transferred and assigned from the
Transferor to EFC, from EFC to the Depositor and then from the Depositor to the
Trust. The Trust, concurrently with the sale, conveyance, transfer and
assignment of the Loans, caused the Offered Securities to be delivered to the
Depositor in exchange for the Loans. The Trust pledged and assigned the Loans to
the Indenture Trustee in exchange for the Notes. Each Loan will be identified in
a schedule
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appearing as an exhibit to the Sale and Servicing Agreement delivered to the
Indenture Trustee (the "LOAN SCHEDULE").
In addition, the Depositor will, as to each Loan, deliver or cause to be
delivered, to the Indenture Trustee or the Custodian, the related Note endorsed
to the order of the Indenture Trustee or the Custodian without recourse, any
assumption and modification agreements and the Mortgage, if any, with evidence
of recording indicated thereon (except for any Mortgage not returned from the
public recording office), an assignment of the Mortgage, if any, in the name of
the Indenture Trustee in recordable form, and any intervening assignments of the
Mortgage (collectively, as to each Loan, the "INDENTURE TRUSTEE'S LOAN FILE").
The Transferor will deliver to the Indenture Trustee after recordation the
assignments to the Indenture Trustee of the Mortgages. In the event that, with
respect to any Mortgage Loan, the Transferor cannot deliver the Mortgage or any
assignment of Mortgage with evidence of recording thereon concurrently with the
conveyance thereof under the Sale and Servicing Agreement because it has or they
have not yet been returned by the public recording office, the Transferor will
deliver or cause to be delivered to the Indenture Trustee or the Custodian a
certified true photocopy of such Mortgage or assignment of Mortgage. The
Transferor will deliver or cause to be delivered to the Indenture Trustee or the
Custodian any such Mortgage or assignment of Mortgage with evidence of recording
indicated thereon upon receipt thereof from the public recording office. The
Indenture Trustee or the Custodian will agree, for the benefit of the holders of
the Offered Securities, to review (or cause to be reviewed) each Indenture
Trustee's Loan File within 45 days after the conveyance of the related Loan to
the Trust to ascertain that all required documents have been executed and
received, subject to the applicable cure period in the Transfer and Servicing
Agreements.
TRUST FEES AND EXPENSES
As compensation for its services pursuant to the Sale and Servicing Agreement,
the Servicer is entitled to the Servicing Fee and additional servicing
compensation and reimbursement as described under "Servicing" below. As
compensation for their services pursuant to the applicable Transfer and
Servicing Agreements, the Indenture Trustee is entitled to the Indenture Trustee
Fee, the Owner Trustee is entitled to the Owner Trustee Fee and the Custodian is
entitled to the Custodian Fee.
SERVICING
In consideration for the performance of the daily loan servicing functions for
the Loans, the Servicer is entitled to receive from payments in respect of
interest on the Loans, a monthly servicing fee (the "SERVICING FEE") in the
amount equal to 0.75% per annum (the "SERVICING FEE RATE") on the Principal
Balance of each Loan as of the first day of each Due Period (or as of the Cut
Off-Date, with respect to the first Due Period) as to which such payment was
made, subject to reduction as a result of any additional Indenture Trustee Fee
owed to the Indenture Trustee. See "Risk Factors--Dependence on Servicer for
Servicing Loans" herein. The Servicer will pay the fees of any Subservicer out
of the amounts it receives as the Servicing Fee. 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 and any other servicing-related penalties
and fees (such additional compensation and the Servicing Fee, collectively, the
"SERVICING COMPENSATION").
In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. However, the Servicer will make
reasonable and customary expense advances with respect to the Loans (each, a
"SERVICING ADVANCE") in accordance with its servicing obligations under the Sale
and Servicing Agreement and will be entitled to receive reimbursement for such
Servicing Advances. For example, such Servicing Advances with respect to a Loan
may include costs and expenses advanced for the preservation, restoration and
protection of the related Mortgaged Property, including advances to pay
delinquent real estate taxes and assessments. Any Servicing Advances previously
made and determined by the Servicer in accordance with accepted servicing
practices to be nonrecoverable will be reimbursable from amounts in the
Collection Account prior to distributions to holders of the Offered Securities.
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COLLECTION ACCOUNT, NOTE DISTRIBUTION ACCOUNT AND CERTIFICATE DISTRIBUTION
ACCOUNT
The Servicer is required to use its best efforts to deposit in an Eligible
Account (the "COLLECTION ACCOUNT"), within two Business Days after receipt, all
payments on the related Loans received after the Cut-Off Date on account of
principal and all payments received with respect to interest due after the Cut-
Off Date, all Net Liquidation Proceeds, Insurance Proceeds, Released Mortgaged
Property Proceeds, any amounts payable in connection with the repurchase or
substitution of any Loan and any amount required to be deposited in the
Collection Account in connection with the termination of the Offered Securities.
The foregoing requirements for deposit in the Collection Account will be
exclusive of payments on account of principal collected on the Loans on or
before the Cut-Off Date and on account of interest payments due on or prior to
the Cut-Off Date. 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 which satisfies the
requirements set forth in the definition of Eligible Account in the Sale and
Servicing Agreement.
The Servicer 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 distribution to the
Noteholders will be deposited and from which all distributions to the
Noteholders will be made (the "NOTE DISTRIBUTION ACCOUNT"). The Servicer will
also establish and maintain with the Indenture Trustee an account in the name of
the Owner Trustee on behalf of the Certificateholders, into which amounts
released from the Collection Account for distribution to the Certificateholders
will be deposited and from which all distributions to the Certificateholders
will be made (the "CERTIFICATE DISTRIBUTION ACCOUNT" and, together with the Note
Distribution Account, the "DISTRIBUTION ACCOUNTS").
On the second Business Day prior to each Distribution Date, the Indenture
Trustee will deposit into the Distribution Accounts the applicable portions of
the Available Collection Amount by making the appropriate withdrawals from the
Collection Account. On each Distribution Date, the Indenture Trustee will make
withdrawals from the Distribution Accounts for application of the amounts
specified above.
INCOME FROM ACCOUNTS
So long as no Event of Default will have occurred and be continuing, amounts
on deposit in the Distribution Accounts and the Collection Account
(collectively, the "ACCOUNTS") will be invested by the Indenture Trustee, as
directed by the Servicer, in one or more Permitted Investments (as defined in
the Sale and Servicing Agreement) bearing interest or sold at a discount. No
such investment in any Account will mature later than the Business Day
immediately preceding the next Distribution Date. All income or other gain from
investments in any Account will be deposited in such Account immediately on
receipt, unless otherwise specified herein.
COLLECTION AND OTHER SERVICING PROCEDURES FOR LOANS
The Servicer has agreed to manage, service, administer and make collections on
the Loans and perform the other actions required by the Servicer under the Sale
and Servicing Agreement. In performing such obligations, the Servicer is
required to act in good faith in a commercially reasonable manner and in
accordance with the terms of the Sale and Servicing Agreement. The Servicer has
full power and authority, subject only to the specific requirements and
prohibitions of the Sale and Servicing Agreement and the respective Loans, to do
any and all things in connection with such servicing and administration which
are consistent with the manner in which it services similar types of loans owned
by the Servicer or any of its affiliates or serviced by the Servicer for others
and which are consistent with the ordinary practices of prudent mortgage lending
institutions.
If any payment due under any Loan is not paid when the same becomes due and
payable, or if the related Obligor fails to perform any other covenant or
obligation under the Loan and such failure continues beyond any applicable grace
period, the Servicer must take such action as it shall deem to be in the best
interest of the Trust.
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The Servicer may modify any provision of any Loan if, in the Servicer's good
faith judgment, such modification would minimize the loss that might otherwise
be experienced with respect to such Loan, only in the event of a payment default
with respect to such Loan or in the event that a payment default with respect to
such Loan is reasonably foreseeable by the Servicer.
INSURANCE
The Servicer shall cause to be maintained such fire and hazard insurance
covering the Mortgaged Properties as the Servicer shall deem reasonable.
REALIZATION UPON DEFAULTED LOANS
With respect to any Mortgage Loan, the Servicer may institute foreclosure
proceedings, exercise any power of sale to the extent permitted by law, obtain a
deed in lieu of foreclosure, or otherwise acquire possession of or title to any
Mortgaged Property, by operation of law or otherwise; provided, however, that in
the Servicer's reasonable judgment such action will be likely to result in a
positive economic benefit to the Trust by creating Net Liquidation Proceeds
(after reimbursement of all amounts owed with respect to such Mortgage Loan to
the Servicer); and provided, further, that the Servicer will have requested,
prior to taking title to any Mortgaged Property, that the Indenture Trustee
obtain, and the Indenture Trustee will have obtained, an environmental review of
the Mortgaged Property from a company having appropriate experience and
otherwise reasonably acceptable to the Indenture Trustee, the scope of which is
limited to the review of public records and documents for information regarding
whether such Mortgaged Property has on it, has under it or is near, hazardous or
toxic material or waste. If such review reveals that the Mortgaged Property has
on it, has under it or is near hazardous or toxic material or waste or reveals
any other environmental problem, the Indenture Trustee shall provide a copy of
the related report to the Servicer and title shall be taken to such Mortgaged
Property only after obtaining the written consent of the Servicer.
In connection with any such foreclosure proceeding, power of sale, deed in
lieu of foreclosure or other acquisition of a Mortgaged Property, the Servicer
shall comply with the requirements of the Sale and Servicing Agreement, shall
follow such practices and procedures as are consistent with the Servicer's
procedure for foreclosure and operation of foreclosed property with respect to
similar loans held in the Servicer's portfolio for its own account or, if there
are no such loans, such loans serviced by the Servicer for others, giving due
consideration to accepted servicing practices of prudent lending institutions,
and shall sell or liquidate the Loan or Mortgaged Property.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement provides that the Servicer deliver to the
Indenture Trustee and the Rating Agencies an annual statement signed by an
officer of the Servicer to the effect that the Servicer has fulfilled its
obligations under the Sale and Servicing Agreement throughout the preceding
year, except as specified in such statement.
Each year (within 90 days following the end of the Servicer's fiscal year),
beginning in 1998, the Servicer will furnish to the Indenture Trustee a report
prepared by a firm of nationally recognized independent public accountants
(which may also render other services to the Servicer or the Depositor) to the
effect that such firm has examined certain documents and the records relating to
servicing of the Loans as specified in the Sale and Servicing Agreement and such
firm's conclusion that the Servicer is in compliance with respect thereto.
The Servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
The Sale and Servicing Agreement provides that the Servicer may not resign
from its obligations and duties thereunder except (i) with the consent of the
Indenture Trustee or (ii) upon determination that by reason of a change in legal
requirements the performance of its duties under the Sale and Servicing
Agreement would cause it to be in violation of such legal requirements in a
manner which would result in a material adverse effect on the Servicer.
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Any such determination permitting the resignation of the Servicer by reason of a
change in such legal requirements shall be evidenced by an opinion of counsel to
such effect delivered and acceptable to the Indenture Trustee. No resignation of
the Servicer shall become effective until a successor servicer shall have
assumed the Servicer's servicing responsibilities and obligations.
The Servicer has agreed not to merge or consolidate with any other company or
permit any other company to become the successor to the Servicer's business
unless, after the merger or consolidation, the successor or surviving entity (i)
shall be an Eligible Servicer (as defined in the Sale and Servicing Agreement)
and (ii) shall be capable of fulfilling the duties of the Servicer contained in
the Sale and Servicing Agreement. Any company into which the Servicer may be
merged or consolidated shall execute an agreement of assumption to perform every
obligation of the Servicer under the Sale and Servicing Agreement and shall be
the successor to the Servicer under the Sale and Servicing Agreement.
The Sale and Servicing Agreement provides that neither the Servicer nor any of
its directors, officers, employees or agents shall have any liability to the
Trust or to the Security Owners for any action taken, or for refraining from
taking any action, in good faith pursuant to the Sale and Servicing Agreement or
for errors in judgment, unless liability would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in performing or failing to perform
the Servicer's duties.
EVENTS OF DEFAULT
"EVENTS OF DEFAULT" will consist of, among other things: (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 two 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 30 Business Days after notice; or (iii) certain events of
insolvency, readjustment of debt, marshalling 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 (an
"INSOLVENCY EVENT") or the Servicer shall dissolve or liquidate, in whole or
part, in any material respect.
If an Event of Default shall occur and be continuing, the Indenture Trustee at
the direction of the Securityholders, by notice given in writing to the Servicer
(and to the Indenture Trustee, if given by the Securityholders) may terminate
all of the rights and obligations of the Servicer under the Sale and Servicing
Agreement. On or after the receipt by the Servicer of such written notice, and
the appointment of and acceptance of appointment by a successor Servicer, all
authority, power, obligations and responsibilities of the Servicer under the
Sale and Servicing Agreement shall become obligations and responsibilities of
the successor Servicer. After the Servicer receives a notice of termination or
upon the resignation of the Servicer, the Indenture Trustee shall be the
successor in all respects to the Servicer in its capacity as servicer under the
Sale and Servicing Agreement.
Any successor Servicer shall be entitled to such compensation (whether payable
out of the Collection Account or otherwise) as the Servicer would have been
entitled to under the Sale and Servicing Agreement if the Servicer had not
resigned or been terminated thereunder. In addition, any successor Servicer
shall be entitled to reasonable transition expenses incurred in acting as
successor Servicer.
THE OWNER TRUSTEE, THE CO-OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Co-Owner Trustee, the Indenture Trustee and any of
their respective affiliates may hold Offered Securities in their own names or as
pledgees.
For the purpose of meeting the legal requirements of certain jurisdictions,
the Servicer, 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 Sale and
Servicing Agreement and the Trust Agreement and upon the Indenture Trustee by
the Sale and Servicing
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Agreement and the Indenture will be conferred or imposed jointly upon the Owner
Trustee and the Indenture Trustee, respectively, and in each such case such
separate trustee or co-trustee, 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, respectively.
The Owner Trustee, the Co-Owner Trustee and the Indenture Trustee may resign
at any time, in which event the Servicer will be obligated to appoint a
successor thereto. The Servicer may remove the Owner Trustee, the Co-Owner
Trustee or the Indenture Trustee if any of them ceases to be eligible to
continue as such under the Trust Agreement or the Indenture, as the case may be,
or becomes legally unable to act or becomes insolvent. In such circumstances,
the Servicer will be obligated to appoint a successor Owner Trustee, a successor
Co-Owner Trustee or a successor Indenture Trustee, as applicable. Any
resignation or removal of the Owner Trustee, the Co-Owner Trustee or the
Indenture Trustee and appointment of a successor thereto will not become
effective until acceptance of the appointment by such successor.
The Trust Agreement and Indenture will provide that the Owner Trustee, the Co-
Owner Trustee and Indenture Trustee will be entitled to indemnification by the
Transferor, and will be held harmless against, any loss, liability or expense
incurred by the Owner Trustee, the Co-Owner Trustee or Indenture Trustee 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).
DUTIES OF THE OWNER TRUSTEE, THE CO-OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee and the Co-Owner Trustee will make no representations as to
the validity or sufficiency of the Trust Agreement, the Securities (other than
the execution and authentication thereof) or of any Loans or related documents,
and will not be accountable for the use or application by the Depositor or the
Servicer of any funds paid to the Depositor or the Servicer in respect of the
Notes, the Class B Certificates or the Loans, or the investment of any monies by
the Servicer before such monies are deposited into the Accounts. So long as no
Event of Default will have occurred and be continuing, the Owner Trustee and the
Co-Owner Trustee will be required to perform only those duties specifically
required of them 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 and the Co-Owner Trustee under the
Trust Agreement, in which case they will only be required to examine such
certificates, reports or other instruments to determine whether they conform to
the requirements of the Trust Agreement. The Owner Trustee and the Co-Owner
Trustee will not be charged with knowledge of a failure by the Servicer to
perform its duties under the Trust Agreement or the Sale and Servicing Agreement
which failure constitutes an Event of Default, unless the Owner Trustee or the
Co-Owner Trustee obtains such actual knowledge of such failure as specified in
the Trust Agreement.
The Owner Trustee and the Co-Owner Trustee will be under no obligation to
exercise any of the rights or powers vested in them 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 any of the Certificateholders, unless such Certificateholders have
offered to the Owner Trustee and the Co-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 the
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 and the Co-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 Class B Certificates evidencing not less than 50% of the
voting interests of the Class B Certificates have made written request upon the
Owner Trustee and the Co-Owner Trustee to institute such proceeding in their own
name as the Owner Trustee and Co-Owner Trustee thereunder and have offered to
the Owner Trustee and the Co-Owner Trustee reasonable indemnity and the Owner
Trustee and the Co-Owner Trustee have for 30 days 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 Securities (other than the execution and
authentication thereof) or of any Loans or related documents, and will not
S-63
be accountable for the use or application by the Depositor or the Servicer of
any funds paid to the Depositor or the Servicer in respect of the Notes, the
Class B Certificates or the Loans, or the investment of any monies by the
Servicer before such monies are deposited into the Accounts. So long as no Event
of Default under the Indenture will have occurred and be continuing, the
Indenture Trustee will be required to perform only those duties specifically
required of it under the Indenture. 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 Trust
Agreement, the Sale and Servicing Agreement or the Administration Agreement
which failure constitutes an Event of Default under the Indenture, unless the
Indenture Trustee obtains such actual knowledge of such failure as specified in
the Indenture.
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 will previously have 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 voting interests of each 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 has for 30 days neglected or refused to institute any such
proceedings.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Brown & Wood LLP, counsel to the Depositor and the
Underwriter ("TAX COUNSEL") for Federal income tax purposes, the Notes will be
characterized as debt and the Trust will not be characterized as an association
(or a publicly traded partnership) taxable 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 Material Federal Income Tax
Considerations" in the Prospectus for additional information concerning the
application of Federal income tax laws to the Trust and the Offered Securities.
The Offered Securities, depending on their issue prices, may be treated as
having been issued with original issue discount. As a result, holders of the
Offered Securities may be required to recognize income with respect to the
Offered Securities somewhat in advance of the receipt of cash attributable to
that income. The prepayment assumption that will be used for purpose of
computing original issue discount for Federal income tax purposes is 100% of the
Prepayment Assumption.
STATE TAX CONSEQUENCES
In addition to the Federal income tax consequences described in "Certain
Federal Income Tax Consequences" herein, potential investors should consider the
state income tax consequences of the acquisition, ownership and disposition of
the Offered Securities. State income tax law may differ substantially from the
corresponding Federal tax law, and this discussion does not purport to describe
any aspect of the income tax laws of any state or other jurisdiction. Therefore,
potential investors should consult their own tax advisors with respect to the
various tax consequences of investments in the Offered Securities.
S-64
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA") and
section 4975 of the Internal Revenue Code of 1986, as amended (the "CODE"),
impose certain restrictions on employee benefit plans subject to ERISA or plans
or arrangements subject to section 4975 of the Code ("PLANS") and on persons who
are parties in interest or disqualified persons ("parties in interest") with
respect to such Plans. Certain employee benefit plans, such as governmental
plans and church plans (if no election has been made under section 410(d) of the
Code) are not subject to the restrictions of ERISA, and assets of such plans may
be invested in the Offered Securities without regard to the ERISA considerations
described below, subject to other applicable Federal and state law. However, any
such governmental or church plan which is qualified under section 401(a) of the
Code and exempt from taxation under section 501(a) of the Code is subject to the
prohibited transaction rules set forth in section 503 of the Code. Any Plan
fiduciary which proposes to cause a Plan to acquire any of the Offered
Securities should consult with its counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
the Offered Securities. See "ERISA Considerations" in the Prospectus.
Investments by Plans are also subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a Plan from
engaging in certain transactions (including loans) involving a Plan and its
assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA) on
parties in interest which engage in non-exempt prohibited transactions.
PLAN ASSET REGULATION
The United States Department of Labor ("LABOR") has issued final regulations
concerning the definition of what constitutes the assets of a Plan for purposes
of ERISA and the prohibited transaction provisions of the Code (the "PLAN ASSET
REGULATION"). The Plan Asset Regulation describes the circumstances under which
the assets of an entity in which a Plan invests will be considered to be "plan
assets" such that any person who exercises control over such assets would be
subject to ERISA's fiduciary standards. Under the Plan Asset Regulation,
generally when a Plan invests in another entity, the Plan's assets do not
include, solely by reason of such investment, any of the underlying assets of
the entity. However, the Plan Asset Regulation provides that, if a Plan acquires
an "equity interest" in an entity that is neither a "publicly-offered security"
(as defined therein) nor a security issued by an investment company registered
under the Investment Company Act of 1940, the assets of the entity will be
treated as assets of the Plan investor unless certain exemptions apply. If the
Notes were deemed to be equity interests and no statutory, regulatory or
administrative exemption applies, the Trust could be considered to hold plan
assets by reason of a Plan's investment in the Notes. Such plan assets would
include an undivided interest in any assets held by the Trust. In such an event,
the Servicer and other persons, in providing services with respect to the
Trust's assets, may be parties in interest with respect to such Plans, subject
to the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of section 406 of ERISA and section 4975 of
the Code with respect to transactions involving the Trust's assets. 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." Although
the Plan Asset Regulation is silent with respect to the question of which law
constitutes "applicable local law" for this purpose, Labor has stated that these
determinations should be made under the state law governing interpretation of
the instrument in question. In the
S-65
preamble to the Plan Asset Regulation, Labor declined to provide a precise
definition of what features are equity features or the circumstances under which
such features would be considered "substantial," noting that the question of
whether a Plan's interest has substantial equity features is an inherently
factual one, but that in making a determination it would be appropriate to take
into account whether the equity features are such that a Plan's investment would
be a practical vehicle for the indirect provision of investment management
services. Brown & Wood LLP ("ERISA COUNSEL") has rendered its opinion that the
Notes will be classified as indebtedness without substantial equity features for
ERISA purposes. ERISA Counsel's opinion is based upon the terms of the Notes,
the opinion of Tax Counsel that the Notes will be classified as debt instruments
for Federal income tax purposes and the ratings which have been assigned to the
Notes. However, if contrary to ERISA Counsel's opinion the Notes are deemed to
be equity interests in the Trust and no statutory, regulatory or administrative
exemption applies, the Trust could be considered to hold Plan assets by reason
of a Plan's investment in the Notes.
Without regard to whether the Notes are treated as an equity interest under
the Plan Asset Regulation, the acquisition or holding of the Notes by or on
behalf of a Plan could be considered to give rise to a prohibited transaction if
such acquisition and holding of the Notes by or on behalf of such Plan is deemed
to be a prohibited loan to a party in interest with respect to such Plan.
Certain exemptions from the prohibited transaction rules could be applicable to
the purchase and holding of the Notes by a Plan depending on the type and
circumstances of the Plan fiduciary making the decision to acquire the Notes.
Included among these exemptions are: Prohibited Transaction Class Exemption
("PTCE") 90-1, regarding certain transactions entered into by insurance company
pooled separate accounts; PTCE 95-60, regarding certain transactions entered
into by insurance company general accounts; PTCE 96-23, regarding certain
transactions effected by "in-house asset managers"; PTCE 91-38 regarding certain
transactions entered into by bank collective investment funds; and PTCE 84-14,
regarding certain transactions effected by "qualified professional asset
managers". Each purchaser and each transferee of a Note shall be deemed to have
represented either that it is not using Plan assets to acquire or hold the Note
or that its purchase and holding of the Note will be covered by a Labor class
exemption to hold Plan assets by reason of a Plan's investment in the Notes.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Notes on behalf of a
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Notes, a
fiduciary of a Plan should make its own determination as to whether the Trust,
as obligor on the Notes, is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulation and
the availability of any other prohibited transaction exemptions. Purchasers
should analyze whether the decision may have an impact with respect to purchases
of the Notes.
LEGAL INVESTMENT MATTERS
The Offered Securities will NOT constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of 1984 because a substantial
number of the Loans are either unsecured or secured by liens on real estate that
are not first liens. Accordingly, many institutions with legal authority to
invest in "mortgage related securities" may not be legally authorized to invest
in the Offered Securities.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Offered Securities or to
purchase Offered Securities representing more than a specified percentage of the
investor's assets. Prospective investors should consult their own legal advisors
in determining whether and to what extent the Offered Securities constitute
legal investments for such investors.
USE OF PROCEEDS
The Transferor intends to use the net proceeds to be received from the sale of
the Offered Securities to pay off certain indebtedness incurred in connection
with the acquisition of the Initial Loans (including indebtedness owed
S-66
to an affiliate of ContiFinancial Services Corporation), to fund the Pre-Funding
Account and the Capitalized Interest Account and to pay other expenses
associated with the pooling of the Loans and the issuance of the Notes and the
Certificates.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and Greenwich Capital Markets, Inc. ("GREENWICH") (an
affiliate of the Depositor) and ContiFinancial Services Corporation
("CONTIFINANCIAL" and, together with Greenwich, the "UNDERWRITERS"), the
Depositor has agreed to sell to the Underwriters, and the Underwriters have
agreed to purchase from the Depositor, the principal amounts of the Notes set
forth below opposite their respective names. Distribution of the Offered
Securities will be made by the Underwriters from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. In connection with the sale of the Offered Securities, the Underwriters
may be deemed to have received compensation from the Depositor in the form of
underwriting discounts.
Principal Principal Principal Principal Principal Principal Principal Principal
Amount of Amount of Amount of Amount of Amount of Amount of Amount of Amount of
Class A-1 Class A-2 Class A-3 Class A-4 Class A-5 Class A-6 Class M-1 Class M-2
Underwriter Notes Notes Notes Notes Notes Notes Notes Notes
- ----------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Greenwich Capital $16,000,000 $16,000,000 $25,100,000 $11,000,000 $24,016,000 $7,000,000 $16,728,000 $15,683,000
Markets, Inc..........
ContiFinancial 500,000 500,000 400,000
Services Corporation..
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total................ $16,500,000 $16,500,000 $25,500,000 $11,000,000 $24,016,000 $7,000,000 $16,728,000 $15,683,000
There is currently no secondary market for the Offered Securities. There can
be no assurance that a secondary market for the Offered Securities will develop
or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor and for the
Underwriters by Brown & Wood LLP, New York, New York. Certain legal matters will
be passed upon for the Transferor by Dewey Ballantine, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Securities that each of the
Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class A-5
Notes and Class A-6 Notes be rated "AAA" by Standard & Poor's and DCR, and the
Class M-1 Notes be rated "AA" and the Class M-2 Notes be rated "A-" by Standard
& Poor's and DCR.
The ratings on the Offered Securities address the likelihood of the receipt by
the holders of the Offered Securities of all distributions on the Loans to which
they are entitled. The ratings on the Offered Securities also address the
structural, legal and issuer-related aspects of the Offered Securities,
including the nature of the Loans. In general, the ratings on the Offered
Securities address credit risk and not prepayment risk. The ratings on the
Offered Securities do not represent any assessment of the likelihood that
principal prepayments of the 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 Offered Securities
do not address the possibility that holders of the Offered Securities might
suffer a lower than anticipated yield in the event of principal payments on the
Offered Securities resulting from rapid prepayments of the Loans or the
application of Excess Spread as
S-67
described herein, or in the event that the Trust is terminated prior to the
Final Scheduled Distribution Date of the Classes of Notes and the Class B
Certificates. The ratings on the Offered Securities do not address the ability
of the Trust to acquire Subsequent Loans, any potential redemption with respect
thereto or the effect on yield resulting therefrom.
The Depositor has not solicited ratings on the Offered Securities with any
rating agency other than the Rating Agencies. However, there can be no assurance
as to whether any other rating agency will rate the Offered Securities or, if it
does, what rating would be assigned by any such other rating agency. Any rating
on the Offered Securities by another rating agency, if assigned at all, may be
lower than the ratings assigned to the Offered Securities by the Rating
Agencies.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to any
of the Offered Securities 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 Offered Securities.
S-68
INDEX OF DEFINED TERMS
PAGE
----
Accounts.................................................. S-60
Allocable Loss Amount..................................... S-10, S-57
Available Collection Amount............................... S-49
Available Distribution Amount............................. S-50
Business Day.............................................. S-51
Capitalized Interest Account.............................. S-11, S-56
Certificate Distribution Account.......................... S-60
Certificateholders' Interest Carry-Forward Amount......... S-52
Certificateholders' Interest Distribution Amount.......... S-52
Certificateholders' Monthly Interest Distribution Amount.. S-52
Class A Excess Spread Distribution........................ S-52
Class A Principal Distribution Amount..................... S-52
Class A-5 Priority Excess Spread Distribution Amount...... S-52
Class A-5 Priority Percentage............................. S-52
Class A-5 Priority Principal Distribution Amount.......... S-52
Class A-5 Pro Rata Excess Spread Distribution Amount...... S-52
Class A-5 Pro Rata Principal Distribution Amount.......... S-53
Class B Certificates...................................... S-1, S-49
Class B Optimal Principal Balance......................... S-53
Class B Pass-Through Rate................................. S-5
Class M-1 Optimal Principal Balance....................... S-53
Class M-2 Optimal Principal Balance....................... S-53
Clean-up Call Date........................................ S-12
Closing Date.............................................. S-2
Co-Owner Trustee.......................................... S-1, S-4
Collection Account........................................ S-60
Combined Loan-to-Value Ratio.............................. S-8
Commission................................................ S-3
ContiFinancial............................................ S-67
CPR....................................................... S-37
Custodian................................................. S-4
Custodian Fee............................................. S-11
Cut-Off Date Principal Balance............................ S-8, S-48
DCR....................................................... S-13
Defective Loan............................................ S-9, S-31
Deleted Loan.............................................. S-31
Depositor................................................. S-1, S-4
Depository................................................ S-2
Determination Date........................................ S-5, S-49
Distribution Accounts..................................... S-60
Distribution Date......................................... S-2, S-5, S-49
DTC....................................................... S-7
Due Period................................................ S-5
EFC....................................................... S-4
Empire Funding............................................ S-1, S-4, S-20, S-28
ERISA..................................................... S-12, S-65
ERISA Counsel............................................. S-66
Events of Default......................................... S-62
S-69
Excess Spread............................................. S-53
FHLMC..................................................... S-16
Final Scheduled Distribution Date......................... S-7
FNMA...................................................... S-16
Greenwich................................................. S-67
Home Loan Purchase Agreement.............................. S-4
Indenture................................................. S-1, S-4, S-49
Indenture Trustee......................................... S-1, S-4
Indenture Trustee Fee..................................... S-11
Indenture Trustee's Loan File............................. S-59
Initial Loans............................................. S-1, S-7
Insolvency Event.......................................... S-62
Insurance Proceeds........................................ S-53
Issuer.................................................... S-4
Labor..................................................... S-65
Liquidated Home Loan...................................... S-53
Loan Rate................................................. S-21
Loan Schedule............................................. S-59
Loans..................................................... S-1, S-21, S-48
LOE's..................................................... S-31
Loss Reimbursement Deficiency............................. S-10, S-53
Majority Residual Interestholders......................... S-11, S-56
Mezzanine Notes........................................... S-2, S-5
Modeling Assumptions...................................... S-37
Mortgage Loans............................................ S-8, S-21
Mortgaged Properties...................................... S-8, S-21
Mortgages................................................. S-1, S-8
Net Delinquency Calculation Amount........................ S-54
Net Liquidation Proceeds.................................. S-54
Note Distribution Account................................. S-60
Note Interest Rate........................................ S-5
Noteholders' Interest Carry-Forward Amount................ S-54
Noteholders' Interest Distribution Amount................. S-54
Noteholders' Monthly Interest Distribution Amount......... S-54
Notes..................................................... S-1, S-49
Obligors.................................................. S-14
Offered Securities........................................ S-1, S-49
Original Class Principal Balance.......................... S-5
Original Pool Principal Balance........................... S-7, S-21, S-48
Original Pre-Funded Amount................................ S-7, S-11, S-48, S-56
Overcollateralization Amount.............................. S-10, S-54, S-57
Overcollateralization Deficiency Amount................... S-54
Overcollateralization Target Amount....................... S-10, S-54, S-57
Owner Trustee............................................. S-1, S-4
Owner Trustee Fee......................................... S-11
Plan Asset Regulation..................................... S-65
Plans..................................................... S-65
Pool...................................................... S-1, S-8
Pool Principal Balance.................................... S-8, S-48
Pre-Funded Amount......................................... S-11, S-56
Pre-Funding Account....................................... S-1, S-11, S-56
Pre-Funding Pro Rata Distribution Trigger................. S-11, S-17, S-56
Prepayment Assumption..................................... S-37
Principal Balance......................................... S-8, S-48
Prospectus................................................ S-2
S-70
PTCE...................................................... S-66
Purchase Agreement........................................ S-48
Purchase Price............................................ S-31
Qualified Substitute Loan................................. S-9, S-31
Rating Agencies........................................... S-13
Record Date............................................... S-5, S-49
Regular Distribution Amount............................... S-54
Regular Principal Distribution Amount..................... S-54
Released Mortgaged Property Proceeds...................... S-55
Residual Interest......................................... S-49
Residual Interest Instruments............................. S-1, S-6
Sale and Servicing Agreement.............................. S-4, S-48
Securities................................................ S-1
Security Owners........................................... S-7
Senior Notes.............................................. S-2, S-5
Senior Optimal Principal Balance.......................... S-55
Servicer.................................................. S-4
Servicing Advance......................................... S-59
Servicing Compensation.................................... S-11, S-12, S-59
Servicing Fee............................................. S-12, S-59
Servicing Fee Rate........................................ S-59
Six-Month Rolling Delinquency Average..................... S-55
SMMEA..................................................... S-13, S-66
Standard & Poor's......................................... S-13
Stepdown Date............................................. S-55
Subsequent Loans.......................................... S-1, S-7, S-48
Substitution Adjustment................................... S-31
Tax Counsel............................................... S-64
Termination Price......................................... S-56
Transfer and Servicing Agreements......................... S-48, S-58
Transferor................................................ S-4
Trust..................................................... S-1, S-4, S-48
Trust Agreement........................................... S-1, S-4, S-49
Trust Fees and Expenses................................... S-11
Underwriter............................................... S-4
Underwriters.............................................. S-67
Unsecured Loans........................................... S-8, S-21
S-71
PROSPECTUS
ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
--------------------
This Prospectus relates to the issuance of Asset Backed Certificates (the
"Certificates") and the Asset Backed Notes (the "Notes" and, together with the
Certificates, the "Securities"), which may be sold from time to time in one or
more series (each, a "Series") by Financial Asset Securities Corp. (the
"Depositor") on terms determined at the time of sale and described in this
Prospectus and the related Prospectus Supplement. The Securities of a Series
will evidence beneficial ownership of a trust fund (a "Trust Fund"). As
specified in the related Prospectus Supplement, the Trust Fund for a Series of
Securities will include certain assets (the "Trust Fund Assets") which will
primarily consist of (i) closed-end and/or revolving home equity loans (the
"Home Equity Loans") secured primarily by subordinate liens on one- to four-
family residential properties, (ii) home improvement installment sales contracts
and installment loan agreements (the "Home Improvement Contracts") that are
either unsecured or secured primarily by subordinate liens on one- to four-
family residential properties, or by purchase money security interests in the
home improvements financed thereby (the "Home Improvements") and/or (iii)
Private Asset Backed Securities (as defined herein). The Home Equity Loans and
the Home Improvement Contracts are collectively referred to herein as the
"Loans". The Trust Fund Assets will be acquired by the Depositor, either
directly or indirectly, from one or more institutions (each, a "Seller"), which
may be affiliates of the Depositor, and conveyed by the Depositor to the related
Trust Fund. A Trust Fund also may include insurance policies, reserve accounts,
reinvestment income, guaranties, obligations, agreements, letters of credit or
other assets to the extent described in the related Prospectus Supplement.
Each Series of Securities will be issued in one or more classes. Each class
of Securities of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on the Trust Fund Assets in the related Trust Fund. A Series of Securities may
include one or more classes that are senior in right of payment to one or more
other classes of Securities of such Series. One or more classes of Securities
of a Series may be entitled to receive distributions of principal, interest or
any combination thereof prior to one or more other classes of Securities of such
Series or after the occurrence of specified events, in each case as specified in
the related Prospectus Supplement.
Distributions to Securityholders will be made monthly, quarterly, semi-
annually or at such other intervals and on the dates specified in the related
Prospectus Supplement. Distributions on the Securities of a Series will be made
from the assets of the related Trust Fund or Funds or other assets pledged for
the benefit of the Securityholders as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will describe any insurance or guarantee
provided with respect to the related Series of Securities including, without
limitation, any insurance or guarantee provided by the Department of Housing and
Urban Development, the United States Department of Veterans' Affairs or any
private insurer or guarantor. The only obligations of the Depositor with
respect to a Series of Securities will be to obtain certain representations and
warranties from each Seller and to assign to the Trustee for the related Series
of Securities the Depositor's rights with respect to such representations and
warranties. The principal obligations of the Master Servicer named in the
related Prospectus Supplement with respect to the related Series of Securities
will be limited to obligations pursuant to certain representations and
warranties and to its contractual servicing obligations, including any
obligation it may have to advance delinquent payments on the Trust Fund Assets
in the related Trust Fund.
The yield on each class of Securities of a Series will be affected by, among
other things, the rate of payments of principal (including prepayments) on the
Trust Fund Assets in the related Trust Fund and the timing of receipt of such
payments as described herein and in the related Prospectus Supplement. A Trust
Fund may be subject to early termination under the circumstances described
herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more elections may be made to
treat the related Trust Fund or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Certain Material Federal Income Tax Consequences."
--------------------
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 11.
THE CERTIFICATES OF A GIVEN SERIES REPRESENT BENEFICIAL INTERESTS IN, AND THE
NOTES OF A GIVEN
SERIES REPRESENT OBLIGATIONS OF, THE RELATED TRUST FUND ONLY AND DO NOT
REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, ANY SELLER OR ANY AFFILIATES
THEREOF, EXCEPT TO THE EXTENT DESCRIBED IN THE RELATED PROSPECTUS
SUPPLEMENT. NEITHER THE SECURITIES NOR THE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY, EXCEPT TO THE
EXTENT DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISOR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
Prior to issuance there will have been no market for the Securities of any
Series and there can be no assurance that a secondary market for any Securities
will develop, or if it does develop, that it will continue. This Prospectus may
not be used to consummate sales of Securities of any Series unless accompanied
by a Prospectus Supplement. Offers of the Securities may be made through one or
more different methods, including offerings through underwriters, as more fully
described under "Method of Distribution" herein and in the related Prospectus
Supplement. All Securities will be distributed by, or sold by underwriters
managed by:
GREENWICH CAPITAL MARKETS, INC.
May 21, 1997
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things, set
forth with respect to such Securities, as appropriate: (i) a description of the
class or classes of Securities and the Pass-Through Rate or method of
determining the rate or the amount of interest, if any, to be passed through to
each such class; (ii) the aggregate principal amount and Distribution Dates
relating to such Series and, if applicable, the initial and final scheduled
Distribution Dates for each class; (iii) information as to the assets comprising
the Trust Fund, including the general characteristics of the Trust Fund Assets
included therein and, if applicable, the insurance policies, surety bonds,
guaranties, letters of credit or other instruments or agreements included in the
Trust Fund or otherwise, and the amount and source of any reserve account; (iv)
the circumstances, if any, under which the Trust Fund may be subject to early
termination; (v) the method used to calculate the amount of principal to be
distributed with respect to each class of Securities; (vi) the order of
application of distributions to each of the classes within such Series, whether
sequential, pro rata, or otherwise; (vii) the Distribution Dates with respect to
such Series; (viii) additional information with respect to the method of
distribution of such Securities; (ix) whether one or more REMIC elections will
be made and designation of the regular interests and residual interests; (x) the
aggregate original percentage ownership interest in the Trust Fund to be
evidenced by each class of Securities; (xi) information as to the Trustee; (xii)
information as to the nature and extent of subordination with respect to any
class of Securities that is subordinate in right of payment to any other class;
and (xiii) information as to the Master Servicer.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed or
caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 14 or 15(d) of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act") prior to the termination of the offering of
Securities evidencing interests therein. Upon request by any person to whom
this Prospectus is delivered in connection with the offering of one or more
classes of Securities, the Depositor will provide or cause to be provided
without charge a copy of any such documents and/or reports incorporated herein
by reference, in each case to the extent such documents or reports relate to
such classes of Securities, other than the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests to the Depositor should be directed in writing to: Paul D. Stevelman,
Assistant Secretary, Financial Asset Securities Corp., 600 Steamboat Road,
Greenwich, Connecticut 06830, telephone number (203) 625-2756. The Depositor
has determined that its financial statements are not material to the offering of
any Securities.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part of
the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits
can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional 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 Securities and
Exchange Commission (the "Commission") maintains a Web site at
2
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Depositor, that file
electronically with the Commission.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series of
Securities are required under an Agreement to be forwarded to Securityholders.
However, such reports will neither be examined nor reported on by an independent
public accountant. See "Description of the Securities--Reports to
Securityholders".
3
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement with respect to the Series offered thereby and to the related
Agreement (as such term is defined below) which will be prepared in connection
with each Series of Securities. Unless otherwise specified, capitalized terms
used and not defined in this Summary of Terms have the meanings given to them in
this Prospectus and in the related Prospectus Supplement.
Title of Securities... Asset Backed Certificates (the "Certificates") and
Asset Backed Notes (the "Notes" and, together with the
Certificates, the "Securities"), which are issuable in
Series.
Depositor............. Financial Asset Securities Corp., a Delaware corporation,
an indirect limited purpose finance subsidiary of
National Westminster Bank Plc and an affiliate of
Greenwich Capital Markets, Inc. See "The Depositor"
herein.
Trustee............... The trustee (the "Trustee") for each Series of Securities
will be specified in the related Prospectus Supplement.
See "The Agreements" herein for a description of the
Trustee's rights and obligations.
Master Servicer....... The entity or entities named as Master Servicer (the
"Master Servicer") will be specified in the related
Prospectus Supplement. See "The Agreements--Certain
Matters Regarding the Master Servicer and the Depositor".
Trust Fund Assets..... Assets of the Trust Fund for a Series of Securities will
include certain assets (the "Trust Fund Assets") which
will primarily consist of (a) Loans or (b) Private Asset
Backed Securities, together with payments in respect of
such Trust Fund Assets and certain other accounts,
obligations or agreements, in each case as specified in
the related Prospectus Supplement. The Loans will be
collected in a pool (each, a "Pool") as of the first day
of the month of the issuance of the related Series of
Securities or such other date specified in the Prospectus
Supplement (the "Cut-off Date"). Trust Fund assets also
may include insurance policies, cash accounts,
reinvestment income, guaranties, letters of credit or
other assets to the extent described in the related
Prospectus Supplement. See "Credit Enhancement". In
addition, if the related Prospectus Supplement so
provides, the related Trust Funds' assets will include
the funds on deposit in an account (a "Pre-Funding
Account") which will be used to purchase additional Loans
during the period specified in the related Prospectus
Supplement. See "The Agreements--Pre-Funding Accounts".
A. Loans............. The Loans will consist of (i) closed-end loans (the
"Closed-End Loans") and/or revolving home equity loans or
certain balances therein (the "Revolving Credit Line
Loans", together with the Closed-End Loans, the "Home
Equity Loans"), and (ii) home improvement installment
sales contracts and installment loan agreements (the
"Home Improvement Contracts"). The Home Equity Loans and
the Home Improvement
4
Contracts are collectively referred to herein as the
"Loans". All Loans will have been purchased by the
Depositor, either directly or through an affiliate, from
one or more Sellers.
As specified in the related Prospectus Supplement, the
Home Equity Loans will, and the Home Improvement
Contracts may, be secured by mortgages or deeds of trust
or other similar security instruments creating a lien on
a mortgaged property (the "Mortgaged Property"), which
may be subordinated to one or more senior liens on the
Mortgaged Property, as described in the related
Prospectus Supplement. As specified in the related
Prospectus Supplement, Home Improvement Contracts may be
unsecured or secured by purchase money security interests
in the Home Improvements financed thereby. The Mortgaged
Properties and the Home Improvements are collectively
referred to herein as the "Properties".
B. Private Asset-
Backed Securities.... Private Asset Backed Securities may include (a) pass-
through certificates representing beneficial interests in
certain loans and/or (b) collateralized obligations
secured by such loans. Private Asset Backed Securities
may include stripped securities representing an undivided
interest in all or a part of either the principal
distributions (but not the interest distributions) or the
interest distributions (but not the principal
distributions) or in some specified portion of the
principal and interest distributions (but not all of such
distributions) on certain loans. Although individual
loans underlying a Private Asset Backed Security may be
insured or guaranteed by the United States or an agency
or instrumentality thereof, they need not be, and the
Private Asset Backed Securities themselves will not be so
insured or guaranteed. Payments on the Private Asset
Backed Securities will be distributed directly to the
Trustee as registered owner of such Private Asset Backed
Securities. See "The Trust Fund--Private Asset Backed
Securities".
Description of
the Securities....... Each Security will represent a beneficial ownership
interest in, or will be secured by the assets of, a Trust
Fund created by the Depositor pursuant to an Agreement
among the Depositor, the Master Servicer and the Trustee
for the related Series. The Securities of any Series may
be issued in one or more classes as specified in the
related Prospectus Supplement. A Series of Securities
may include one or more classes of senior Securities
(collectively, the "Senior Securities") and one or more
classes of subordinate Securities (collectively, the
"Subordinated Securities"). Certain Series or classes of
Securities may be covered by insurance policies or other
forms of credit enhancement, in each case as described
herein and in the related Prospectus Supplement.
One or more classes of Securities of each Series (i) may
be entitled to receive distributions allocable only to
principal, only to interest or to any combination
thereof; (ii) may be entitled to receive distributions
only of prepayments of principal throughout the lives of
the Securities or during specified periods; (iii) may be
subordinated in the right to
5
receive distributions of scheduled payments of principal,
prepayments of principal, interest or any combination
thereof to one or more other classes of Securities of
such Series throughout the lives of the Securities or
during specified periods; (iv) may be entitled to receive
such distributions only after the occurrence of events
specified in the related Prospectus Supplement; (v) may
be entitled to receive distributions in accordance with a
schedule or formula or on the basis of collections from
designated portions of the assets in the related Trust
Fund; (vi) as to Securities entitled to distributions
allocable to interest, may be entitled to receive
interest at a fixed rate or a rate that is subject to
change from time to time; and (vii) as to Securities
entitled to distributions allocable to interest, may be
entitled to distributions allocable to interest only
after the occurrence of events specified in the related
Prospectus Supplement and may accrue interest until such
events occur, in each case as specified in the related
Prospectus Supplement. The timing and amounts of such
distributions may vary among classes, over time, or
otherwise as specified in the related Prospectus
Supplement.
Distributions on
the Securities.... Distributions on the Securities entitled thereto will be
made monthly or at such other intervals and on the dates
specified in the related Prospectus Supplement (each, a
"Distribution Date") out of the payments received in
respect of the assets of the related Trust Fund or Funds
or other assets pledged for the benefit of the Securities
as specified in the related Prospectus Supplement. The
amount allocable to payments of principal and interest on
any Distribution Date will be determined as specified in
the related Prospectus Supplement. Allocations of
distributions among Securityholders of a single class
shall be set forth in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus
Supplement, the aggregate original principal balance of
the Securities will not exceed the aggregate
distributions allocable to principal that such Securities
will be entitled to receive. If specified in the related
Prospectus Supplement, the Securities will have an
aggregate original principal balance equal to the
aggregate unpaid principal balance of the Trust Fund
Assets as of the first day of the month of creation of
the Trust Fund and will bear interest in the aggregate at
a rate equal to the interest rate borne by the underlying
Loans (the "Loan Rate") and/or Private Asset Backed
Securities, net of the aggregate servicing fees and any
other amounts specified in the related Prospectus
Supplement (the "Pass-Through Rate"). If specified in
the related Prospectus Supplement, the aggregate original
principal balance of the Securities and interest rates on
the classes of Securities will be determined based on the
cash flow on the Trust Fund Assets.
The rate at which interest will be passed through to
holders of each class of Securities entitled thereto may
be a fixed rate or a rate that is subject to change from
time to time from the time and for the periods, in each
case as specified in the related Prospectus Supplement.
Any
6
such rate may be calculated on a loan-by-loan, weighted
average, notional amount or other basis, in each case as
described in the related Prospectus Supplement.
Compensating
Interest............. If so specified in the related Prospectus Supplement, the
Master Servicer will be required to remit to the Trustee,
with respect to each Loan in the related Trust Fund as to
which a principal prepayment in full or a principal
payment which is in excess of the scheduled monthly
payment and is not intended to cure a delinquency was
received during any Due Period, an amount, from and to
the extent of amounts otherwise payable to the Master
Servicer as servicing compensation, equal to (i) the
excess, if any, of (a) 30 days' interest on the principal
balance of the related Loan at the Loan Rate net of the
per annum rate at which the Master Servicer's servicing
fee accrues, over (b) the amount of interest actually
received on such Loan during such Due Period, net of the
Master Servicer's servicing fee or (ii) such other amount
as described in the related Prospectus Supplement. See
"Description of the Securities--Compensating Interest".
Credit Enhancement.... The assets in a Trust Fund or the Securities of one or
more classes in the related Series may have the benefit
of one or more types of credit enhancement as described
in the related Prospectus Supplement. The protection
against losses afforded by any such credit support may be
limited. The type, characteristics and amount of credit
enhancement will be determined based on the
characteristics of the Loans and/or Private Asset Backed
Securities underlying or comprising the Trust Fund Assets
and other factors and will be established on the basis of
requirements of each Rating Agency rating the Securities
of such Series. See "Credit Enhancement."
A. Subordination...... The rights of the holders of the Subordinated Securities
of a Series to receive distributions with respect to the
assets in the related Trust Fund will be subordinated to
such rights of the holders of the Senior Securities of
the same Series to the extent described in the related
Prospectus Supplement. This subordination is intended to
enhance the likelihood of regular receipt by holders of
Senior Securities of the full amount of monthly payments
of principal and interest due them. The protection
afforded to the holders of Senior Securities of a Series
by means of the subordination feature will be
accomplished by (i) the preferential right of such
holders to receive, prior to any distribution being made
in respect of the related Subordinated Securities, the
amounts of interest and/or principal due them on each
Distribution Date out of the funds available for
distribution on such date in the related Security Account
and, to the extent described in the related Prospectus
Supplement, by the right of such holders to receive
future distributions on the assets in the related Trust
Fund that would otherwise have been payable to the
holders of Subordinated Securities; (ii) reducing the
ownership interest of the related Subordinated
Securities; (iii) a combination of clauses (i) and (ii)
above; or (iv) as otherwise described in the related
Prospectus Supplement. If so specified in the related
7
Prospectus Supplement, subordination may apply only in
the event of certain types of losses not covered by other
forms of credit support, such as hazard losses not
covered by standard hazard insurance policies, losses due
to the bankruptcy or fraud of the borrower. The related
Prospectus Supplement will set forth information
concerning, among other things, the amount of
subordination of a class or classes of Subordinated
Securities in a Series, the circumstances in which such
subordination will be applicable, and the manner, if any,
in which the amount of subordination will decrease over
time.
B. Reserve Account.... One or more reserve accounts (each, a "Reserve Account")
may be established and maintained for each Series. The
related Prospectus Supplement will specify whether or not
such Reserve Accounts will be included in the corpus of
the Trust Fund for such Series and will also specify the
manner of funding the related Reserve Accounts and the
conditions under which the amounts in any such Reserve
Accounts will be used to make distributions to holders of
Securities of a particular class or released from the
related Reserve Account.
C. Special Hazard
Insurance Policy.... Certain classes of Securities may have the benefit of a
Special Hazard Insurance Policy. Certain physical risks
that are not otherwise insured against by standard hazard
insurance policies may be covered by a Special Hazard
Insurance Policy or Policies. Each Special Hazard
Insurance Policy will be limited in scope and will cover
losses pursuant to the provisions of each such Special
Hazard Insurance Policy as described in the related
Prospectus Supplement.
D. Bankruptcy Bond.... One or more bankruptcy bonds (each a "Bankruptcy Bond")
may be obtained covering certain losses resulting from
action which may be taken by a bankruptcy court in
connection with a Loan. The level of coverage and the
limitations in scope of each Bankruptcy Bond will be
specified in the related Prospectus Supplement.
E. Loan Pool
Insurance Policy.... A mortgage pool insurance policy or policies may be
obtained and maintained for Loans relating to any Series,
which shall be limited in scope, covering defaults on the
related Loans in an initial amount equal to a specified
percentage of the aggregate principal balance of all
Loans included in the Pool as of the Cut-off Date.
F. FHA Insurance...... If specified in the related Prospectus Supplement, (i)
all or a portion of the Loans in a Pool may be insured by
the Federal Housing Administra tion (the "FHA") and/or
(ii) all or a portion of the Loans may be partially
guaranteed by the Department of Veterans' Affairs (the
"VA"). See "Certain Legal Considerations--Title I
Program".
G. Cross-Support...... If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets
included in a Trust Fund may be evidenced by separate
classes of the related Series of Securities. In
8
such case, credit support may be provided by a cross-
support feature which requires that distributions be made
with respect to Securities evidencing beneficial
ownership of one or more asset groups prior to
distributions to Subordinated Securities evidencing a
beneficial ownership interest in, or secured by, other
asset groups within the same Trust Fund.
If specified in the related Prospectus Supplement, the
coverage provided by one or more forms of credit support
may apply concurrently to two or more separate Trust
Funds. If applicable, the related Prospectus Supplement
will identify the Trust Funds to which such credit
support relates and the manner of determining the amount
of the coverage provided thereby and of the application
of such coverage to the identified Trust Funds.
H. Other
Arrangements...... Other arrangements as described in the related
Prospectus Supplement including, but not limited to, one
or more letters of credit, surety bonds, other insurance
or third-party guarantees may be used to provide coverage
for certain risks of defaults or various types of losses.
Advances.............. The Master Servicer and, if applicable, each mortgage
servicing institution that services a Loan in a Pool on
behalf of the Master Servicer (a "Sub-Servicer") may be
obligated to advance amounts (each, an "Advance")
corresponding to delinquent interest and/or principal
payments on such Loan until the date, as specified in the
related Prospectus Supplement, following the date on
which the related Property is sold at a foreclosure sale
or the related Loan is otherwise liquidated. Any
obligation to make Advances may be subject to limitations
as specified in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, Advances
may be drawn from a cash account available for such
purpose as described in such Prospectus Supplement.
Any such obligation of the Master Servicer or a Sub-
Servicer to make Advances may be supported by the
delivery to the Trustee of a support letter from an
affiliate of the Master Servicer or such Sub-Servicer or
an unaffiliated third party (a "Support Servicer")
guaranteeing the payment of such Advances by the Master
Servicer or Sub-Servicer, as the case may be, as
specified in the related Prospectus Supplement.
In the event the Master Servicer, Support Servicer or
Sub-Servicer fails to make a required Advance, the
Trustee may be obligated to advance such amounts
otherwise required to be advanced by the Master Servicer,
Support Servicer or Sub-Servicer. See "Description of
the Securities--Advances."
Optional
Termination.......... The Master Servicer or the party specified in the
related Prospectus Supplement, including the holder of
the residual interest in a REMIC, may have the option to
effect early retirement of a Series of Securities through
the purchase of the Trust Fund Assets and other assets in
the related Trust Fund under the circumstances and in the
manner described
9
in "The Agreements--Termination; Optional Termination"
herein and in the related Prospectus Supplement.
Legal Investment...... The Prospectus Supplement for each series of Securities
will specify which, if any, of the classes of Securities
offered thereby constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of Securities that
qualify as "mortgage related securities" will be legal
investments for certain types of institutional investors
to the extent provided in SMMEA, subject, in any case, to
any other regulations which may govern investments by
such institutional investors. Institutions whose
investment activities are subject to review by federal or
state authorities should consult with their counsel or
the applicable authorities to determine whether an
investment in a particular class of Securities (whether
or not such class constitutes a "mortgage related
security") complies with applicable guidelines, policy
statements or restrictions. See "Legal Investment."
Certain Material
Federal Income Tax
Consequences......... The material federal income tax consequences to
Securityholders will vary depending on whether one or
more elections are made to treat the Trust Fund or
specified portions thereof as a real estate mortgage
investment conduit ("REMIC") under the provisions of the
Internal Revenue Code of 1986, as amended (the "Code").
The Prospectus Supplement for each Series of Securities
will specify whether such an election will be made. See
"Certain Material Federal Income Tax Consequences".
ERISA Considerations.. A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully review with its
legal advisors whether the purchase or holding of
Securities could give rise to a transaction prohibited or
not otherwise permissible under ERISA or the Code. See
"ERISA Considerations". Certain classes of Securities
may not be transferred unless the Trustee and the
Depositor are furnished with a letter of representation
or an opinion of counsel to the effect that such transfer
will not result in a violation of the prohibited
transaction provisions of ERISA and the Code and will not
subject the Trustee, the Depositor or the Master Servicer
to additional obligations. See "Description of the
Securities--General" and "ERISA Considerations".
10
RISK FACTORS
Investors should consider, among other things, the following factors
in connection with the purchase of the Securities.
LIMITED LIQUIDITY
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or will continue for the life of the Securities of such
Series.
LIMITED ASSETS
The Depositor does not have, nor is it expected to have, any
significant assets. Unless otherwise specified in the related Prospectus
Supplement, the Securities of a Series will be payable solely from the Trust
Fund for such Securities and will not have any claim against or security
interest in the Trust Fund for any other Series. There will be no recourse to
the Depositor or any other person for any failure to receive distributions on
the Securities. Further, at the times set forth in the related Prospectus
Supplement, certain Trust Fund Assets and/or any balance remaining in the
Security Account immediately after making all payments due on the Securities of
such Series, after making adequate provision for future payments on certain
classes of Securities and after making any other payments specified in the
related Prospectus Supplement, may be promptly released or remitted to the
Depositor, the Servicer, any credit enhancement provider or any other person
entitled thereto and will no longer be available for making payments to
Securityholders. Consequently, holders of Securities of each Series must rely
solely upon payments with respect to the Trust Fund Assets and the other assets
constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of such
Series.
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their respective affiliates. The only
obligations, if any, of the Depositor with respect to the Trust Fund Assets or
the Securities of any Series will be pursuant to certain representations and
warranties. The Depositor does not have, and is not expected in the future to
have, any significant assets with which to meet any obligation to repurchase
Trust Fund Assets with respect to which there has been a breach of any
representation or warranty. If, for example, the Depositor were required to
repurchase a Loan, its only sources of funds to make such repurchase would be
from funds obtained (i) from the enforcement of a corresponding obligation, if
any, on the part of the Seller or originator of such Loan, or (ii) from a
Reserve Account or similar credit enhancement established to provide funds for
such repurchases. The Master Servicer's servicing obligations under the related
Agreement may include its limited obligation to make certain advances in the
event of delinquencies on the Loans, but only to the extent deemed recoverable.
To the extent described in the related Prospectus Supplement, the Depositor or
Master Servicer will be obligated under certain limited circumstances to
purchase or act as a remarketing agent with respect to a convertible Loan upon
conversion to a fixed rate.
CREDIT ENHANCEMENT
Although credit enhancement is intended to reduce the risk of
delinquent payments or losses to holders of Securities entitled to the benefit
thereof, the amount of such credit enhancement will be limited, as set forth in
the related Prospectus Supplement, and may decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Securityholders may suffer losses. Moreover, such
credit enhancement may not cover all potential losses or risks. For example,
credit enhancement may or may not cover fraud or negligence by a loan originator
or other parties. See "Credit Enhancement".
11
PREPAYMENT AND YIELD CONSIDERATIONS
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments of the Loans and, in the case of Private Asset Backed Securities,
the underlying loans related thereto, comprising the Trust Fund, which
prepayments may be influenced by a variety of factors, (ii) the manner of
allocating principal and/or payments among the classes of Securities of a Series
as specified in the related Prospectus Supplement, (iii) the exercise by the
party entitled thereto of any right of optional termination and (iv) the rate
and timing of payment defaults and losses incurred with respect to the Trust
Fund Assets. Prepayments of principal may also result from repurchases of Trust
Fund Assets due to material breaches of the Depositor's or the Master Servicer's
representations and warranties, as applicable. The yield to maturity
experienced by a holder of Securities may be affected by the rate of prepayment
of the Loans comprising or underlying the Trust Fund Assets. See "Yield and
Prepayment Considerations".
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two
or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at par)
to Securityholders will be less than the indicated coupon rate. See
"Description of the Securities -- Distributions of Interest".
BALLOON PAYMENTS
Certain of the Loans as of the Cut-off Date may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (i.e., balloon payments) at their stated maturity. Loans
with balloon payments involve a greater degree of risk because the ability of a
borrower to make a balloon payment typically will depend upon its ability either
to timely refinance the loan or to timely sell the related Property. The
ability of a borrower to accomplish either of these goals will be affected by a
number of factors, including the level of available mortgage rates at the time
of sale or refinancing, the borrower's equity in the related Property, the
financial condition of the borrower and tax laws.
NATURE OF MORTGAGES
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loans, together with
any senior financing on the Properties, if applicable, would equal or exceed the
value of the Properties. Among the factors that could adversely affect the
value of the Properties are an overall decline in the residential real estate
market in the areas in which the Properties are located or a decline in the
general condition of the Properties as a result of failure of borrowers to
maintain adequately the Properties or of natural disasters that are not
necessarily covered by insurance, such as earthquakes and floods. In the case
of Home Equity Loans, such decline could extinguish the value of the interest of
a junior mortgagee in the Property before having any effect on the interest of
the related senior mortgagee. If such a decline occurs, the actual rates of
delinquencies, foreclosures and losses on all Loans could be higher than those
currently experienced in the mortgage lending industry in general.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is subject
to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a Property. In the event of a default
by a borrower, these restrictions, among other things, may impede the ability of
the Master Servicer to foreclose on or sell the Property or to obtain
liquidation proceeds sufficient to repay all amounts due on the related Loan.
In addition, the Master Servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably
12
incurred in attempting to recover amounts due on defaulted Loans and not yet
repaid, including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted loan having a small remaining principal balance as it would in
the case of a defaulted loan having a large remaining principal balance, the
amount realized after expenses of liquidation would be smaller as a percentage
of the outstanding principal balance of the small loan than would be the case
with the defaulted loan having a large remaining principal balance. Since the
mortgages and deeds of trust securing the Home Equity Loans will be primarily
junior liens subordinate to the rights of the mortgagee under the related senior
mortgage(s) or deed(s) of trust, the proceeds from any liquidation, insurance or
condemnation proceeds will be available to satisfy the outstanding balance of
such junior lien only to the extent that the claims of such senior mortgagees
have been satisfied in full, including any related foreclosure costs. In
addition, a junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to any senior mortgage, in which case it
must either pay the entire amount due on any senior mortgage to the related
senior mortgagee at or prior to the foreclosure sale or undertake the obligation
to make payments on any such senior mortgage in the event the mortgagor is in
default thereunder. The Trust Fund will not have any source of funds to satisfy
any senior mortgages or make payments due to any senior mortgagees.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most states have other laws,
public policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and practices which may apply to the
origination, servicing and collection of the Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
Master Servicer to collect all or part of the principal of or interest on the
Loans, may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the Master Servicer to damages and administrative
sanctions. See "Certain Legal Aspects of the Loans".
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
In certain circumstances, these laws and regulations impose obligations on
owners or operators of residential properties such as those subject to the
Loans. The failure to comply with such laws and regulations may result in fines
and penalties.
Under various federal, state and local laws and regulations, an owner
or operator of real estate may be liable for the costs of addressing hazardous
substances on, in or beneath such property and related costs. Such liability
could exceed the value of the property and the aggregate assets of the owner or
operator. In addition, persons who transport or dispose of hazardous
substances, or arrange for the transportation, disposal or treatment of
hazardous substances, at off-site locations may also be held liable if there are
releases or threatened releases of hazardous substances at such off-site
locations.
Under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), contamination
of property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states, such a lien has priority over the lien of
an existing mortgage against such property.
Under the laws of some states, and under CERCLA and the federal Solid
Waste Disposal Act, there is a possibility that a lender may be held liable as
an "owner" or "operator" for costs of addressing releases or threatened releases
of hazardous substances at a property, or releases of petroleum from an
underground storage tank, under certain circumstances. See "Certain Legal
Aspects of the Loans--Environmental Risks."
13
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE LOANS
The Loans may also be subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) for Loans that were originated or closed after November 7, 1989,
the Home Equity Loan Consumer Protection Act of 1988, which requires
additional application disclosures, limits changes that may be made to the
loan documents without the borrower's consent and restricts a lender's
ability to declare a default or to suspend or reduce a borrower's credit
limit to certain enumerated events.
The Riegle Act. Certain mortgage loans are subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act") which
incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a
mandatory basis to all mortgage loans originated on or after October 1, 1995.
These provisions can impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may affect the enforceability of the
related loans. In addition, any assignee of the creditor would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the mortgage loan.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
"Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans and in addition could subject the Trust Fund to damages
and administrative enforcement. See "Certain Legal Aspects of the Loans".
RATING OF THE SECURITIES
It will be a condition to the issuance of a class of Securities that they
be rated in one of the four highest rating categories by the Rating Agency
identified in the related Prospectus Supplement. Any such rating would be based
on among other things, the adequacy of the value of the Trust Fund Assets and
any credit enhancement with respect to such class and will respect such Rating
Agency's assessment solely of the likelihood that holders of a class of
Securities will receive payments to which such Securityholders are entitled
under the related Agreement. Such rating will not constitute an assessment of
the likelihood that principal prepayments on the related Loans will be made, the
degree to which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination of the Series of
Securities. Such rating shall not be deemed a recommendation to purchase, hold
or sell Securities, inasmuch as it does not address market price or suitability
for
14
a particular investor. Such rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
such investor to experience a lower than anticipated yield or that an investor
purchasing a Security at a significant premium might fail to recoup its initial
investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn, among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a class 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 similar 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 similar loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Loans. No assurance can be given that the values of any Properties have
remained or will remain at their levels on the respective dates of origination
of the related Loans. If the residential real estate markets should experience
an overall decline in property values such that the outstanding principal
balances of the Loans in a particular Trust Fund and any secondary financing on
the related Properties become equal to or greater than the value of the
Properties, the rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Loans and, accordingly, the rates of
delinquencies, foreclosures and losses with respect to any Trust Fund. To the
extent that such losses are not covered by credit enhancement, such losses will
be borne, at least in part, by the holders of one or more classes of the
Securities of the related Series. See "Rating".
BOOK-ENTRY REGISTRATION
If issued in book-entry form, such registration may reduce the liquidity of
the Securities in the secondary trading market since investors may be unwilling
to purchase Securities for which they cannot obtain physical certificates.
Since transactions in Securities can be effected only through the Depository
Trust Company ("DTC"), participating organizations ("Participants"), Financial
Intermediaries and certain banks, the ability of a Securityholder to pledge a
Security to persons or entities that do not participate in the DTC system, or
otherwise to take actions in respect of such Securities, may be limited due to
lack of a physical certificate representing the Securities.
In addition, Securityholders may experience some delay in their receipt of
distributions of interest and principal on the Securities since distributions
are required to be forwarded by the Trustee to DTC and DTC will then be required
to credit such distributions to the accounts of Participants which thereafter
will be required to credit them to the accounts of Securityholders either
directly or indirectly through Financial Intermediaries. See "Description of
the Securities--Book-Entry Registration of Securities".
PRE-FUNDING ACCOUNTS
If so provided in the related Prospectus Supplement, on the Closing Date
the Depositor will deposit an amount (the "Pre-Funded Amount") specified in such
Prospectus Supplement into the Pre-Funding Account. In no event shall the Pre-
Funded Amount exceed 25% of the initial aggregate principal amount of the
Certificates and/or Notes of the related Series of Securities. The Pre-Funded
Amount will be used to purchase Loans ("Subsequent Loans") in a period from the
Closing Date to a date not more than three months after the Closing Date (such
period,
15
the "Funding Period") from the Depositor (which, in turn, will acquire such
Subsequent Loans from the Seller or Sellers specified in the related Prospectus
Supplement). To the extent that the entire Pre-Funded Amount has not been
applied to the purchase of Subsequent Loans by the end of the related Funding
Period, any amounts remaining in the Pre-Funding Account will be distributed as
a prepayment of principal to Certificateholders and/or Noteholders on the
Distribution Date immediately following the end of the Funding Period, in the
amounts and pursuant to the priorities set forth in the related Prospectus
Supplement.
LOWER CREDIT QUALITY TRUST FUND ASSETS
Certain of the Trust Fund Assets underlying or securing, as the case may
be, a Series of Securities may have been made to lower credit quality borrowers
who have marginal credit and fall into one of two categories: customers with
moderate income, limited assets and other income characteristics which cause
difficulty in borrowing from banks and other traditional sources of lenders, and
customers with a derogatory credit report including a history of irregular
employment, previous bankruptcy filings, repossession of property, charged-off
loans and garnishment of wages. The average interest rate charged on such Trust
Fund Assets made to these types of borrowers is generally higher than that
charged by lenders that typically impose more stringent credit requirements.
The payment experience on loans made to these types of borrowers is likely to be
different (i.e., greater likelihood of later payments or defaults, less
likelihood of prepayments) from that on loans made to borrowers with higher
credit quality, and is likely to be more sensitive to changes in the economic
climate in the areas in which such borrowers reside. See "The Mortgage Pool" in
the related Prospectus Supplement.
DELINQUENT TRUST FUND ASSETS
No more than 5% (by principal balance) of the Trust Fund Assets for any
particular Series of Securities will be between 30 and 59 days past due as of
the related Cut-off Date.
OTHER CONSIDERATIONS
There is no assurance that the market value of the Trust Fund Assets or any
other assets of a Series will at any time be equal to or greater than the
principal amount of the Securities of such Series then outstanding, plus accrued
interest thereon. Moreover, upon an event of default under the Agreement for a
Series and a sale of the assets in the Trust Fund or upon a sale of the assets
of a Trust Fund for a Series of Securities, the Trustee, the Master Servicer,
the credit enhancer, if any, and any other service provider specified in the
related Prospectus Supplement generally will be entitled to receive the proceeds
of any such sale to the extent of unpaid fees and other amounts owing to such
persons under the related Agreement prior to distributions to Securityholders.
Upon any such sale, the proceeds thereof may be insufficient to pay in full the
principal of and interest on the Securities of such Series.
THE TRUST FUND
The Certificates of each Series will represent interests in the assets of
the related Trust Fund, and the Notes of each Series will be secured by the
pledge of the assets of the related Trust Fund. The Trust Fund for each Series
will be held by the Trustee for the benefit of the related Securityholders.
Each Trust Fund will consist of certain assets (the "Trust Fund Assets")
consisting of a pool (each, a "Pool") comprised of Loans or Private Asset Backed
Securities, in each case as specified in the related Prospectus Supplement,
together with payments in respect of such Trust Fund Assets and certain other
accounts, obligations or agreements, in each case as specified in the related
Prospectus Supplement./1/ The Pool will be created on the first day of the
month of the issuance of the related Series
- --------------------
/1/ Whenever the terms "Pool", "Certificates" and "Notes" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Pool and the Certificates representing certain
undivided interests in, or Notes secured by the assets of, a single trust fund
(the "Trust Fund")
(continued...)
16
of Securities or such other date specified in the Prospectus Supplement (the
"Cut-off Date"). The Securities will be entitled to payment from the assets of
the related Trust Fund or Funds or other assets pledged for the benefit of the
Securityholders as specified in the related Prospectus Supplement and will not
be entitled to payments in respect of the assets of any other trust fund
established by the Depositor.
The Trust Fund Assets will be acquired by the Depositor, either directly or
through affiliates, from originators or sellers which may be affiliates of the
Depositor (the "Sellers"), and conveyed by the Depositor to the related Trust
Fund. Loans acquired by the Depositor will have been originated in accordance
with the underwriting criteria specified below under "Loan Program--Underwriting
Standards" or as otherwise described in a related Prospectus Supplement. See
"Loan Program--Underwriting Standards".
The Depositor will cause the Trust Fund Assets to be assigned to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Master Servicer named in
the related Prospectus Supplement will service the Trust Fund Assets, either
directly or through other servicing institutions ("Sub-Servicers"), pursuant to
a Pooling and Servicing Agreement among the Depositor, the Master Servicer and
the Trustee with respect to a Series of Certificates, or a servicing agreement
(each, a "Servicing Agreement") between the Trustee and the Servicer with
respect to a Series of Notes, and will receive a fee for such services. See
"Loan Program" and "The Pooling and Servicing Agreement". With respect to Loans
serviced by the Master Servicer through a Sub-Servicer, the Master Servicer will
remain liable for its servicing obligations under the related Agreement as if
the Master Servicer alone were servicing such Loans.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding of the related Trust Fund Assets and other assets
contemplated herein and in the related Prospectus Supplement and the proceeds
thereof, issuing Securities and making payments and distributions thereon and
certain related activities. No Trust Fund is expected to have any source of
capital other than its assets and any related credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Depositor with respect to a Series of Securities will be to
obtain certain representations and warranties from the Sellers and to assign to
the Trustee for such Series of Securities the Depositor's rights with respect to
such representations and warranties. See "The Agreements--Assignment of Trust
Fund Assets". The obligations of the Master Servicer with respect to the Loans
will consist principally of its contractual servicing obligations under the
related Agreement (including its obligation to enforce the obligations of the
Sub-Servicers or Sellers, or both, as more fully described herein under "Loan
Program--Representations by Sellers; Repurchases" and "The Agreements--Sub-
Servicing of Loans", "--Assignment of Trust Fund Assets") and its obligation, if
any, to make certain cash advances in the event of delinquencies in payments on
or with respect to the Loans in the amounts described herein under "Description
of the Securities--Advances". The obligations of the Master Servicer to make
advances may be subject to limitations, to the extent provided herein and in the
related Prospectus Supplement.
- --------------------
/1/ (...continued)
consisting primarily of the Loans in such Pool. Similarly, the term "Pass-
Through Rate" will refer to the Pass-Through Rate borne by the Certificates or
Notes of one specific Series and the term "Trust Fund" will refer to one
specific Trust Fund.
17
The following is a brief description of the assets expected to be included
in the Trust Funds. If specific information respecting the Trust Fund Assets is
not known at the time the related Series of Securities initially is offered,
more general information of the nature described below will be provided in the
related Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Securities (the "Detailed
Description"). A copy of the Agreement with respect to each Series of
Securities will be attached to the Form 8-K and will be available for inspection
at the corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Trust Fund Assets relating to such Series will be
attached to the Agreement delivered to the Trustee upon delivery of the
Securities.
THE LOANS
General. For purposes hereof, "Home Equity Loans" includes "Closed-End
Loans" and "Revolving Credit Line Loans". The real property which secures
repayment of the Loans is referred to as "Properties". Unless otherwise
specified in the related Prospectus Supplement, the Loans will be secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on a Property, which may be subordinated to one or more senior liens on the
related Properties, each as described in the related Prospectus Supplement. As
more fully described in the related Prospectus Supplement, the Loans may be
"conventional" loans or loans that are insured or guaranteed by a governmental
agency such as the FHA or VA.
The Properties relating to Loans will consist primarily of detached or
semi-detached one- to four-family dwelling units, townhouses, rowhouses,
individual condominium units, individual units in planned unit developments, and
certain other dwelling units ("Single Family Properties") or Small Mixed-Used
Properties (as defined herein) which consist of structures of not more than
three stories which include one- to four-family residential dwelling units and
space used for retail, professional or other commercial uses. Such Properties
may include vacation and second homes, investment properties and leasehold
interests. The Properties may be located in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the United
States.
The payment terms of the Loans to be included in a Trust Fund will be
described in the related
Prospectus Supplement and may include any of the following features (or
combination thereof) or other features,
all as described above or in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and
added to the principal of a loan for such periods and under such
circumstances as may be specified in the related Prospectus Supplement.
Loans may provide for the payment of interest at a rate lower than the
specified interest rate borne by such Mortgage (the "Loan Rate") for a
period of time or for the life of the Loan, and the amount of any
difference may be contributed from funds supplied by the Seller of the
Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
interest rate on the Loan or may not be amortized during all or a portion
of the original term. Payment of all or a substantial portion of the
principal may be due on maturity ("balloon payment"). Principal may
include interest that has been deferred and added to the principal balance
of the Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may
change from period to period. Loans may include limits
18
on periodic increases or decreases in the amount of monthly payments and
may include maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or for certain periods ("lockout
periods"). Certain loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee
in connection with any such subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The loans may include "due on sale" clauses which
permit the mortgagee to demand payment of the entire loan in connection
with the sale or certain transfers of the related Property. Other loans
may be assumable by persons meeting the then applicable underwriting
standards of the Seller.
As more fully described in the related Prospectus Supplement, interest on
each Revolving Credit Line Loan, excluding introduction rates offered from time
to time during promotional periods, is computed and payable monthly on the
average daily outstanding principal balance of such Loan. Principal amounts on
a Revolving Credit Line Loan may be drawn down (up to a maximum amount as set
forth in the related Prospectus Supplement) or repaid under each Revolving
Credit Line Loan from time to time, but may be subject to a minimum periodic
payment. Except to the extent provided in the related Prospectus Supplement,
the Trust Fund will not include any amounts borrowed under a Revolving Credit
Line Loan after the Cut-off Date. The full amount of a Closed-End Loan is
advanced at the inception of the loan and generally is repayable in equal (or
substantially equal) installments of an amount to fully amortize such loan at
its stated maturity. Except to the extent provided in the related Prospectus
Supplement, the original terms to stated maturity of Closed-End Loan will not
exceed 360 months. Under certain circumstances, under either a Revolving Credit
Line Loan or a Closed-End Loan, a borrower may choose an interest only payment
option and is obligated to pay only the amount of interest which accrues on the
loan during the billing cycle. An interest only payment option may be available
for a specified period before the borrower must begin paying at least the
minimum monthly payment of a specified percentage of the average outstanding
balance of the loan.
The aggregate principal balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the sole basis for a
representation that a given percentage of the Loans is secured by Single Family
Property that is owner-occupied will be either (i) the making of a
representation by the borrower at origination of the Loan either that the
underlying Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Property as a primary
residence or (ii) a finding that the address of the underlying Property is the
borrower's mailing address.
The Loans may include fixed-rate, closed-end mortgage loans having terms to
maturity of up to 30 years and secured by first-lien mortgages originated on
Properties containing one to four residential units and no more than three
income producing non-residential units ("Small Mixed-Use Properties"). At least
50% of the units contained in a Small Mixed-Use Property will consist of
residential units. Income from such non-residential units will not exceed 40%
of the adjusted gross income of the related borrower. The maximum Loan-to-Value
Ratio on Small Mixed-Use Properties will not exceed 65%. Small Mixed-Use
Properties may be owner occupied or investor properties and the loan purpose may
be a refinancing or a purchase.
Home Improvement Contracts. The Trust Fund Assets for a Series may
consist, in whole or part, of home improvement installment sales contracts and
installment loan agreements (the "Home Improvement Contracts") originated by a
home improvement contractor, a thrift or a commercial mortgage banker in the
ordinary course of business. As specified in the related Prospectus Supplement,
the Home Improvement Contracts will either be unsecured or secured by the
Mortgages primarily on Single Family Properties which are generally subordinate
to other mortgages on the same Property, or secured by purchase money security
interest in the Home Improvements financed thereby. Except as otherwise
specified in the related Prospectus Supplement, the Home Improvement
19
Contracts will be fully amortizing and may have fixed interest rates or
adjustable interest rates and may provide for other payment characteristics as
described below and in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the
home improvements (the "Home Improvements") securing the Home Improvement
Contracts will include, but are not limited to, replacement windows, house
siding, new roofs, swimming pools, satellite dishes, kitchen and bathroom
remodeling goods and solar heating panels.
The initial Loan-to-Value Ratio of a Home Improvement Contract is computed
in the manner described in the related Prospectus Supplement.
Additional Information. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the Depositor, with respect to the Loans contained in the
related Pool, including (i) the aggregate outstanding principal balance and the
average outstanding principal balance of the Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Loan (e.g., one- to four-family
houses, individual units in condominium apartment buildings, vacation and second
homes or other real property), (iii) the original terms to maturity of the
Loans, (iv) the largest principal balance and the smallest principal balance of
any of the Loans, (v) the earliest origination date and latest maturity date of
any of the Loans, (vi) the Loan-to-Value Ratios or Combined Loan-to-Value
Ratios, as applicable, of the Loans, (vii) the Loan Rates or annual percentage
rates ("APR") or range of Loan Rates or APR's borne by the Loans, and (viii) the
geographical location of the Loans on a state-by-state basis. If specific
information respecting the Loans is not known to the Depositor at the time the
related Securities are initially offered, more general information of the nature
described above will be provided in the related Prospectus Supplement, and
specific information will be set forth in the Detailed Description.
Except as otherwise specified in the related Prospectus Supplement, the
"Combined Loan-to-Value Ratio" of a Loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal balance
of the Loan (or, in the case of a Revolving Credit Line Loan, the maximum amount
thereof available) and (b) the outstanding principal balance at the date of
origination of the Loan of any senior mortgage loan(s) or, in the case of any
open-ended senior mortgage loan, the maximum available line of credit with
respect to such mortgage loan, regardless of any lesser amount actually
outstanding at the date of origination of the Loan, to (ii) the Collateral
Value of the related Property. Except as otherwise specified in the related
Prospectus Supplement, the "Collateral Value" of the Property, other than with
respect to certain Loans the proceeds of which were used to refinance an
existing mortgage loan (each, a "Refinance Loan"), is the lesser of (a) the
appraised value determined in an appraisal obtained by the originator at
origination of such Loan and (b) the sales price for such Property. In the case
of Refinance Loans, the "Collateral Value" of the related Property is the
appraised value thereof determined in an appraisal obtained at the time of
refinancing.
PRIVATE ASSET BACKED SECURITIES
General. Private Asset Backed Securities may consist of (a) pass-through
certificates or participation certificates evidencing an undivided interest in a
pool of home equity or home improvement loans, or (b) collateralized mortgage
obligations secured by home equity or home improvement loans. Private Asset
Backed Securities may include stripped asset backed securities representing an
undivided interest in all or a part of either the principal distributions (but
not the interest distributions) or the interest distributions (but not the
principal distributions) or in some specified portion of the principal and
interest distributions (but not all of such distributions) on certain home
equity or home improvement loans. Private Asset Backed Securities will have
been issued pursuant to a pooling and servicing agreement, an indenture or
similar agreement (a "PABS Agreement"). The seller/servicer of the underlying
Loans will have entered into the PABS Agreement with the trustee under such PABS
Agreement (the "PABS Trustee"). The PABS Trustee or its agent, or a custodian,
will possess the loans underlying such Private Asset Backed Security. Loans
underlying a Private Asset Backed Security will be serviced by a servicer (the
"PABS Servicer") directly or by one or more subservicers who may be subject to
the supervision of the PABS Servicer. Except as otherwise specified in the
related Prospectus Supplement, the PABS Servicer will be a FNMA
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or FHLMC approved servicer and, if FHA Loans underlie the Private Asset Backed
Securities, approved by HUD as an FHA mortgagee.
The issuer of the Private Asset Backed Securities (the "PABS Issuer") will
be a financial institution or other entity engaged generally in the business of
mortgage lending, a public agency or instrumentality of a state, local or
federal government, or a limited purpose corporation organized for the purpose
of, among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. The PABS
Issuer shall not be an affiliate of the Depositor. The obligations of the PABS
Issuer will generally be limited to certain representations and warranties with
respect to the assets conveyed by it to the related trust. Except as otherwise
specified in the related Prospectus Supplement, the PABS Issuer will not have
guaranteed any of the assets conveyed to the related trust or any of the Private
Asset Backed Securities issued under the PABS Agreement. Additionally, although
the loans underlying the Private Asset Backed Securities may be guaranteed by an
agency or instrumentality of the United States, the Private Asset Backed
Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private Asset
Backed Securities on the dates specified in the related Prospectus Supplement.
The Private Asset Backed Securities may be entitled to receive nominal or no
principal distributions or nominal or no interest distributions. Principal and
interest distributions will be made on the Private Asset Backed Securities by
the PABS Trustee or the PABS Servicer. The PABS Issuer or the PABS Servicer may
have the right to repurchase assets underlying the Private Asset Backed
Securities after a certain date or under other circumstances as specified in the
related Prospectus Supplement.
Underlying Loans. The home equity or home improvement loans underlying the
Private Asset Backed Securities may consist of fixed rate, level payment, fully
amortizing loans or graduated payment loans, buydown loans, adjustable rate
loans, or loans having balloon or other special payment features. Such loans
may be secured by single family property, multifamily property, manufactured
homes or by an assignment of the proprietary lease or occupancy agreement
relating to a specific dwelling within a cooperative and the related shares
issued by such cooperative. Except as otherwise specified in the related
Prospectus Supplement, the underlying loans will have the following
characterizations: (i) no loan will have had a Loan-to-Value Ratio at
origination in excess of 95%, (ii) each single family loan secured by a
mortgaged property that had a Loan-to-Value ratio in excess of 80% at
origination will be covered by a primary mortgage insurance policy, (iii) each
loan will have had an original term to stated maturity of not less than 5 years
and not more than 40 years, (iv) no loan that was more than 89 days delinquent
as to the payment of principal or interest will have been eligible for inclusion
in the assets under the related PABS Agreement, (v) each loan (other than a
cooperative loan) will be required to be covered by a standard hazard insurance
policy (which may be a blanket policy), and (vi) each loan (other than a
cooperative loan or a contract secured by a manufactured home) will be covered
by a title insurance policy.
Credit Support Relating to Private Asset Backed Securities. Credit support
in the form of reserve funds, subordination of other private certificates issued
under the PABS Agreement, letters of credit, surety bonds, insurance policies or
other types of credit support may be provided with respect to the loans
underlying the Private Asset Backed Securities themselves.
Rating of Private Asset Backed Securities. The PABS upon their issuance
will have been assigned a rating in one of the four highest rating categories by
at least one nationally recognized statistical rating agency.
Additional Information. The Prospectus Supplement for a Series for which
the Trust Fund includes Private Asset Backed Securities will specify (i) the
aggregate approximate principal amount and type of the Private Asset Backed
Securities to be included in the Trust Fund, (ii) certain characteristics of the
loans which comprise the underlying assets for the Private Asset Backed
Securities including (A) the payment features of such loans, (B) the approximate
aggregate principal balance, if known, of underlying loans insured or guaranteed
by a governmental entity, (C) the servicing fee or range of servicing fees with
respect to the loans, and (D) the minimum and maximum stated maturities of the
underlying loans at origination, (iii) the maximum original term-to-stated
maturity of the Private Asset Backed Securities, (iv) the weighted average term-
to-stated maturity of the Private Asset Backed
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Securities, (v) the pass-through or certificate rate of the Private Asset Backed
Securities, (vi) the weighted average pass-through or certificate rate of the
Private Asset Backed Securities, (vii) the PABS Issuer, the PABS Servicer (if
other than the PABS Issuer) and the PABS Trustee for such Private Asset Backed
Securities, (viii) certain characteristics of credit support, if any, such as
reserve funds, insurance policies, surety bonds, letters of credit or guaranties
relating to the loans underlying the Private Asset Backed Securities or to such
Private Asset Backed Securities themselves, (ix) the term on which the
underlying loans for such Private Asset Backed Securities may, or are required
to, be purchased prior to their stated maturity or the stated maturity of the
Private Asset Backed Securities, (x) the terms on which loans may be substituted
for those originally underlying the Private Asset Backed Securities and (xi) to
the extent provided in a periodic report to the Trustee in its capacity as
holder of the PABS, certain information regarding the status of the credit
support, if any, relating to the PABS.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects to sell
Securities in Series from time to time, but the timing and amount of offerings
of Securities will depend on a number of factors, including the volume of Trust
Fund Assets acquired by the Depositor, prevailing interest rates, availability
of funds and general market conditions.
THE DEPOSITOR
Financial Asset Securities Corp., the Depositor, is a Delaware corporation
organized on August 2, 1995 for the limited purpose of acquiring, owning and
transferring Trust Fund Assets and selling interests therein or bonds secured
thereby. It is an indirect limited purpose finance subsidiary of National
Westminster Bank Plc and an affiliate of Greenwich Capital Markets, Inc., a
registered securities broker-dealer. The Depositor maintains its principal
office at 600 Steamboat Road, Greenwich, Connecticut 06830. Its telephone
number is (203) 625-2700.
Neither the Depositor nor any of the Depositor's affiliates will insure or
guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly or
through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards".
UNDERWRITING STANDARDS
Each Seller will represent and warrant that all Loans originated and/or
sold by it to the Depositor or one of its affiliates will have been underwritten
in accordance with standards consistent with those utilized by mortgage lenders
generally during the period of origination for similar types of loans. As to
any Loan insured by the FHA or partially guaranteed by the VA, the Seller will
represent that it has complied with underwriting policies of the FHA or the VA,
as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the Property as collateral. In general, a prospective borrower applying for
a Loan is required to fill out a detailed application designed to provide to the
underwriting officer pertinent credit information, including the principal
balance and payment history with respect to any senior mortgage, if any, which,
unless otherwise specified in the related Prospectus Supplement, the borrower's
income will be verified by the Seller. As part of the description of the
borrower's financial condition, the borrower generally is required to provide a
current list of assets and liabilities and a statement of income and expenses,
as well as an authorization to apply for a credit report which summarizes the
borrower's credit history with local merchants and lenders and any record of
bankruptcy. In most cases, an employment verification is obtained from
22
an independent source (typically the borrower's employer) which verification
reports the length of employment with that organization, the current salary, and
whether it is expected that the borrower will continue such employment in the
future. If a prospective borrower is self-employed, the borrower may be
required to submit copies of signed tax returns. The borrower may also be
required to authorize verification of deposits at financial institutions where
the borrower has demand or savings accounts.
In determining the adequacy of the property to be used as collateral, an
appraisal will generally be made of each property considered for financing. The
appraiser is generally required to inspect the property, issue a report on its
condition and, if applicable, verify that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home. The value of the property being financed, as indicated
by the appraisal, must be such that it currently supports, and is anticipated to
support in the future, the outstanding loan balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other expenses
related to the property (such as property taxes and hazard insurance) and (ii)
to meet monthly housing expenses and other financial obligations and monthly
living expenses. The underwriting standards applied by Sellers, particularly
with respect to the level of loan documentation and the mortgagor's income and
credit history, may be varied in appropriate cases where factors such as low
Combined Loan-to-Value Ratios or other favorable credit exist.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing loans of
the type contained in the related Pool in accordance with accepted practices and
prudent guidelines, and must maintain satisfactory facilities to originate and
service those loans. Unless otherwise specified in the related Prospectus
Supplement, each Seller will be a seller/servicer approved by either FNMA or
FHLMC.
REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each Seller will have made representations and warranties in respect of the
Loans sold by such Seller and evidenced by all, or a part, of a Series of
Securities. Except as otherwise specified in the related Prospectus Supplement,
such representations and warranties include, among other things: (i) that title
insurance (or in the case of Properties located in areas where such policies are
generally not available, an attorney's certificate of title) and any required
hazard insurance policy (or certificate of title as applicable) remained in
effect on the date of purchase of the Loan from the Seller by or on behalf of
the Depositor; (ii) that the Seller had good title to each such Loan and such
Loan was subject to no offsets, defenses, counterclaims or rights of rescission
except to the extent that any buydown agreement described herein may forgive
certain indebtedness of a borrower; (iii) that each Loan constituted a valid
lien on the Property (subject only to permissible liens disclosed, if
applicable, title insurance exceptions, if applicable, and certain other
exceptions described in the Agreement) and that the Property was free from
damage and was in acceptable condition; (iv) that there were no delinquent tax
or assessment liens against the Property; (v) that no required payment on a Loan
was more than thirty days' delinquent; and (vi) that each Loan was made in
compliance with, and is enforceable under, all applicable local, state and
federal laws and regulations in all material respects.
If so specified in the related Prospectus Supplement, the representations
and warranties of a Seller in respect of a Loan will be made not as of the Cut-
off Date but as of the date on which such Seller sold the Loan to the Depositor
or one of its affiliates. Under such circumstances, a substantial period of
time may have elapsed between such date and the date of initial issuance of the
Series of Securities evidencing an interest in such Loan. Since the
representations and warranties of a Seller do not address events that may occur
following the sale of a Loan by such Seller, its repurchase obligation described
below will not arise if the relevant event that would
23
otherwise have given rise to such an obligation with respect to a Loan occurs
after the date of sale of such Loan by such Seller to the Depositor or its
affiliates. However, the Depositor will not include any Loan in the Trust Fund
for any Series of Securities if anything has come to the Depositor's attention
that would cause it to believe that the representationes and warranties of a
Seller will not be accurate and complete in all material respects in respect of
such Loan as of the date of initial issuance of the related Series of
Securities. If the Master Servicer is also a Seller of Loans with respect to a
particular Series, such representations will be in addition to the
representations and warranties made by the Master Servicer in its capacity as a
Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the Seller,
will promptly notify the relevant Seller of any breach of any representation or
warranty made by it in respect of a Loan which materially and adversely affects
the interests of the Securityholders in such Loan. Unless otherwise specified
in the related Prospectus Supplement, if such Seller cannot cure such breach
within 90 days following notice from the Master Servicer or the Trustee, as the
case may be, then such Seller will be obligated either (i) to repurchase such
Loan from the Trust Fund at a price (the "Purchase Price") equal to 100% of the
unpaid principal balance thereof as of the date of the repurchase plus accrued
interest thereon to the first day of the month following the month of repurchase
at the Loan Rate (less any Advances or amount payable as related servicing
compensation if the Seller is the Master Servicer) or (ii) to substitute for
such Loan a replacement loan that satisfies certain requirements set forth in
the Agreement. If a REMIC election is to be made with respect to a Trust Fund,
unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or a holder of the related residual certificate generally will be
obligated to pay any prohibited transaction tax which may arise in connection
with any such repurchase or substitution and the Trustee must have received a
satisfactory opinion of counsel that such repurchase or substitution will not
cause the Trust Fund to lose its status as a REMIC or otherwise subject the
Trust Fund to a prohibited transaction tax. The Master Servicer may be entitled
to reimbursement for any such payment from the assets of the related Trust Fund
or from any holder of the related residual certificate. See "Description of the
Securities--General". Except in those cases in which the Master Servicer is the
Seller, the Master Servicer will be required under the applicable Agreement to
enforce this obligation for the benefit of the Trustee and the holders of the
Securities, following the practices it would employ in its good faith business
judgment were it the owner of such Loan. This repurchase or substitution
obligation will constitute the sole remedy available to holders of Securities or
the Trustee for a breach of representation by a Seller.
Neither the Depositor nor the Master Servicer (unless the Master Servicer
is the Seller) will be obligated to purchase or substitute a Loan if a Seller
defaults on its obligation to do so, and no assurance can be given that Sellers
will carry out their respective repurchase or substitution obligations with
respect to Loans. However, to the extent that a breach of a representation and
warranty of a Seller may also constitute a breach of a representation made by
the Master Servicer, the Master Servicer may have a repurchase or substitution
obligation as described below under "The Agreements--Assignment of Trust Fund
Assets".
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to separate agreements
(each, a "Pooling and Servicing Agreement" or a "Trust Agreement") among the
Depositor, the Servicer, if the Series relates to Loans, and the Trustee. A
form of Pooling and Servicing Agreement and Trust Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
Each Series of Notes will be issued pursuant to an indenture (the "Indenture")
between the related Trust Fund and the entity named in the related Prospectus
Supplement as trustee (the "Trustee") with respect to such Series. A form of
Indenture has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. A Series may consist of both Notes and
Certificates. Each Agreement, dated as of the related Cut-off Date, will be
among the Depositor, the Master Servicer and the Trustee for the benefit of the
holders of the Securities of such Series. The provisions of each Agreement will
vary depending upon the nature of the Securities to be issued thereunder and the
nature of the related Trust Fund. The following summaries describe certain
provisions which may appear in each Agreement. The Prospectus Supplement for a
Series of Securities will describe any provision of the Agreement relating to
such Series that mainly differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
24
Agreement for each Series of Securities and the applicable Prospectus
Supplement. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a holder
of record of a Security of such Series addressed to Financial Asset Securities
Corp., 600 Steamboat Road, Greenwich, Connecticut 06830, Attention: Asset Backed
Finance Group.
GENERAL
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be entitled
to payments in respect of the assets included in any other Trust Fund
established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Notes of each Series will be issued in book-entry or
fully registered form, in the authorized denominations specified in the related
Prospectus Supplement, will be secured by the pledge of the assets of the
related Trust Fund and will not be entitled to payments in respect of the assets
included in any other Trust Fund established by the Depositor. The Securities
will not represent obligations of the Depositor or any affiliate of the
Depositor. Certain of the Loans may be guaranteed or insured as set forth in
the related Prospectus Supplement. Each Trust Fund will consist of, to the
extent provided in the Agreement, (i) the Trust Fund Assets, as from time to
time are subject to the related Agreement (exclusive of any amounts specified in
the related Prospectus Supplement ("Retained Interest")), including all payments
of interest and principal received with respect to the Loans after the Cut-off
Date (to the extent not applied in computing the Cut-off Date Principal
Balance); (ii) such assets as from time to time are required to be deposited in
the related Security Account, as described below under "The Agreements--Payments
on Loans; Deposits to Security Account"; (iii) property which secured a Loan and
which is acquired on behalf of the Securityholders by foreclosure or deed in
lieu of foreclosure and (iv) any insurance policies or other forms of credit
enhancement required to be maintained pursuant to the related Agreement. If so
specified in the related Prospectus Supplement, a Trust Fund may also include
one or more of the following: reinvestment income on payments received on the
Trust Fund Assets, a Reserve Account, a mortgage pool insurance policy, a
Special Hazard Insurance Policy, a Bankruptcy Bond, one or more letters of
credit, a surety bond, guaranties or similar instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right to payment
to one or more other classes of Securities of such Series. One or more classes
of Securities of a Series may be entitled to receive distributions of principal,
interest or any combination thereof. Distributions on one or more classes of a
Series of Securities may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Trust Fund Assets in the
related Trust Fund or on a different basis, in each case as specified in the
related Prospectus Supplement. The timing and amounts of such distributions may
vary among classes or over time as specified in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Securities will be made by the Trustee on each
Distribution Date (i.e., monthly or at such other intervals and on the dates as
are specified in the Prospectus Supplement) in proportion to the percentages
specified in the related Prospectus Supplement. Distributions will be made to
the persons in whose names the Securities are registered at the close of
business on the dates specified in the related Prospectus Supplement (each, a
"Record Date"). Distributions will be made in the manner specified in the
Prospectus Supplement to the persons entitled thereto at the address appearing
in the register maintained for holders of Securities (the "Security Register");
provided, however, that the final distribution in retirement of the Securities
will be made only upon presentation and surrender of the Securities at the
office or agency of the Trustee or other person specified in the notice to
Securityholders of such final distribution.
25
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee benefit
plan or other retirement arrangement (including individual retirement accounts
and annuities, Keogh plans and collective investment funds in which such plans,
accounts or arrangements are invested) subject to provisions of ERISA or the
Code may result in prohibited transactions within the meaning of ERISA and the
Code. See "ERISA Considera tions". Unless otherwise specified in the related
Prospectus Supplement, the transfer of Securities of such a class will not be
registered unless the transferee (i) represents that it is not, and is not
purchasing on behalf of, any such plan, account or arrangement or (ii) provides
an opinion of counsel satisfactory to the Trustee and the Depositor that the
purchase of Securities of such a class by or on behalf of such plan, account or
arrangement is permissible under applicable law and will not subject the
Trustee, the Master Servicer or the Depositor to any obligation or liability in
addition to those undertaken in the Agreements.
As to each Series, an election may be made to treat the related Trust Fund
or designated portions thereof as a "real estate mortgage investment conduit" or
"REMIC" as defined in the Code. The related Prospectus Supplement will specify
whether a REMIC election is to be made. Alternatively, the Agreement for a
Series may provide that a REMIC election may be made at the discretion of the
Depositor or the Master Servicer and may only be made if certain conditions are
satisfied. As to any such Series, the terms and provisions applicable to the
making of a REMIC election, as well as any material federal income tax
consequences to Securityholders not otherwise described herein, will be set
forth in the related Prospectus Supplement. If such an election is made with
respect to a Series, one of the classes will be designated as evidencing the
sole class of "residual interests" in the related REMIC, as defined in the Code.
All other classes of Securities in such a Series will constitute "regular
interests" in the related REMIC, as defined in the Code. As to each Series with
respect to which a REMIC election is to be made, the Master Servicer or a holder
of the related residual certificate will be obligated to take all actions
required in order to comply with applicable laws and regulations and will be
obligated to pay any prohibited transaction taxes. The Master Servicer, to the
extent set forth in the related Prospectus Supplement, will be entitled to
reimbursement for any such payment from the assets of the Trust Fund or from any
holder of the related residual certificate.
DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of distributions
on a particular Series of Securities will depend on the type of credit support,
if any, that is used with respect to such Series. See "Credit Enhancement".
Set forth below are descriptions of various methods that may be used to
determine the amount of distributions on the Securities of a particular Series.
The Prospectus Supplement for each Series of Securities will describe the method
to be used in determining the amount of distributions on the Securities of such
Series.
Distributions allocable to principal and interest on the Securities will be
made by the Trustee out of, and only to the extent of, funds in the related
Security Account, including any funds transferred from any Reserve Account (a
"Reserve Account"). As between Securities of different classes and as between
distributions of principal (and, if applicable, between distributions of
Principal Prepayments, as defined below, and scheduled payments of principal)
and interest, distributions made on any Distribution Date will be applied as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the distributions to any class of Securities
will be made pro rata to all Securityholders of that class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus
26
Supplement and specified in the Agreement. Unless otherwise provided in the
related Prospectus Supplement, "Available Funds" for each Distribution Date will
equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on account
of principal (including Principal Prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus Supplement) and
interest on the Loans in the related Trust Fund (including Liquidation
Proceeds and Insurance Proceeds and amounts drawn under letters of credit
or other credit enhancement instruments as permitted thereunder and as
specified in the related Agreement) received by the Master Servicer after
the Cut-off Date and on or prior to the day of the month of the related
Distribution Date specified in the related Prospectus Supplement (the
"Determination Date") except
(a) all payments which were due on or before the Cut-off Date;
(b) all Liquidation Proceeds and all Insurance Proceeds, all
Principal Prepayments and all other proceeds of any Loan purchased by
the Depositor, Master Servicer, any Sub-Servicer or any Seller
pursuant to the Agreement that were received after the prepayment
period specified in the related Prospectus Supplement and all related
payments of interest representing interest for any period after the
interest accrual period;
(c) all scheduled payments of principal and interest due on a
date or dates subsequent to the Due Period relating to such
Distribution Date;
(d) amounts received on particular Loans as late payments of
principal or interest or other amounts required to be paid by
borrowers, but only to the extent of any unreimbursed advance in
respect thereof made by the Master Servicer (including the related
Sub-Servicers, Support Servicers or the Trustee);
(e) amounts representing reimbursement, to the extent permitted
by the Agreement and as described under "Advances" below, for advances
made by the Master Servicer, Sub-Servicers, Support Servicers or the
Trustee that were deposited into the Security Account, and amounts
representing reimbursement for certain other losses and expenses
incurred by the Master Servicer or the Depositor and described below;
(f) that portion of each collection of interest on a particular
Loan in such Trust Fund which represents servicing compensation
payable to the Master Servicer or Retained Interest which is to be
retained from such collection or is permitted to be retained from
related Insurance Proceeds, Liquidation Proceeds or proceeds of Loans
purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer, Sub
Servicer, Support Servicer or Trustee as described under "Advances" below
and deposited by it in the Security Account;
(iii) if applicable, amounts withdrawn from a Reserve Account;
(iv) if applicable, amounts provided under a letter of credit,
insurance policy, surety bond or other third-party guaranties; and
(v) if applicable, the amount of prepayment interest shortfall.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Security Principal
Balance (or, in the case of Securities (i) entitled only to distributions
allocable to interest, the aggregate notional principal balance or (ii) which,
under certain circumstances, allow for the accrual of interest otherwise
scheduled for payment to remain unpaid until the occurrence of certain events
specified in the related Prospectus Supplement) of each class of Securities
entitled to interest from the date, at the
27
Pass-Through Rate (which may be a fixed rate or rate adjustable as specified in
such Prospectus Supplement) and for the periods specified in such Prospectus
Supplement. To the extent funds are available therefor, interest accrued during
each such specified period on each class of Securities entitled to interest
(other than a class of Securities that provides for interest that accrues, but
is not currently payable, referred to hereafter as "Accrual Securities") will be
distributable on the Distribution Dates specified in the related Prospectus
Supplement until the aggregate Security Principal Balance of the Securities of
such class has been distributed in full or, in the case of Securities entitled
only to distributions allocable to interest, until the aggregate notional
principal balance of such Securities is reduced to zero or for the period of
time designated in the related Prospectus Supplement. The original Security
Principal Balance of each Security will equal the aggregate distributions
allocable to principal to which such Security is entitled. Unless otherwise
specified in the related Prospectus Supplement, distributions allocable to
interest on each Security that is not entitled to distributions allocable to
principal will be calculated based on the notional principal balance of such
Security. The notional principal balance of a Security will not evidence an
interest in or entitlement to distributions allocable to principal but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two
or more days prior to a Distribution Date, the effective yield to
Securityholders will be reduced from the yield that would otherwise be
obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at par)
to Securityholders will be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Security Principal
Balance of such class of Securities on that Distribution Date. Distributions of
interest on any class of Accrual Securities will commence only after the
occurrence of the events specified in the related Prospectus Supplement. Prior
to such time, the beneficial ownership interest of such class of Accrual
Securities in the Trust Fund, as reflected in the aggregate Security Principal
Balance of such class of Accrual Securities, will increase on each Distribution
Date by the amount of interest that accrued on such class of Accrual Securities
during the preceding interest accrual period but that was not required to be
distributed to such class on such Distribution Date. Any such class of Accrual
Securities will thereafter accrue interest on its outstanding Security Principal
Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will specify
the method by which the amount of principal to be distributed on the Securities
on each Distribution Date will be calculated and the manner in which such amount
will be allocated among the classes of Securities entitled to distributions of
principal. The aggregate Security Principal Balance of any class of Securities
entitled to distributions of principal generally will be the aggregate original
Security Principal Balance of such class of Securities specified in such
Prospectus Supplement, reduced by all distributions reported to the holders of
such Securities as allocable to principal and, (i) in the case of Accrual
Securities, increased by all interest accrued but not then distributable on such
Accrual Securities and (ii) in the case of adjustable rate Securities, subject
to the effect of negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more classes of
Securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of such payments ("Principal Prepayments") in the
percentages and under the circumstances or for the periods specified in such
Prospectus Supplement. Any such allocation of Principal Prepayments to such
class or classes of Securityholders will have the effect of accelerating the
amortization of such Securities while increasing the interests evidenced by
other Securities in the Trust Fund. Increasing the interests of the other
Securities relative to that of certain Securities allocated by the principal
prepayments is intended to preserve the availability of the subordination
provided by such other Securities. See "Credit Enhancement--Subordination".
28
Unscheduled Distributions. The Securities will be subject to receipt of
distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such
unscheduled distributions on the day and in the amount specified in the related
Prospectus Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the Trust Fund Assets, the Trustee or the Master
Servicer determines that the funds available or anticipated to be available from
the Security Account and, if applicable, any Reserve Account, may be
insufficient to make required distributions on the Securities on such
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the amount of any such unscheduled distribution that is allocable to
principal will not exceed the amount that would otherwise have been required to
be distributed as principal on the Securities on the next Distribution Date.
Unless otherwise specified in the related Prospectus Supplement, the unscheduled
distributions will include interest at the applicable Pass-Through Rate (if any)
on the amount of the unscheduled distribution allocable to principal for the
period and to the date specified in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Securities would have been made on the next Distribution Date, and with respect
to Securities of the same class, unscheduled distributions of principal will be
made on the same basis as such distributions would have been made on the next
Distribution Date on a pro rata basis. Notice of any unscheduled distribution
will be given by the Trustee prior to the date of such distribution.
ADVANCES
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers or Support Servicers or funds
held in the Security Account for future distributions to the holders of such
Securities), an amount equal to the aggregate of payments of interest and/or
principal that were delinquent on the related Determination Date and were not
advanced by any Sub-Servicer, subject to the Master Servicer's determination
that such advances will be recoverable out of late payments by borrowers,
Liquidation Proceeds, Insurance Proceeds or otherwise. In addition, to the
extent provided in the related Prospectus Supplement, a cash account may be
established to provide for Advances to be made in the event of certain Trust
Fund Assets payment defaults or collection shortfalls.
In making Advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to holders of the Securities,
rather than to guarantee or insure against losses. If Advances are made by the
Master Servicer from cash being held for future distribution to Securityholders,
the Master Servicer will replace such funds on or before any future Distribution
Date to the extent that funds in the applicable Security Account on such
Distribution Date would be less than the amount required to be available for
distributions to Securityholders on such date. Any Master Servicer funds
advanced will be reimbursable to the Master Servicer out of recoveries on the
specific Loans with respect to which such Advances were made (e.g., late
payments made by the related borrower, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Loan purchased by a Sub-Servicer or a
Seller under the circumstances described hereinabove). Advances by the Master
Servicer (and any advances by a Sub-Servicer or a Support Servicer) also will be
reimbursable to the Master Servicer (or Sub-Servicer or a Support Servicer) from
cash otherwise distributable to Securityholders (including the holders of Senior
Securities) to the extent that the Master Servicer determines that any such
Advances previously made are not ultimately recoverable as described above. To
the extent provided in the related Prospectus Supplement, the Master Servicer
also will be obligated to make Advances, to the extent recoverable out of
Insurance Proceeds, Liquidation Proceeds or otherwise, in respect of certain
taxes and insurance premiums not paid by borrowers on a timely basis. Funds so
advanced are reimbursable to the Master Servicer to the extent permitted by the
Agreement. The obliga tions of the Master Servicer to make advances may be
supported by a cash advance reserve fund, a surety bond or other arrangement, in
each case as described in such Prospectus Supplement.
The Master Servicer or Sub-Servicer may enter into an agreement (a "Support
Agreement") with a Support Servicer pursuant to which the Support Servicer
agrees to provide funds on behalf of the Master Servicer or Sub-Servicer in
connection with the obligation of the Master Servicer or Sub-Servicer, as the
case may be, to make
29
Advances. The Support Agreement will be delivered to the Trustee and the
Trustee will be authorized to accept a substitute Support Agreement in exchange
for an original Support Agreement, provided that such substitution of the
Support Agreement will not adversely affect the rating or ratings then in effect
on the Securities.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Master Servicer, a Sub-Servicer or a Support Servicer fails to make a
required Advance, the Trustee will be obligated to make such Advance in its
capacity as successor servicer. If the Trustee makes such an Advance, it will
be entitled to be reimbursed for such Advance to the same extent and degree as
the Master Servicer, a Sub-Servicer or a Support Servicer is entitled to be
reimbursed for Advances. See "Description of the Securities--Distributions on
Securities" herein.
COMPENSATING INTEREST
If so specified in the related Prospectus Supplement, the Master Servicer
will be required to remit to the Trustee, with respect to each Loan in the
related Trust Fund as to which a principal prepayment in full or a principal
payment which is in excess of the scheduled monthly payment and is not intended
to cure a delinquency was received during any Due Period, an amount, from and to
the extent of amounts otherwise payable to the Master Servicer as servicing
compensation, equal to the excess, if any, of (a) 30 days' interest on the
principal balance of the related Loan at the Loan Rate net of the per annum rate
at which the Master Servicer's servicing fee accrues, over (b) the amount of
interest actually received on such Loan during such Due Period, net of the
Master Servicer's servicing fee.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date, the
Master Servicer or the Trustee will furnish to each Securityholder of record of
the related Series a statement setting forth, to the extent applicable to such
Series of Securities, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and any
applicable prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the Subordinated
Securityholders on such Distribution Date, and (b) withdrawn from the
Reserve Fund, if any, that is included in the amounts distributed to the
Senior Securityholders;
(v) the outstanding principal balance or notional principal balance of
such class after giving effect to the distribution of principal on such
Distribution Date;
(vi) the percentage of principal payments on the Loans (excluding
prepayments), if any, which such class will be entitled to receive on the
following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if any,
which such class will be entitled to receive on the following Distribution
Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Security Account by the Master Servicer, and the amount
of additional servicing compensation received by the Master Servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
30
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 31 to 60 days, (2) 61 to
90 days and (3) 91 or more days and (B) in foreclosure and delinquent (1)
31 to 60 days, (2) 61 to 90 days and (3) 91 or more days, as of the close
of business on the last day of the calendar month preceding such
Distribution Date;
(x) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
(xi) if a class is entitled only to a specified portion of payments of
interest on the Loans in the related Pool, the Pass-Through Rate, if
adjusted from the date of the last statement, of the Loans expected to be
applicable to the next distribution to such class;
(xii) if applicable, the amount remaining in any Reserve Account at
the close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the immediately
preceding Distribution Date;
and
(xiv) any amounts remaining under letters of credit, pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Security of the relevant class having the Percentage Interest
specified in the related Prospectus Supplement. The report to Securityholders
for any Series of Securities may include additional or other information of a
similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record during
a portion of such calendar year, for the applicable portion of such year and (b)
such other customary information as may be deemed necessary or desirable for
Securityholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through the Depository Trust Company ("DTC") in the United States, or
Cedel Bank, societe anonyme ("CEDEL") or the Euroclear System ("Euroclear") (in
Europe) if they are participants ("Participants") of such systems, or indirectly
through organizations which are Participants in such systems. The Book-Entry
Securities will be issued in one or more certificates which equal the aggregate
principal balance of the Securities and will initially be registered in the name
of Cede & Co., the nominee of DTC. CEDEL and Euroclear will hold omnibus
positions on behalf of their Participants through customers' securities accounts
in CEDEL's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. will act as depositary
for CEDEL and the Brussels, Belgium branch of Morgan Guarantee Trust Company of
New York ("Morgan") will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Except as described below, no Security Owner will be entitled
to receive a physical certificate representing such Security (a "Definitive
Security"). Unless and until Definitive Securities are issued, it is
anticipated that the only "Securityholders" of the Securities will be Cede &
Co., as nominee of DTC. Security Owners are only permitted to exercise their
rights indirectly through Participants and DTC.
31
The Security Owner's ownership of a Book-Entry Security will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Security
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Security will be recorded on the records of DTC (or
of a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Security Owner's
Financial Intermediary is not a Participant and on the records of CEDEL or
Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants.
While the Securities are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security
Owners have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will
not possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by book-
entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
herein) or Euroclear Participant (as defined herein) to a DTC Participant will
be received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL
32
Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in CEDEL in any of 28 currencies,
including United States dollars. CEDEL provides to its CEDEL Participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. CEDEL interfaces with domestic markets in several countries. As a
professional depository, CEDEL is subject to regulation by the Luxembourg
Monetary Institute. CEDEL participants are recognized financial institutions
around the world, including underwriters, securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations.
Indirect access to CEDEL is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
Morgan, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
Morgan, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of
securities and cash within Euroclear, withdrawals of securities and cash from
Euroclear, and receipts of payments with respect to securities in Euroclear.
All securities in Euroclear are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants, and has no record of or relationship with persons holding through
Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Securities
held through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Certain Material Federal Income
Tax Consequences--Tax Treatment of Foreign Investors" and "--Tax Consequences to
Holders of Notes--Backup Withholding" herein. Because DTC can only act on
behalf of Financial Intermediaries, the ability of a beneficial owner to pledge
Book-Entry Securities to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Securities, may be limited due to the lack of physical certificates for such
Book-Entry Securities. In addition, issuance of the Book-Entry Securities in
book-entry form may reduce the liquidity of such Securities in the secondary
market since certain potential investors may be unwilling to purchase Securities
for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to CEDE, as
nominee of DTC, and may be made available by CEDE to beneficial owners upon
request, in accordance with the rules, regulations and procedures
33
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Securities of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Securities under the applicable Agreement only at the direction of
one or more Financial Intermediaries to whose DTC accounts the Book-Entry
Securities are credited, to the extent that such actions are taken on behalf of
Financial Intermediaries whose holdings include such Book-Entry Securities.
CEDEL or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Securityholder under the Agreement on behalf of a
CEDEL Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Securities which
conflict with actions taken with respect to other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for re-
registration, the Trustee will issue Definitive Securities, and thereafter the
Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
None of the Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating, to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of a
Series of Securities or with respect to the Trust Fund Assets in the related
Trust Fund. Credit enhancement may be in the form of a limited financial
guaranty policy issued by an entity named in the related Prospectus Supplement,
the subordination of one or more classes of the Securities of such Series, the
establishment of one or more Reserve Accounts, the use of a cross-support
feature, use of a mortgage pool insurance policy, FHA Insurance, VA Guarantee,
bankruptcy bond, special hazard insurance policy, surety bond, letter of credit,
guaranteed investment contract or another method of credit enhancement described
in the related Prospectus Supplement, or any combination of the foregoing.
Unless otherwise specified in the related Prospectus Supplement, credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the Securities and
interest thereon. If losses occur which exceed the amount covered be credit
enhancement or which are not covered by the credit enhancement, Securityholders
will bear their allocable share of deficiencies.
SUBORDINATION
Protection afforded to holders of one or more classes of Securities of a
Series by means of the subordination feature may be accomplished by the
preferential right of holders of one or more other classes of such Series (the
"Senior Securities") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise would
have been payable to holders of Subordinated Securities under the circumstances
and to the extent specified in the related Prospectus Supplement. Protection
may also be afforded to the holders of Senior Securities of a Series by: (i)
reducing the ownership interest of the related Subordinated Securities; (ii) a
combination of the immediately preceding sentence and clause (i) above; or (iii)
as otherwise
34
described in the related Prospectus Supplement. Delays in receipt of scheduled
payments on the Loans and losses on defaulted Loans may be borne first by the
various classes of Subordinated Securities and thereafter by the various classes
of Senior Securities, in each case under the circumstances and subject to the
limitations specified in such related Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Loans over the lives of
the Securities or at any time, the aggregate losses in respect of defaulted
Loans which must be borne by the Subordinated Securities by virtue of
subordination and the amount of the distributions otherwise distributable to the
Subordinated Securityholders that will be distributable to Senior
Securityholders on any Distribution Date may be limited as specified in the
related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Loans or aggregate losses in respect of such Loans
were to exceed an amount specified in the related Prospectus Supplement, holders
of Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the related
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Securities on any Distribution Date may instead be
deposited into one or more Reserve Accounts established with the Trustee or
distributed to holders of Senior Securities. Such deposits may be made on each
Distribution Date, for specified periods or until the balance in the Reserve
Account has reached a specified amount and, following payments from the Reserve
Account to holders of Senior Securities or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Account to required levels, in
each case as specified in the related Prospectus Supplement. Amounts on deposit
in the Reserve Account may be released to the holders of certain classes of
Securities at the times and under the circumstances specified in such Prospectus
Supplement.
Various classes of Senior Securities and Subordinated Securities may
themselves be subordinate in their right to receive certain distributions to
other classes of Senior and Subordinated Securities, respectively, through a
cross support mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus Supplement.
As between classes of Subordinated Securities, payments to holders of Senior
Securities on account of delinquencies or losses and payments to any Reserve
Account will be allocated as specified in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
A separate Special Hazard Insurance Policy may be obtained for the Pool and
issued by the insurer (the "Special Hazard Insurer") named in the related
Prospectus Supplement. Each Special Hazard Insurance Policy will, subject to
limitations described below, protect holders of the related Securities from (i)
loss by reason of damage to Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage or as
otherwise specified in the related Prospectus Supplement) not insured against
under the standard form of hazard insurance policy for the respective states in
which the Properties are located or under a flood insurance policy if the
Property is located in a federally designated flood area, and (ii) loss caused
by reason of the application of the coinsurance clause contained in hazard
insurance policies. See "The Agreements--Hazard Insurance". Each Special Hazard
Insurance Policy will not cover losses occasioned by fraud or conversion by the
Trustee or Master Servicer, war, insurrection, civil war, certain governmental
action, errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear or chemical reactions, flood (if the Property is located
in a federally designated flood area), nuclear or chemical contamination and
certain other risks. The amount of coverage under any Special Hazard Insurance
Policy will be specified in the related Prospectus Supplement. Each Special
Hazard Insurance Policy will provide that no claim may be paid unless hazard
and, if applicable, flood insurance on the Property securing the Loan have been
kept in force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in the
related Prospectus Supplement, each Special Hazard Insurance Policy will provide
that where there has been damage to Property securing a
35
foreclosed Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the borrower or the Master Servicer, the
Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the Property to the
Special Hazard Insurer, the unpaid principal balance of such Loan at the time of
acquisition of such Property by foreclosure or deed in lieu of foreclosure, plus
accrued interest to the date of claim settlement and certain expenses incurred
by the Master Servicer with respect to such Property. If the unpaid principal
balance of a Loan plus accrued interest and certain expenses is paid by the
Special Hazard Insurer, the amount of further coverage under the related Special
Hazard Insurance Policy will be reduced by such amount less any net proceeds
from the sale of the Property. Any amount paid as the cost of repair of the
Property will further reduce coverage by such amount.
The Master Servicer may deposit cash, an irrevocable letter of credit or
any other instrument acceptable to each Rating Agency rating the Securities of
the related Series in a special trust account to provide protection in lieu of
or in addition to that provided by a Special Hazard Insurance Policy. The
amount of any Special Hazard Insurance Policy or of the deposit to the special
trust account relating to such Securities in lieu thereof may be reduced so long
as any such reduction will not result in a downgrading of the rating of such
Securities by any such Rating Agency.
BANKRUPTCY BONDS
A bankruptcy bond ("Bankruptcy Bond") for proceedings under the federal
Bankruptcy Code may be issued by an insurer named in such Prospectus Supplement.
Each Bankruptcy Bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a Loan or a
reduction by such court of the principal amount of a Loan and will cover certain
unpaid interest on the amount of such a principal reduction from the date of the
filing of a bankruptcy petition. The required amount of coverage under each
Bankruptcy Bond will be set forth in the related Prospectus Supplement. The
Master Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each Rating Agency rating the Securities of the related
Series in a special trust account to provide protection in lieu of or in
addition to that provided by a Bankruptcy Bond. Coverage under a Bankruptcy
Bond may be cancelled or reduced by the Master Servicer if such cancellation or
reduction would not adversely affect the then current rating or ratings of the
related Securities. See "Certain Legal Aspects of the Loans--Anti-Deficiency
Legislation and Other Limitations on Lenders".
RESERVE ACCOUNTS
Credit support with respect to a Series of Securities may be provided by
the establishment and maintenance with the Trustee for such Series of
Securities, in trust, of one or more Reserve Accounts for such Series. The
related Prospectus Supplement will specify whether or not any such Reserve
Accounts will be included in the Trust Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit therein
of cash, United States Treasury securities, instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in the related Prospectus Supplement, (ii) by the deposit therein from
time to time of certain amounts, as specified in the related Prospectus
Supplement to which the Subordinate Securityholders, if any, would otherwise be
entitled or (iii) in such other manner as may be specified in the related
Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in Permitted
Investments which may include obligations of the United States and certain
agencies thereof, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks and certain
repurchase agreements of United States government securities with eligible
commercial banks. If a letter of credit is deposited with the Trustee, such
letter of credit will be irrevocable. Any instrument deposited therein will
name the Trustee, in its capacity as trustee for the holders of the Securities,
as beneficiary and will be issued by an entity acceptable to each Rating Agency
that rates the
36
Securities. Additional information with respect to such instruments deposited
in the Reserve Accounts will be set forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Securities for the purposes, in the manner and at the times specified
in the related Prospectus Supplement.
POOL INSURANCE POLICIES
A separate pool insurance policy ("Pool Insurance Policy") may be obtained
for the Pool and issued by the insurer (the "Pool Insurer") named in the related
Prospectus Supplement. Each Pool Insurance Policy will, subject to the
limitations described below, cover loss by reason of default in payment on Loans
in the Pool in an amount equal to a percentage specified in such Prospectus
Supplement of the aggregate principal balance of such Loans on the Cut-off Date
which are not covered as to their entire outstanding principal balances by
Primary Mortgage Insurance Policies. As more fully described below, the Master
Servicer will present claims thereunder to the Pool Insurer on behalf of itself,
the Trustee and the holders of the Securities. The Pool Insurance Policies,
however, are not blanket policies against loss, since claims thereunder may only
be made respecting particular defaulted Loans and only upon satisfaction of
certain conditions precedent described below. Unless otherwise specified in the
related Prospectus Supplement, the Pool Insurance Policies will not cover losses
due to a failure to pay or denial of a claim under a Primary Mortgage Insurance
Policy.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy will provide that no claims may be validly presented unless (i)
any required Primary Mortgage Insurance Policy is in effect for the defaulted
Loan and a claim thereunder has been submitted and settled; (ii) hazard
insurance on the related Property has been kept in force and real estate taxes
and other protection and preservation expenses have been paid; (iii) if there
has been physical loss or damage to the Property, it has been restored to its
physical condition (reasonable wear and tear excepted) at the time of issuance
of the policy; and (iv) the insured has acquired good and merchantable title to
the Property free and clear of liens except certain permitted encumbrances.
Upon satisfaction of these conditions, the Pool Insurer will have the option
either (a) to purchase the property securing the defaulted Loan at a price equal
to the principal balance thereof plus accrued and unpaid interest at the Loan
Rate to the date of purchase and certain expenses incurred by the Master
Servicer on behalf of the Trustee and Securityholders, or (b) to pay the amount
by which the sum of the principal balance of the defaulted Loan plus accrued and
unpaid interest at the Loan Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Property, in either case net of certain amounts paid or assumed to have been
paid under the related Primary Mortgage Insurance Policy. If any Property
securing a defaulted Loan is damaged and proceeds, if any, from the related
hazard insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged Property to a condition sufficient to permit
recovery under the Pool Insurance Policy, the Master Servicer will not be
required to expend its own funds to restore the damaged Property unless it
determines that (i) such restoration will increase the proceeds to
securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) such expenses will be recoverable by it
through proceeds of the sale of the Property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy will not insure (and many Primary Mortgage Insurance Policies
do not insure) against loss sustained by reason of a default arising from, among
other things, (i) fraud or negligence in the origination or servicing of a Loan,
including misrepresentation by the borrower, the originator or persons involved
in the origination thereof, or (ii) failure to construct a Property in
accordance with plans and specifications. A failure of coverage attributable to
one of the foregoing events might result in a breach of the related Seller's
representations described above, and, in such events might give rise to an
obligation on the part of such Seller to purchase the defaulted Loan if the
breach cannot be cured by such Seller. No Pool Insurance Policy will cover (and
many Primary Mortgage Insurance Policies do not cover) a claim in respect of a
defaulted Loan occurring when the servicer of such Loan, at the time of default
or thereafter, was not approved by the applicable insurer.
37
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of claims
paid less the aggregate of the net amounts realized by the Pool Insurer upon
disposition of all foreclosed properties. The amount of claims paid may include
certain expenses incurred by the Master Servicer as well as accrued interest on
delinquent Loans to the date of payment of the claim. Accordingly, if aggregate
net claims paid under any Pool Insurance Policy reach the original policy limit,
coverage under that Pool Insurance Policy will be exhausted and any further
losses will be borne by the Securityholders.
FHA INSURANCE; VA GUARANTEES
Loans designated in the related Prospectus Supplement as insured by the FHA
will be insured by the FHA as authorized under the United States Housing Act of
1934, as amended. In addition to the Title I Program of the FHA, see "Certain
Legal Considerations -- Title I Program", certain Loans will be insured under
various FHA programs including the standard FHA 203(b) program to finance the
acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD") or
by the Master Servicer or any Sub-Servicer and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide that
insurance benefits are payable either upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to the United States of
America or upon assignment of the defaulted Loan to the United States of
America. With respect to a defaulted FHA-insured Loan, the Master Servicer or
any Sub-Servicer is limited in its ability to initiate foreclosure proceedings.
When it is determined, either by the Master Servicer or any Sub-Servicer or HUD,
that default was caused by circumstances beyond the mortgagor's control, the
Master Servicer or any Sub-Servicer is expected to make an effort to avoid
foreclosure by entering, if feasible, into one of a number of available forms of
forbearance plans with the mortgagor. Such plans may involve the reduction or
suspension of regular mortgage payments for a specified period, with such
payments to be made upon or before the maturity date of the mortgage, or the
recasting of payments due under the mortgage up to or, other than Loans
originated under the Title I Program of the FHA, beyond the maturity date. In
addition, when a default caused by such circumstances is accompanied by certain
other criteria, HUD may provide relief by making payments to the Master Servicer
or any Sub-Servicer in partial or full satisfaction of amounts due under the
Loan (which payments are to be repaid by the mortgagor to HUD) or by accepting
assignment of the loan from the Master Servicer or any Sub-Servicer. With
certain exceptions, at least three full monthly installments must be due and
unpaid under the Loan, and HUD must have rejected any request for relief from
the mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each FHA-
insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Loan upon default for an amount equal to the
principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master Servicer
or Sub-Servicer for certain costs and expenses and to deduct certain amounts
received or retained by the Master Servicer or Sub-Servicer after default. When
entitlement to insurance benefits results from foreclosure (or other acquisition
of possession) and conveyance to HUD, the Master Servicer or Sub-Servicer is
compensated for no more than two-thirds of its foreclosure costs, and is
compensated for interest accrued and unpaid prior to such date but in general
only to the extent it was allowed pursuant to a forbearance plan approved by
HUD. When entitlement to insurance benefits results from assignment of the Loan
to HUD, the insurance payment includes full compensation for interest accrued
and unpaid to the assignment date. The insurance payment itself, upon
38
foreclosure of an FHA-insured Loan, bears interest from a date 30 days after the
borrower's first uncorrected failure to perform any obligation to make any
payment due under the mortgage and, upon assignment, from the date of assignment
to the date of payment of the claim, in each case at the same interest rate as
the applicable HUD debenture interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended (a "VA Guaranty Policy"). The Serviceman's Readjustment
Act of 1944, as amended, permits a veteran (or in certain instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no Loan guaranteed by the VA will have an
original principal amount greater than five times the partial VA guarantee for
such Loan.
The maximum guarantee that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. As
of January 1, 1990, the maximum guarantee that may be issued by the VA under a
VA guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $46,000. The liability on
the guarantee is reduced or increased pro rata with any reduction or increase in
the amount of indebtedness, but in no event will the amount payable on the
guarantee exceed the amount of the original guarantee. The VA may, at its
option and without regard to the guarantee, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Master Servicer or Sub-
Servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim for the guarantee is submitted after liquidation of the
Property.
The amount payable under the guarantee will be the percentage of the VA-
insured Loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of the Loan, interest
accrued on the unpaid balance of the Loan to the appropriate date of computation
and limited expenses of the mortgagee, but in each case only to the extent that
such amounts have not been recovered through liquidation of the Property. The
amount payable under the guarantee may in no event exceed the amount of the
original guarantee.
CROSS-SUPPORT
The beneficial ownership of separate groups of assets included in a Trust
Fund may be evidenced by separate classes of the related Series of Securities.
In such case, credit support may be provided by a cross-support feature which
requires that distributions be made with respect to Securities evidencing a
beneficial ownership interest in, or secured by, other asset groups within the
same Trust Fund. The related Prospectus Supplement for a Series which includes
a cross-support feature will describe the manner and conditions for applying
such cross-support feature.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trust Funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A Trust Fund may also include insurance, guaranties, surety bonds, letters
of credit or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
39
included in such Trust Fund, (ii) paying administrative expenses or (iii)
establishing a minimum reinvestment rate on the payments made in respect of such
assets or principal payment rate on such assets. Such arrangements may include
agreements under which Securityholders are entitled to receive amounts deposited
in various accounts held by the Trustee upon the terms specified in such
Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will be
affected primarily by the amount and timing of principal payments received on or
in respect of the Trust Fund Assets included in the related Trust Fund. With
respect to a Trust Fund which includes Private Asset Backed Securities, the
possible effects of the amount and timing of principal payments received with
respect to the underlying mortgage loans will be described in the related
Prospectus Supplement. The original terms to maturity of the Loans in a given
Pool will vary depending upon the type of Loans included therein. Each
Prospectus Supplement will contain information with respect to the type and
maturities of the Loans in the related Pool. Unless otherwise specified in the
related Prospectus Supplement, Loans may be prepaid without penalty in full or
in part at any time. The prepayment experience on the Loans in a Pool will
affect the life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity loans
and home improvement contracts have been originated in significant volume only
during the past few years and the Depositor is not aware of any publicly
available studies or statistics on the rate of prepayment of such loans.
Generally, home equity loans and home improvement contracts are not viewed by
borrowers as permanent financing. Accordingly, the Loans may experience a
higher rate of prepayment than traditional first mortgage loans. On the other
hand, because home equity loans such as the Revolving Credit Line Loans
generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments lower than, or similar to,
those of traditional fully-amortizing first mortgages. The prepayment
experience of the related Trust Fund may be affected by a wide variety of
factors, including general economic conditions, prevailing interest rate levels,
the availability of alternative financing and homeowner mobility and the
frequency and amount of any future draws on any Revolving Credit Line Loans.
Other factors that might be expected to affect the prepayment rate of a pool of
home equity mortgage loans or home improvement contracts include the amounts of,
and interest rates on, the underlying senior mortgage loans, and the use of
first mortgage loans as long-term financing for home purchase and subordinate
mortgage loans as shorter-term financing for a variety of purposes, including
home improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, the Loans may experience a higher rate of prepayment
than traditional fixed-rate mortgage loans. In addition, any future limitations
on the right of borrowers to deduct interest payments on home equity loans for
federal income tax purposes may further increase the rate of prepayments of the
Loans. The enforcement of a "due-on-sale" provision (as described below) will
have the same effect as a prepayment of the related Loan. See "Certain Legal
Aspects of the Loans--Due-on-Sale Clauses". The yield to an investor who
purchases Securities in the secondary market at a price other than par will vary
from the anticipated yield if the rate of prepayment on the Loans is actually
different than the rate anticipated by such investor at the time such Securities
were purchased.
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the minimum
monthly payment for such month or, during the interest-only period for certain
Revolving Credit Line Loans and, in more limited circumstances, Closed-End
Loans, with respect to which an interest-only payment option has been selected,
the interest and the fees and charges for such month or (ii) make payments as
high as the entire outstanding principal balance plus accrued interest and the
fees and charges thereon. It is possible that borrowers may fail to make the
required periodic payments. In addition, collections on the Loans may vary due
to seasonal purchasing and the payment habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, the Loans
will contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of the loan upon sale or certain transfers by the borrower. Loans
insured by the FHA, and Single Family Loans partially guaranteed by the VA, are
assumable with the consent of the FHA and the VA, respectively. Thus, the rate
of prepayments on such Loans may be lower than that of conventional Loans
bearing comparable interest rates. Unless otherwise specified in the related
Prospectus
40
Supplement, the Master Servicer generally will enforce any due-on-sale or due-
on-encumbrance clause, to the extent it has knowledge of the conveyance or
further encumbrance or the proposed conveyance or proposed further encumbrance
of the Property and reasonably believes that it is entitled to do so under
applicable law; provided, however, that the Master Servicer will not take any
enforcement action that would impair or threaten to impair any recovery under
any related insurance policy. See "The Agreements--Collection Procedures" and
"Certain Legal Aspects of the Loans" for a description of certain provisions of
each Agreement and certain legal developments that may affect the prepayment
experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. If prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans may be subject
to higher prepayment rates than if prevailing interest rates remain at or above
such Loan Rates. Conversely, if prevailing interest rates rise appreciably
above the Loan Rates borne by the Loans, such Loans may experience a lower
prepayment rate than if prevailing rates remain at or below such Loan Rates.
However, there can be no assurance that such will be the case.
When a full prepayment is made on a Loan, the borrower is charged interest
on the principal amount of the Loan so prepaid only for the number of days in
the month actually elapsed up to the date of the prepayment, rather than for a
full month. Unless the Master Servicer remits amounts otherwise payable to it
as servicing compensation, see "Description of the Securities--Compensating
Interest", the effect of prepayments in full will be to reduce the amount of
interest passed through in the following month to holders of Securities because
interest on the principal amount of any Loan so prepaid will be paid only to the
date of prepayment. Partial prepayments in a given month may be applied to the
outstanding principal balances of the Loans so prepaid on the first day of the
month of receipt or the month following receipt. In the latter case, partial
prepayments will not reduce the amount of interest passed through in such month.
Unless otherwise specified in the related Prospectus Supplement, neither full
nor partial prepayments will be passed through until the month following
receipt.
Even assuming that the Properties provide adequate security for the Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Loans and corresponding delays in the receipt of related proceeds by
Securityholders could occur. An action to foreclose on a Property securing a
Loan is regulated by state statutes and rules and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in some
states an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a property. In the event of a default by a borrower, these
restrictions among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Property or to obtain liquidation proceeds
sufficient to repay all amounts due on the related Loan. In addition, the
Master Servicer will be entitled to deduct from related liquidation proceeds all
expenses reasonably incurred in attempting to recover amounts due on defaulted
Loans and not yet repaid, including payments to senior lienholders, legal fees
and costs of legal action, real estate taxes and maintenance and preservation
expenses.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the remaining principal balance of the small mortgage
loan than would be the case with the other defaulted mortgage loan having a
large remaining principal balance.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of Loans. In addition, most have other laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the Loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the Master Servicer to collect
all or part of the principal of or interest on the Loans, may entitle the
borrower to a refund of amounts previously paid and, in addition, could subject
the Master Servicer to damages and administrative sanctions.
41
If the rate at which interest is passed through to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis, disproportionate
principal prepayments among Loans with different Loan Rates will affect the
yield on such Securities. In most cases, the effective yield to Securityholders
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate and purchase price, because while interest will accrue on each Loan from
the first day of the month (unless otherwise specified in the related Prospectus
Supplement), the distribution of such interest will not be made earlier than the
month following the month of accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related Prospectus
Supplement may have the option to purchase the assets of a Trust Fund thereby
effecting earlier retirement of the related Series of Securities. See "The
Agreements--Termination; Optional Termination".
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and over
the lives of the Securities. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of the Trust Fund Assets at any time or
over the lives of the Securities.
The Prospectus Supplement relating to a Series of Securities will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. The summary does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the provisions of each Agreement. Where particular provisions or terms used in
the Agreements are referred to, such provisions or terms are as specified in the
Agreements. Except as otherwise specified, the Agree ment described herein
contemplates a Trust Fund comprised of Loans. The provisions of an Agreement
with respect to a Trust Fund which consists of or includes Private Asset Backed
Securities may contain provisions similar to those described herein but will be
more fully described in the related Prospectus Supplement.
ASSIGNMENT OF THE TRUST FUND ASSETS
Assignment of the Loans. At the time of issuance of the Securities of a
Series, the Depositor will cause the Loans comprising the related Trust Fund to
be assigned to the Trustee, together with all principal and interest received by
or on behalf of the Depositor on or with respect to such Loans after the Cut-off
Date, other than principal and interest due on or before the Cut-off Date and
other than any Retained Interest specified in the related Prospectus Supplement.
The Trustee will, concurrently with such assignment, deliver the Securities to
the Depositor in exchange for the Loans. Each Loan will be identified in a
schedule appearing as an exhibit to the related Agreement. Such schedule will
include information as to the outstanding principal balance of each Loan after
application of payments due on or before the Cut-off Date, as well as
information regarding the Loan Rate or APR, the current scheduled monthly
payment of principal and interest, the maturity of the Loan, the Combined Loan-
to-Value Ratios at origination and certain other information.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies of
documents and instruments related to each Home Improvement Contract and, other
than in the case of unsecured Home Improvement Contracts, the security interest
in the Property securing such Home Improvement Contract. In order to give
notice of the right, title and interest of Securityholders to the Home
Improvement Contracts, the Depositor will cause a UCC-1 financing statement to
be executed by the Depositor or the Seller identifying the Trustee as the
secured party and identifying all Home Improvement Contracts as collateral.
Unless otherwise specified in the related Prospectus Supplement, the Home
Improvement Contracts will not be stamped or otherwise marked to reflect their
assignment to the Trustee. Therefore, if, through negligence, fraud or
42
otherwise, a subsequent purchaser were able to take physical possession of the
Home Improvement Contracts without notice of such assignment, the interest of
Securityholders in the Home Improvement Contracts could be defeated. See
"Certain Legal Aspects of the Loans--The Home Improvement Contracts."
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Home Equity Loan, among other
things, (i) the mortgage note or contract endorsed without recourse in blank or
to the order of the Trustee, (ii) the mortgage, deed of trust or similar
instrument (a "Mortgage") with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office, in which case
the Depositor will deliver or cause to be delivered a copy of such Mortgage
together with a certificate that the original of such Mortgage was delivered to
such recording office), (iii) an assignment of the Mortgage to the Trustee,
which assignment will be in recordable form in the case of a Mortgage
assignment, and (iv) such other security documents, including those relating to
any senior interests in the Property, as may be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will promptly cause the assignments of the related
Loans to be recorded in the appropriate public office for real property records,
except in states in which, in the opinion of counsel acceptable to the Trustee,
such recording is not required to protect the Trustee's interest in such Loans
against the claim of any subsequent transferee or any successor to or creditor
of the Depositor or the originator of such Loans.
The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the Securityholders. Unless otherwise specified in the
related Prospectus Supplement, if any such document is found to be missing or
defective in any material respect, the Trustee (or such custodian) will notify
the Master Servicer and the Depositor, and the Master Servicer will notify the
related Seller. If the Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice (or such other period as
may be specified in the related Prospectus Supplement), the Seller will be
obligated either (i) to purchase the related Loan from the Trust at the Purchase
Price or (ii) to remove such Loan from the Trust Fund and substitute in its
place one or more other Loans. There can be no assurance that a Seller will
fulfill this purchase or substitution obligation. Although the Master Servicer
may be obligated to enforce such obligation to the extent described above under
"Loan Program--Representations by Sellers; Repurchases", neither the Master
Servicer nor the Depositor will be obligated to purchase or replace such Loan if
the Seller defaults on its obligation, unless such breach also constitutes a
breach of the representations or warranties of the Master Servicer or the
Depositor, as the case may be. Unless otherwise specified in the related
Prospectus Supplement, this purchase obligation constitutes the sole remedy
available to the Securityholders or the Trustee for omission of, or a material
defect in, a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Securityholders in a Loan, the Master Servicer will be obligated either to cure
the breach in all material respects or to purchase or replace the Loan at the
Purchase Price. Unless otherwise specified in the related Prospectus
Supplement, this obligation to cure, purchase or substitute constitutes the sole
remedy available to the Securityholders or the Trustee for such a breach of
representation by the Master Servicer.
Assignment of Private Asset Backed Securities. The Depositor will cause
Private Asset Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated Private
Asset Backed Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of record of
any underlying assets for a Private Asset Backed Security. See "The Trust
Fund--Private Asset Backed Securities" herein. Each Private Asset Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount,
43
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date and certain other pertinent information for
each Private Asset Backed Security conveyed to the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, no purchase or substitution of a Loan will
be made if such purchase or substitution would result in a prohibited
transaction tax under the Code.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing Agreement
(as defined below under "--Sub-Servicing of Loans") will establish and maintain
an account (the "Sub-Servicing Account") which meets the following requirements
and is otherwise acceptable to the Master Servicer. A Sub-Servicing Account
must be established with a Federal Home Loan Bank or with a depository
institution (including the Sub-Servicer itself) whose accounts are insured by
either the Bank Insurance Fund (the "BIF") of the FDIC or the Savings
Association Insurance Fund (as successor to the Federal Savings and Loan
Insurance Corporation ("SAIF")) of the FDIC. If a Sub-Servicing Account is
maintained at an institution that is a Federal Home Loan Bank or an FDIC-insured
institution and, in either case, the amount on deposit in the Sub-Servicing
Account exceeds the FDIC insurance coverage amount, then such excess amount must
be remitted to the Master Servicer within one business day of receipt. In
addition, the Sub-Servicer must maintain a separate account for escrow and
impound funds relating to the Loans. Each Sub-Servicer is required to deposit
into its Sub-Servicing Account on a daily basis all amounts described below
under "--Sub-Servicing of Loans" that are received by it in respect of the
Loans, less its servicing or other compensation. On or before the date specified
in the Sub-Servicing Agreement, the Sub-Servicer will remit or cause to be
remitted to the Master Servicer or the Trustee all funds held in the Sub-
Servicing Account with respect to Loans that are required to be so remitted. The
Sub-Servicer may also be required to advance on the scheduled date of remittance
an amount corresponding to any monthly installment of interest and/or principal,
less its servicing or other compensation, on any Loan for which payment was not
received from the mortgagor. Unless otherwise specified in the related
Prospectus Supplement, any such obligation of the Sub-Servicer to advance will
continue up to and including the first of the month following the date on which
the related Property is sold at a foreclosure sale or is acquired on behalf of
the Securityholders by deed in lieu of foreclosure, or until the related Loan is
liquidated.
The Master Servicer will establish and maintain or cause to be established
and maintained with respect to the related Trust Fund a separate account or
accounts for the collection of payments on the related Trust Fund Assets in the
Trust Fund (the "Security Account") must be either (i) maintained with a
depository institution the debt obligations of which (or in the case of a
depository institution that is the principal subsidiary of a holding company,
the obligations of which) are rated in one of the two highest rating categories
by the Rating Agency or Rating Agencies that rated one or more classes of the
related Series of Securities, (ii) an account or accounts the deposits in which
are fully insured by either the BIF or SAIF, (iii) an account or accounts the
deposits in which are insured by the BIF or SAIF (to the limits established by
the FDIC), and the uninsured deposits in which are otherwise secured such that,
as evidenced by an opinion of counsel, the Securityholders have a claim with
respect to the funds in the Security Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the depository
institution with which the Security Account is maintained, or (iv) an account or
accounts otherwise acceptable to each Rating Agency. The collateral eligible to
secure amounts in the Security Account is limited to United States government
securities and other high-quality investments ("Permitted Investments"). A
Security Account may be maintained as an interest bearing account or the funds
held therein may be invested pending each succeeding Distribution Date in
Permitted Investments. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or its designee will be entitled to receive any
such interest or other income earned on funds in the Security Account as
additional compensation and will be obligated to deposit in the Security Account
the amount of any loss immediately as realized. The Security Account may be
maintained with the Master Servicer or with a depository institution that is an
affiliate of the Master Servicer, provided it meets the standards set forth
above.
44
The Master Servicer will deposit or cause to be deposited in the Security
Account for each Trust Fund on a daily basis, to the extent applicable and
provided in the Agreement, the following payments and collections received or
advances made by or on behalf of it subsequent to the Cut-off Date (other than
payments due on or before the Cut-off Date and exclusive of any amounts
representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and any applicable prepayment penalties, on the Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred, and
unreimbursed advances made, by the related Sub-Servicer, if any) of the
hazard insurance policies and any Primary Mortgage Insurance Policies, to
the extent such proceeds are not applied to the restoration of the property
or released to the Mortgagor in accordance with the Master Servicer's
normal servicing procedures (collectively, "Insurance Proceeds") and all
other cash amounts (net of unreimbursed expenses incurred in connection
with liquidation or foreclosure ("Liquidation Expenses") and unreimbursed
advances made, by the related Sub-Servicer, if any) received and retained
in connection with the liquidation of defaulted Loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds received
on a monthly basis with respect to any properties acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Seller as described under "Loan Program--Representations by Sellers;
Repurchases" or "--Assignment of Trust Fund Assets" above and all proceeds
of any Loan repurchased as described under "--Termination; Optional
Termination" below;
(v) all payments required to be deposited in the Security Account
with respect to any deductible clause in any blanket insurance policy
described under "--Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Security Account; and
(vii) all other amounts required to be deposited in the Security
Account pursuant to the Agreement.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which the Depositor will
deposit the Pre-Funded Amount on the related Closing Date. The Pre-Funded
Amount will not exceed 25% of the initial aggregate principal amount of the
Certificates and Notes of the related Series. The Pre-Funded Amount will be
used by the related Trustee to purchase Subsequent Loans from the Depositor from
time to time during the Funding Period. The Funding Period, if any, for a Trust
Fund will begin on the related Closing Date and will end on the date specified
in the related Prospectus Supplement, which in no event will be later than the
date that is three months after the Closing Date. Any amounts remaining in the
Pre-Funding Account at the end of the Funding Period will be distributed to the
related Securityholders in the manner and priority specified in the related
Prospectus Supplement, as a prepayment of principal of the related Securities.
SUB-SERVICING OF LOANS
Each Seller of a Loan or any other servicing entity may act as the Sub-
Servicer for such Loan pursuant to an agreement (each, a "Sub-Servicing
Agreement"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely between
the Master Servicer and the
45
Sub-Servicer, the Agreement pursuant to which a Series of Securities is issued
will provide that, if for any reason the Master Servicer for such Series of
Securities is no longer the Master Servicer of the related Loans, the Trustee or
any successor Master Servicer must recognize the Sub-Servicer's rights and
obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate its
servicing obligations to third-party servicers, but such Sub-Servicer will
remain obligated under the related Sub-Servicing Agreement. Each Sub-Servicer
will be required to perform the customary functions of a servicer of mortgage
loans. Such functions generally include collecting payments from mortgagors or
obligors and remitting such collections to the Master Servicer; maintaining
hazard insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder, subject in certain cases
to the right of the Master Servicer to approve in advance any such settlement;
maintaining escrow or impoundment accounts of mortgagors or obligors for payment
of taxes, insurance and other items required to be paid by the mortgagor or
obligor pursuant to the related Loan; processing assumptions or substitutions,
although, the Master Servicer is generally required to exercise due-on-sale
clauses to the extent such exercise is permitted by law and would not adversely
affect insurance coverage; attempting to cure delinquencies; supervising
foreclosures; inspecting and managing Properties under certain circumstances;
maintaining accounting records relating to the Loans; and, to the extent
specified in the related Prospectus Supplement, maintaining additional insurance
policies or credit support instruments and filing and settling claims
thereunder. A Sub-Servicer will also be obligated to make advances in respect
of delinquent installments of interest and/or principal on Loans, as described
more fully above under "--Payments on Loans; Deposits to Security Account", and
in respect of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on the
related Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and
retain, as part of its servicing compensation, any prepayment or late charges
provided in the Mortgage Note or related instruments. Each Sub-Servicer will be
reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under the
Agreement. The Master Servicer may purchase the servicing of Loans if the Sub-
Servicer elects to release the servicing of such Loans to the Master Servicer.
See "--Servicing and Other Compensation and Payment of Expenses".
Each Sub-Servicer may be required to agree to indemnify the Master Servicer
for any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Sub-Servicer in its servicing capacity.
Each Sub-Servicer will be required to maintain a fidelity bond and an errors and
omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Loan pursuant to the
terms of the Sub-Servicing Agreement for the entire term of such Loan, unless
the Sub-Servicing Agreement is earlier terminated by the Master Servicer or
unless servicing is released to the Master Servicer. The Master Servicer may
terminate a Sub-Servicing Agreement without cause, upon written notice to the
Sub-Servicer in the manner specified in such Sub-Servicing Agreement.
The Master Servicer may agree with a Sub-Servicer to amend a Sub-Servicing
Agreement or, upon termina tion of the Sub-Servicing Agreement, the Master
Servicer may act as servicer of the related Loans or enter into new Sub-
Servicing Agreements with other Sub-Servicers. If the Master Servicer acts as
servicer, it will not assume liability for the representations and warranties of
the Sub-Servicer which it replaces. Each Sub-Servicer must be a Seller or meet
the standards for becoming a Seller or have such servicing experience as to be
otherwise satisfactory to the Master Servicer and the Depositor. The Master
Servicer will make reasonable efforts to have the new Sub-Servicer assume
liability for the representations and warranties of the terminated Sub-Servicer,
but no assurance can be given that such an assumption will occur. In the event
of such an assumption, the Master Servicer may in the exercise of its business
judgment release the terminated Sub-Servicer from liability in respect of such
representations and warranties. Any amendments to a Sub-Servicing Agreement or
new Sub-Servicing Agreements
46
may contain provisions different from those which are in effect in the original
Sub-Servicing Agreement. However, each Agreement will provide that any such
amendment or new agreement may not be inconsistent with or violate such
Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Loans and
will, consistent with each Agreement and any Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and Bankruptcy Bond
or alternative arrangements, follow such collection procedures as are customary
with respect to loans that are comparable to the Loans. Consistent with the
above, the Master Servicer may, in its discretion, (i) waive any assumption fee,
late payment or other charge in connection with a Loan and (ii) to the extent
not inconsistent with the coverage of such Loan by a Pool Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond
or alternative arrangements, if applicable, arrange with a borrower a schedule
for the liquidation of delinquencies running for no more than 125 days after the
applicable due date for each payment. Both the Sub-Servicer and the Master
Servicer may be obligated to make Advances during any period of such an
arrangement.
Except as otherwise specified in the related Prospectus Supplement, in any
case in which property securing a Loan has been, or is about to be, conveyed by
the mortgagor or obligor, the Master Servicer will, to the extent it has
knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of such Loan under any due-on-
sale clause applicable thereto, but only if the exercise of such rights is
permitted by applicable law. If these conditions are not met or if the Master
Servicer reasonably believes it is unable under applicable law to enforce such
due-on-sale clause, or the Master Servicer will enter into or cause to be
entered into an assumption and modification agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such person
becomes liable for repayment of the Loan and, to the extent permitted by
applicable law, the mortgagor remains liable thereon. Any fee collected by or
on behalf of the Master Servicer for entering into an assumption agreement will
be retained by or on behalf of the Master Servicer as additional servicing
compensation. See "Certain Legal Aspects of the Loans--Due-on-Sale Clauses". In
connection with any such assumption, the terms of the related Loan may not be
changed.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to maintain a
hazard insurance policy providing for no less than the coverage of the standard
form of fire insurance policy with extended coverage customary for the type of
Property in the state in which such Property is located. All amounts collected
by the Master Servicer under any hazard policy (except for amounts to be applied
to the restoration or repair of the Property or released to the mortgagor or
obligor in accordance with the Master Servicer's normal servicing procedures)
will be deposited in the related Security Account. In the event that the Master
Servicer maintains a blanket policy insuring against hazard losses on all the
Loans comprising part of a Trust Fund, it will conclusively be deemed to have
satisfied its obligation relating to the maintenance of hazard insurance. Such
blanket policy may contain a deductible clause, in which case the Master
Servicer will be required to deposit from its own funds into the related
Security Account the amounts which would have been deposited therein but for
such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a Loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-
related causes, earth movement (including earthquakes, landslides and mud
flows), nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic
animals, theft and, in certain cases, vandalism. The foregoing list is merely
indicative of certain kinds of uninsured
47
risks and is not intended to be all inclusive. If the Property securing a Loan
is located in a federally designated special flood area at the time of
origination, the Master Servicer will require the mortgagor or obligor to obtain
and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of the full replacement value of the
insured property in order to recover the full amount of any partial loss. If
the insured's coverage falls below this specified percentage, then the insurer's
liability in the event of partial loss will not exceed the larger of (i) the
actual cash value (generally defined as replacement cost at the time and place
of loss, less physical depreciation) of the improvements damaged or destroyed or
(ii) such proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements. Since
the amount of hazard insurance the Master Servicer may cause to be maintained on
the improvements securing the Loans declines as the principal balances owing
thereon decrease, and since improved real estate generally has appreciated in
value over time in the past, the effect of this requirement in the event of
partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damaged property. If specified in the related Prospectus
Supplement, a special hazard insurance policy will be obtained to insure against
certain of the uninsured risks described above. See "Credit Enhancement--Special
Hazard Insurance Policies".
If the Property securing a defaulted Loan is damaged and proceeds, if any,
from the related hazard insurance policy are insufficient to restore the damaged
Property, the Master Servicer is not required to expend its own funds to restore
the damaged Property unless it determines (i) that such restoration will
increase the proceeds to Securityholders on liquidation of the Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is not
available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer will
be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the defaulted
Loan are less than the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Trust Fund will realize a loss
in the amount of such difference plus the aggregate of expenses incurred by the
Master Servicer in connection with such proceedings and which are reimbursable
under the Agreement. In the unlikely event that any such proceedings result in
a total recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Master Servicer will be entitled
to withdraw or retain from the Security Account amounts representing its normal
servicing compensation with respect to such Loan and, unless otherwise specified
in the related Prospectus Supplement, amounts representing the balance of such
excess, exclusive of any amount required by law to be forwarded to the related
borrower, as additional servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if the
Master Servicer or its designee recovers Insurance Proceeds which, when added to
any related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the principal balance of such Loan
plus interest accrued thereon that is payable to Securityholders, the Master
Servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to such
Loan. In the event that the Master Servicer has expended its own funds to
restore the damaged Property and such funds have not been reimbursed under the
related hazard insurance policy, it will be entitled to withdraw from the
Security Account out of related Liquidation Proceeds or Insurance Proceeds in an
amount equal to such expenses incurred by it, in which event the Trust Fund may
realize a loss up to the amount so charged. Since Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the Master Servicer,
no such payment or recovery will result in a recovery to the Trust Fund which
exceeds the principal balance of the defaulted Loan together with accrued
interest thereon. See "Credit Enhancement".
48
REALIZATION UPON DEFAULTED LOANS
Primary Mortgage Insurance Policies. The Master Servicer will maintain or
cause each Sub-Servicer to maintain, as the case may be, in full force and
effect, to the extent specified in the related Prospectus Supplement, a Primary
Mortgage Insurance Policy with regard to each Loan for which such coverage is
required. The Master Servicer will not cancel or refuse to renew any such
Primary Mortgage Insurance Policy in effect at the time of the initial issuance
of a Series of Securities that is required to be kept in force under the
applicable Agreement unless the replacement Primary Mortgage Insurance Policy
for such cancelled or nonrenewed policy is maintained with an insurer whose
claims-paying ability is sufficient to maintain the current rating of the
classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Loan will consist of the insured percentage of the unpaid principal
amount of the covered Loan and accrued and unpaid interest thereon and
reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Property, (ii)
hazard insurance proceeds in excess of the amount required to restore the
Property and which have not been applied to the payment of the Loan, (iii)
amounts expended but not approved by the issuer of the related Primary Mortgage
Insurance Policy (the "Primary Insurer"), (iv) claim payments previously made by
the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained by
reason of a default arising from or involving certain matters, including (i)
fraud or negligence in origination or servicing of the Loans, including
misrepresentation by the originator, borrower or other persons involved in the
origination of the Loans; (ii) failure to construct the Property subject to the
Loan in accordance with specified plans; (iii) physical damage to the Property;
and (iv) the related Master Servicer or Sub-servicer not being approved as a
servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Loan, the insured will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Property in at least as good a
condition as existed at the effective date of such Primary Mortgage Insurance
Policy, ordinary wear and tear excepted, (3) Property sales expenses, (4) any
outstanding liens (as defined in such Primary Mortgage Insurance Policy) on the
Property and (5) foreclosure costs, including court costs and reasonable
attorneys' fees; (ii) in the event of any physical loss or damage to the
Property, to have the Property restored and repaired to at least as good a
condition as existed at the effective date of such Primary Mortgage Insurance
Policy, ordinary wear and tear excepted; and (iii) tender to the Primary Insurer
good and merchantable title to and possession of the Property.
In those cases in which a Loan is serviced by a Sub-Servicer, the Sub-
Servicer, on behalf of itself, the Trustee and Securityholders, will present
claims to the Primary Insurer, and all collection thereunder will be deposited
in the Sub-Servicing Account. In all other cases, the Master Servicer, on
behalf of itself, the Trustee and the Securityholders, will present claims to
the insurer under each Primary Mortgage Insurance Policy, and will take such
reasonable steps as are necessary to receive payment or to permit recovery
thereunder with respect to defaulted Loans. As set forth above, all collections
by or on behalf of the Master Servicer under any Primary Mortgage Insurance
Policy and, when the Property has not been restored, the hazard insurance
policy, are to be deposited in the Security Account, subject to withdrawal as
heretofore described.
If the Property securing a defaulted Loan is damaged and proceeds, if any,
from the related hazard insurance policy are insufficient to restore the damaged
Property to a condition sufficient to permit recovery under the related Primary
Mortgage Insurance Policy, if any, the Master Servicer is not required to expend
its own funds to restore the damaged Property unless it determines (i) that such
restoration will increase the proceeds to
49
Securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) that such expenses will be recoverable by it
from related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Loan is not covered by a Primary Mortgage
Insurance Policy, the Master Servicer will be obligated to follow or cause to be
followed such normal practices and procedures as it deems necessary or advisable
to realize upon the defaulted Loan. If the proceeds of any liquidation of the
Property securing the defaulted Loan are less than the principal balance of such
Loan plus interest accrued thereon that is payable to Securityholders, the Trust
Fund will realize a loss in the amount of such difference plus the aggregate of
expenses incurred by the Master Servicer in connection with such proceedings and
which are reimbursable under the Agreement. In the unlikely event that any such
proceedings result in a total recovery which is, after reimbursement to the
Master Servicer of its expenses, in excess of the principal balance of such Loan
plus interest accrued thereon that is payable to Securityholders, the Master
Servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to such Loan
and, except as otherwise specified in the Prospectus Supplement, amounts
representing the balance of such excess, exclusive of any amount required by law
to be forwarded to the related borrower, as additional servicing compensation.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer's primary servicing compensation with respect to a Series of Securities
will come from the monthly payment to it, out of each interest payment on a
Loan, of an amount equal to the percentage per annum specified in the related
Prospectus Supplement of the outstanding principal balance thereof. Since the
Master Servicer's primary compensation is a percentage of the outstanding
principal balance of each Loan, such amounts will decrease as the Loans
amortize. In addition to primary compensation, the Master Servicer or the Sub-
Servicers may be entitled to retain all assumption fees and late payment
charges, to the extent collected from borrowers, and, if so provided in the
related Prospectus Supplement, any prepayment penalties and any interest or
other income which may be earned on funds held in the Security Account or any
Sub-Servicing Account. Unless otherwise specified in the related Prospectus
Supplement, any Sub-Servicer will receive a portion of the Master Servicer's
primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Master Servicer
will, unless otherwise specified in the related Prospectus Supplement, pay from
its servicing compensation certain expenses incurred in connection with its
servicing of the Loans, including, without limitation, payment of any premium
for any insurance policy, guaranty, surety or other form of credit enhancement
as specified in the related Prospectus Supplement, payment of the fees and
disbursements of the Trustee and independent accountants, payment of expenses
incurred in connection with distributions and reports to Securityholders, and
payment of any other expenses described in the related Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of mortgage loans or private
asset backed securities, or under pooling and servicing agreements substantially
similar to each other (including the related Agreement) was conducted in
compliance with such agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Audit Program for Mortgages
serviced for FHLMC, or the Uniform Single Audit Program for Mortgage Bankers, it
is required to report. In rendering its statement such firm may rely, as to
matters relating to the direct servicing of Loans or Private Asset Backed
Securities by Sub-Servicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for
50
FHLMC (rendered within one year of such statement) of firms of independent
public accountants with respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or before
a specified date in each year, of an annual statement signed by two officers of
the Master Servicer to the effect that the Master Servicer has fulfilled its
obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the Master Servicer may be obtained by Securityholders of the related Series
without charge upon written request to the Master Servicer at the address set
forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign from
its obligations and duties under the Agreement except upon a determination that
its duties thereunder are no longer permissible under applicable law. The
Master Servicer may, however, be removed from its obligations and duties as set
forth in the Agreement. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's obligations
and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer, the
Depositor nor any director, officer, employee, or agent of the Master Servicer
or the Depositor will be under any liability to the related Trust Fund or
Securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Master Servicer, the Depositor nor any such
person will be protected against any liability which would otherwise be imposed
by reason of wilful misfeasance or gross negligence in the performance of duties
thereunder or by reasons of reckless disregard of obligations and duties
thereunder. To the extent provided in the related Agreement, the Master
Servicer, the Depositor and any director, officer, employee or agent of the
Master Servicer or the Depositor may be entitled to indemnification by the
related Trust Fund and may be held harmless against any loss, liability or
expense incurred in connection with any legal action relating to the Agreement
or the Securities, other than any loss, liability or expense related to any
specific Loan or Loans (except any such loss, liability or expense otherwise
reimbursable pursuant to the Agreement) and any loss, liability or expense
incurred by reason of willful misfeasance or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, each Agreement will provide that neither the
Master Servicer nor the Depositor will be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. The Master Servicer or the Depositor may, however, in
its discretion undertake any such action which it may deem necessary or
desirable with respect to the Agreement and the rights and duties of the parties
thereto and the interests of the Securityholders thereunder. In such event, the
legal expenses and costs of such action and any liability resulting therefrom
will be expenses, costs and liabilities of the Trust Fund and the Master
Servicer or the Depositor, as the case may be, will be entitled to be reimbursed
therefor out of funds otherwise distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master Servicer
is a party, or any person succeeding to the business of the Master Servicer,
will be the successor of the Master Servicer under each Agreement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Except as otherwise
specified in the related Prospectus Supplement, Events of Default under each
Agreement will consist of (i) any failure by the Master
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Servicer to distribute or cause to be distributed to Securityholders of any
class any required payment (other than an Advance) which continues unremedied
for five business days after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Securities of such class evidencing
not less than 25% of the aggregate Percentage Interests evidenced by such class;
(ii) any failure by the Master Servicer to make an Advance as required under the
Agreement, unless cured as specified therein; (iii) any failure by the Master
Servicer duly to observe or perform in any material respect any of its other
covenants or agreements in the Agreement which continues unremedied for thirty
days after the giving of written notice of such failure to the Master Servicer
by the Trustee or the Depositor, or to the Master Servicer, the Depositor and
the Trustee by the holders of Securities of any class evidencing not less than
25% of the aggregate Percentage Interests constituting such class; and (iv)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceeding and certain actions by or on behalf of the
Master Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund in the event that payments in respect thereto are insufficient to
make payments required in the Agreement. The assets of the Trust Fund will be
sold only under the circumstances and in the manner specified in the related
Prospectus Supplement.
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities of
any class evidencing not less than 51% of the aggregate Percentage Interests
constituting such class and under such other circumstances as may be specified
in such Agreement, the Trustee shall, terminate all of its rights and
obligations of the Master Servicer under the Agreement relating to such Trust
Fund and in and to the Trust Fund Assets, whereupon the Trustee will succeed to
all of the responsibilities, duties and liabilities of the Master Servicer under
the Agreement, including, if specified in the related Prospectus Supplement, the
obligation to make advances, and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act,
it may appoint, or petition a court of competent jurisdiction for the
appointment of, a mortgage loan servicing institution with a net worth of a
least $10,000,000 to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Master Servicer under the Agreement.
No Securityholder, solely by virtue of such holder's status as a
Securityholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant thereto
or in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series have a Pass-
Through Rate of 0%,
52
such portion of the principal amount as may be specified in the terms of that
Series, as provided in the related Prospectus Supplement) of all the Notes of
such Series to be due and payable immediately. Such declaration may, under
certain circumstances, be rescinded and annulled by the holders of more than 50%
of the Percentage Interests of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the holders of 100% of the Percentage Interests of the Notes of
such Series consent to such sale, (b) the proceeds of such sale or liquidation
are sufficient to pay in full the principal of and accrued interest, due and
unpaid, on the outstanding Notes of such Series at the date of such sale or (c)
the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the holders of 66 2/3% of the Percentage Interests of the
Notes of such Series.
In the event that the 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 Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders would be less than would otherwise be the case. However, the
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.
Except as otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the holders of Notes of such Series, unless such holders offered to the
Trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the Trustee,
without the consent of any of the Securityholders, (i) to cure any ambiguity;
(ii) to correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein; or (iii) to make any other
revisions with respect to matters or questions arising under the
53
Agreement which are not inconsistent with the provisions thereof, provided that
such action will not adversely affect in any material respect the interests of
any Securityholder. In addition, to the extent provided in the related
Agreement, an Agreement may be amended without the consent of any of the
Securityholders, to change the manner in which the Security Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Securities of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any of
its provisions to such extent as may be necessary to maintain the qualification
of the related Trust Fund as a REMIC, provided that the Trustee has received an
opinion of counsel to the effect that such action is necessary or helpful to
maintain such qualification. Except as otherwise specified in the related
Prospectus Supplement, each Agreement may also be amended by the Depositor, the
Master Servicer and the Trustee with consent of holders of Securities of such
Series evidencing not less than 66% of the aggregate Percentage Interests of
each class affected thereby for the purpose of adding any provisions to or
changing in an manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of the holders of the related Securities;
provided, however, that no such amendment may (i) reduce in any manner the
amount of or delay the timing of, payments received on Loans which are required
to be distributed on any Security without the consent of the holder of such
Security, or (ii) reduce the aforesaid percentage of Securities of any class of
holders which are required to consent to any such amendment without the consent
of the holders of all Securities of such class covered by such Agreement then
outstanding. If a REMIC election is made with respect to a Trust Fund, the
Trustee will not be entitled to consent to an amendment to the related Agreement
without having first received an opinion of counsel to the effect that such
amendment will not cause such Trust Fund to fail to qualify as a REMIC.
TERMINATIONS; OPTIONAL TERMINATION
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each Series of Securities will
terminate upon the payment to the related Securityholders of all amounts held in
the Security Account or by the Master Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment of or
other liquidation of the last of the Trust Fund Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Trust Fund
Assets remaining in the Trust Fund and (ii) the purchase by the Master Servicer
or, if REMIC treatment has been elected and if specified in the related
Prospectus Supplement, by the holder of the residual interest in the REMIC (see
"Certain Material Federal Income Tax Consequences" below), from the related
Trust Fund of all of the remaining Trust Fund Assets and all property acquired
in respect of such Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any such
purchase of Trust Fund Assets and property acquired in respect of Trust Fund
Assets evidenced by a Series of Securities will be made at the option of the
Master Servicer or, if applicable, such holder of the REMIC residual interest,
at a price, and in accordance with the procedures, specified in the related
Prospectus Supplement. The exercise of such right will effect early retirement
of the Securities of that Series, but the right of the Master Servicer or, if
applicable, such holder of the REMIC residual interest, to so purchase is
subject to the principal balance of the related Trust Fund Assets being less
than the percentage specified in the related Prospectus Supplement of the
aggregate principal balance of the Trust Fund Assets at the Cut-off Date for the
Series. The foregoing is subject to the provision that if a REMIC election is
made with respect to a Trust Fund, any repurchase pursuant to clause (ii) above
will be made only in connection with a "qualified liquidation" of the REMIC
within the meaning of Section 860F(g)(4) of the Code.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to
54
register the transfer of or exchange Notes of such Series, to replace stolen,
lost or mutilated Notes of such Series, to maintain paying agencies and to hold
monies for payment in trust) upon the deposit with the Trustee, in trust, of
money and/or direct obligations of or obligations guaranteed by the United
States of America which through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of and each installment of interest on the Notes
of such Series on the last scheduled Distribution Date for such Notes and any
installment of interest on such Notes in accordance with the terms of the
Indenture and the Notes of such Series. In the event of any such defeasance and
discharge of Notes of such Series, holders of Notes of such Series would be able
to look only to such money and/or direct obligations for payment of principal
and interest, if any, on their Notes until maturity.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor, the Master Servicer and any of
their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Loans. Because such legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal laws and the appropriate laws of
the states in which Loans may be originated.
GENERAL
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of recording
with a state or county office. There are two parties to a mortgage, the
mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until such time as the underlying
debt is repaid. The trustee's authority under a deed of trust, the mortgagee's
authority under a mortgage and the grantee's authority under a security deed or
deed to secure debt are governed by law and, with respect to some deeds of
trust, the directions of the beneficiary.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a non-judicial
sale under a specific provision in the deed of trust which authorizes the
trustee to sell the property at public auction upon any default by the borrower
under the terms of the note or deed of trust. In addition to any notice
requirements contained in a deed of trust, in some states, the trustee must
record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. In
general, the
55
borrower, or any other person having a junior encumbrance on the real estate,
may, during a statutorily prescribed reinstatement period, cure a monetary
default by paying the entire amount in arrears plus other designated costs and
expenses incurred in enforcing the obligation. Generally, state law controls
the amount of foreclosure expenses and costs, including attorney's fees, which
may be recovered by a lender. After the reinstatement period has expired
without the default having been cured, the borrower or junior lienholder no
longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated,
a notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some
state laws require that a copy of the notice of sale be posted on the property
and sent to all parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding under
the loan, accrued and unpaid interest and the expenses of foreclosure in which
event the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burden of ownership,
including obtaining hazard insurance and making such repairs at its own expense
as are necessary to render the property suitable for sale. The lender will
commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be reduced by the receipt of
any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. See "Junior Mortgages; Rights of Senior Mortgagees".
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
56
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 ("SWDA") provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the
management" of the facility in question or is found not to have held its
interest primarily to protect a security interest, the lender may forfeit its
secured creditor exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
("EPA") in April 1992 attempted to clarify the activities in which lenders could
engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The rule was
struck down in 1994 by the United States Court of Appeals for the District of
Columbia Circuit in Kelley ex rel State of Michigan v. Environmental Protection
Agency, 15 F.3d 1100 (D.C Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied
sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of the SWDA. That regulation has not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA to provide
additional clarification regarding the scope of the lender liability exemptions
under the two statutes. Among other things, the 1996 amendments specify the
circumstances under which a lender will be protected by the CERCLA and SWDA
exemptions, both while the borrower is still in possession of the secured
property and following foreclosure on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility will be
considered to participate in management only if, while the borrower is still in
possession of the facility encumbered by the security interest, the lender (i)
exercises decision-making control over environmental compliance related to the
facility such that the lender has undertaken responsibility for hazardous
substance handling or disposal practices related to the facility or (ii)
exercises control at a level comparable to that of a manager of the facility
such that the lender has assumed or manifested responsibility for (x) overall
management of the facility encompassing daily-decision making with respect to
environmental compliance or (y) overall or substantially all of the operational
functions (as distinguished from financial or administrative functions) of the
facility other than the function of environmental compliance. The amendments
also specify certain activities that are not considered to be "participation in
management", including monitoring or enforcing the terms of the extension
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of credit or security interest, inspecting the facility, and requiring a lawful
means of addressing the release or threatened release of a hazardous substance.
The 1996 amendments also specify that a lender who did not participate in
management of a facility prior to foreclosure will not be considered an "owner
or operator", even if the lender forecloses on the facility and after
foreclosure sells or liquidates the facility, maintains business activities,
winds up operations, undertakes an appropriate response action, or takes any
other measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at the
earliest practicable, commercially reasonable time, on commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements.
The CERCLA and SWDA lender liability amendments specifically address the
potential liability of lenders who hold mortgages or similar conventional
security interests in real property, such as the Trust Fund does in connection
with the Home Equity Loans and the Home Improvement Contracts. The amendments
do not clearly address the potential liability of lenders who retain legal title
to a property and enter into an agreement with the purchaser for the payment of
the purchase price and interest over the term of the contract, such as the Trust
Fund does in connection with the Installment Contracts.
If a lender (including a lender under an Installment Contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a previous
owner or operator. However, such persons or entities may be bankrupt or
otherwise judgment proof, and the costs associated with environmental cleanup
and related actions may be substantial. Moreover, some state laws imposing
liability for addressing hazardous substances do not contain exemptions from
liability for lenders. Whether the costs of addressing a release or threatened
release at a property pledged as collateral for one of the Loans (or at a
property subject to an Installment Contract), would be imposed on the Trust
Fund, and thus occasion a loss to the Securityholders, therefore depends on the
specific factual and legal circumstances at issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to
force the lender to retain the property and pay the expenses of ownership until
the redemption period has run. In some states, there is no right to redeem
property after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the right of
the beneficiary or mortgagee to obtain a deficiency judgment against borrowers
financing the purchase of their residence or following sale under a deed of
trust or certain other foreclosure proceedings. A deficiency judgment is a
personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. Other statutes require the beneficiary
or mortgagee to exhaust the security afforded under a deed of trust or mortgage
by foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. In certain other states, the lender has the option
of bringing a personal action against the borrower on the debt without first
exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. Consequently, the practical effect of the election requirement, when
applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a foreclosure sale to the excess of the outstanding debt over the fair
market value of the
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property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on the
Property without the permission of the bankruptcy court. The rehabilitation
plan proposed by the debtor may provide, if the Property is not the debtor's
principal residence and the court determines that the value of the Property is
less than the principal balance of the mortgage loan, for the reduction of the
secured indebtedness to the value of the Property as of the date of the
commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including but not limited to any automatic stay, could result
in delays in receiving payments on the Loans underlying a Series of Securities
and possible reductions in the aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party. Numerous federal and state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and enforcement of loans secured by Single Family
Properties. These laws include the federal Truth-in-Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act and related statutes and regulations. These
federal and state laws impose specific statutory liabilities upon lenders who
fail to comply with the provisions of the law. In some cases, this liability
may affect assignees of the loans or contracts.
DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, each
conventional Loan will contain a due-on-sale clause which will provide that if
the mortgagor or obligor sells, transfers or conveys the Property, the loan or
contract may be accelerated by the mortgagee or secured party. The Garn-St.
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act"),
subject to certain exceptions, preempts state constitutional, statutory and case
law prohibiting the enforcement of due-on-sale clauses. As a result, due-on-
sale clauses have become generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of such
clauses with respect to mortgage loans that were (i) originated or assumed
during the "window period" under the Garn-St. Germain Act which ended in all
cases not later than October 15, 1982, and (ii) originated by lenders other than
national banks, federal savings institutions and federal credit unions. FHLMC
has taken the position in its published mortgage servicing standards that, out
of a total of eleven "window period states," five states (Arizona, Michigan,
Minnesota, New Mexico and Utah) have enacted statutes extending, on various
terms and for varying periods, the prohibition on enforcement of due-on-sale
clauses with respect to certain categories of window period loans. Also, the
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
As to loans secured by an owner-occupied residence, the Garn-St. Germain
Act sets forth nine specific instances in which a mortgagee covered by the Act
may not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related Property to an
uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
Loans and the number of Loans which may extend to maturity.
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In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been
fashioned include judicial requirements that the lender undertake affirmative
and expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in some cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Federal Home Loan Bank Board (the
"FHLBB") prohibit the imposition of a prepayment penalty or equivalent fee in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect
to Loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of the 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. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1993 deadline. In addition,
even where Title V is not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on mortgage loans
covered by Title V. Certain states have taken action to reimpose interest rate
limits and/or to limit discount points or other charges.
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THE HOME IMPROVEMENT CONTRACTS
General. The Home Improvement Contracts, other than those Home Improvement
Contracts that are unsecured or secured by mortgages on real estate (such Home
Improvement Contracts are hereinafter referred to in this section as
"contracts") generally are "chattel paper" or constitute "purchase money
security interests" each as defined in the Uniform Commercial Code (the "UCC").
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the related
Agreement, the Depositor will transfer physical possession of the contracts to
the Trustee or a designated custodian or may retain possession of the contracts
as custodian for the Trustee. In addition, the Depositor will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the Trustee's ownership of the contracts. Unless otherwise
specified in the related Prospectus Supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of such assignment, the Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements. The contracts that are secured by
the Home Improvements financed thereby grant to the originator of such contracts
a purchase money security interest in such Home Improvements to secure all or
part of the purchase price of such Home Improvements and related services. A
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. Such purchase money security
interests are assignable. In general, a purchase money security interest grants
to the holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of such collateral. However,
to the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in such Home Improvement must generally be perfected by a timely fixture filing.
In general, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose such characterization upon incorporation
of such materials into the related property, will not be secured by a purchase
money security interest in the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the Home
Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give
the debtor a number of days' notice, which varies from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws. The so-called "Holder-in-Due Course" rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims
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and defenses which the debtor could assert against the seller of goods.
Liability under this rule is limited to amounts paid under a contract; however,
the obligor also may be able to assert the rule to set off remaining amounts due
as a defense against a claim brought by the Trustee against such obligor.
Numerous other federal and state consumer protection laws impose requirements
applicable to the origination and lending pursuant to the contracts, including
the Truth in Lending Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act,
the Fair Debt Collection Practices Act and the Uniform Consumer Credit Code. In
the case of some of these laws, the failure to comply with their provisions may
affect the enforceability of the related contract.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"), provides
that, subject to the following conditions, state usury limitations shall not
apply to any contract which is secured by a first lien on certain kinds of
consumer goods. The contracts would be covered if they satisfy certain
conditions, among other things, governing the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered by
Title V.
INSTALLMENT CONTRACTS
The Loans may also consist of installment contracts. Under an installment
contract ("Installment Contract") the seller (hereinafter referred to in this
section as the "lender") retains legal title to the property and enters into an
agreement with the purchaser hereinafter referred to in this section as the
"borrower") for the payment of the purchase price, plus interest, over the term
of such contract. Only after full performance by the borrower of the contract
is the lender obligated to convey title to the property to the purchaser. As
with mortgage or deed of trust financing, during the effective period of the
Installment Contract, the borrower is generally responsible for maintaining the
property in good condition and for paying real estate taxes, assessments and
hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the Installment Contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an Installment Contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the Installment Contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Loan (including a borrower who is a
member of the National Guard or is in reserve status at the time of the
origination of the Loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of such borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the Master Servicer to collect
full amounts of interest on certain of the Loans. Any shortfall in interest
collections resulting from the application of the Relief Act could result in
losses to the Securityholders. The Relief Act also imposes limitations which
would impair the ability of the Master Servicer to foreclose on an affected Loan
during the borrower's period of active duty status. Moreover, the Relief Act
permits the extension of a Loan's maturity and the re-adjustment of its payment
schedule beyond the completion of military service. Thus, in the event that
such a Loan goes into default, there may be delays and losses occasioned by the
inability to realize upon the Property in a timely fashion.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the Trust Fund (and therefore the
Securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause the
property securing the Loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon
a failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
Cut-off Date with respect to any mortgage will not be included in the Trust
Fund. The priority of the lien securing any advance made under the clause may
depend
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in most states on whether the deed of trust or mortgage is called and recorded
as a credit line deed of trust or mortgage. If the beneficiary or lender
advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of such intervening junior trust
deeds or mortgages and other liens at the time of the advance. In most states,
the trust deed or mortgage lien securing mortgage loans of the type which
includes home equity credit lines applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the home equity credit line does not exceed the maximum
specified principal amount of the recorded trust deed or mortgage, except as to
advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
THE TITLE I PROGRAM
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I Program").
Under the Title I Program, the FHA is authorized and empowered to insure
qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under the
Title I Program include property improvement loans ("Property Improvement Loans"
or "Title I Loans"). A Property Improvement Loan or Title I Loan means a loan
made to finance actions or items that substantially protect or improve the basic
livability or utility of a property and includes single family improvement
loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from the lender. The lender may disburse proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties to the
transaction. With respect to a dealer Title I Loan, a dealer may include a
seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed interest
rates and generally provide for equal installment payments due weekly, biweekly,
semi-monthly or monthly, except that a loan may be payable quarterly or semi-
annually where a borrower has an irregular flow of income. The first or last
payments (or both) may vary in amount but may not exceed 150% of the regular
installment payment, and the first payment may be due no later than two months
from the date of the loan. The note must contain a provision permitting full or
partial prepayment of the loan. The interest rate must be negotiated and agreed
to by the borrower and the lender and must be fixed for the term of the loan and
recited in the note. Interest on an insured loan must accrue from the date of
the loan and be calculated according to the actuarial method. The lender must
assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income
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will be adequate to meet the periodic payments required by the loan, as well as
the borrower's other housing and recurring expenses, which determination must be
made in accordance with the expense-to-income ratios published by the Secretary
of HUD unless the lender determines and documents in the loan file the existence
of compensating factors concerning the borrower's creditworthiness which support
approval of the loan.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
Requirements for Title I Loans. The maximum principal amount for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I Loan may not be
less than six months nor greater than 20 years and 32 days. A borrower may
obtain multiple Title I Loans with respect to multiple properties, and a
borrower may obtain more than one Title I Loan with respect to a single
property, in each case as long as the total outstanding balance of all Title I
Loans in the same property does not exceed the maximum loan amount for the type
of Title I Loan thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property. In the case of a Title I Loan with a total principal balance
in excess of $15,000, if the property is not occupied by the owner, the borrower
must have equity in the property being improved at least equal to the principal
amount of the loan, as demonstrated by a current appraisal. Any Title I Loan in
excess of $7,500 must be secured by a recorded lien on the improved property
which is evidenced by a mortgage or deed of trust executed by the borrower and
all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month extension
if necessary, a completion certificate, signed by the borrower. The lender is
required to conduct an on-site inspection on any Title I Loan where the
principal obligation is $7,500 or more, and on any direct Title I Loan where the
borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program, the FHA establishes an
insurance coverage reserve account for each lender which has been granted a
Title I contract of insurance. The amount of insurance coverage in this account
is a maximum of 10% of the amount disbursed, advanced or expended by the lender
in originating or purchasing eligible loans registered with the FHA for Title I
insurance, with certain adjustments. The balance in the insurance coverage
reserve account is the maximum amount of insurance claims the FHA is required to
pay to the Title I lender. Loans to be insured under the Title I Program will
be registered for insurance by the FHA and the insurance coverage attributable
to such loans will be included in the insurance coverage reserve account for the
originating or purchasing lender following the receipt and acknowledgment by the
FHA of a loan report on the prescribed form pursuant to the Title I regulations.
For each eligible loan reported and acknowledged for insurance, the FHA charges
a fee (the "Premium"). For loans having a maturity of 25 months or less, the
FHA bills the
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lender for the entire Premium in an amount equal to the product of 0.50% of the
original loan amount and the loan term. For home improvement loans with a
maturity greater than 25 months, each year that a loan is outstanding the FHA
bills the lender for a Premium in an amount equal to 0.50% of the original loan
amount. If a loan is prepaid during the year, the FHA will not refund or abate
the Premium paid for such year.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans and
(ii) the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. The balance of the lender's FHA insurance coverage reserve
account will be further adjusted as required under Title I or by the FHA, and
the insurance coverage therein may be earmarked with respect to each or any
eligible loans insured thereunder, if a determination is made by the Secretary
of HUD that it is in its interest to do so. Originations and acquisitions of
new eligible loans will continue to increase a lender's insurance coverage
reserve account balance by 10% of the amount disbursed, advanced or expended in
originating or acquiring such eligible loans registered with the FHA for
insurance under the Title I Program. The Secretary of HUD may transfer
insurance coverage between insurance coverage reserve accounts with earmarking
with respect to a particular insured loan or group of insured loans when a
determination is made that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide transaction)
insured loans and loans reported for insurance only to another qualified lender
under a valid Title I contract of insurance. Unless an insured loan is
transferred with recourse or with a guaranty or repurchase agreement, the FHA,
upon receipt of written notification of the transfer of such loan in accordance
with the Title I regulations, will transfer from the transferor's insurance
coverage reserve account to the transferee's insurance coverage reserve account
an amount, if available, equal to 10% of the actual purchase price or the net
unpaid principal balance of such loan (whichever is less). However, under the
Title I Program not more than $5,000 in insurance coverage shall be transferred
to or from a lender's insurance coverage reserve account during any October 1 to
September 30 period without the prior approval of the Secretary of HUD. Amounts
which may be recovered by the Secretary of HUD after payment of an insurance
claim are not added to the amount of insurance coverage in the related lender's
insurance coverage reserve account.
Claims Procedures Under Title I. Under the Title I Program the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either (a) proceed against the property under any security instrument, or
(b) make a claim under the lender's contract of insurance. If the lender
chooses to proceed against the property under a security instrument (or if it
accepts a voluntary conveyance or surrender of the property), the lender may
file an insurance claim only with the prior approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be filed
with the FHA no later than 9 months after the date of default of such loan.
Concurrently with filing the insurance claim, the lender shall
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assign to the United States of America the lender's entire interest in the loan
note (or a judgment in lien of the note), in any security held and in any claim
filed in any legal proceedings. If, at the time the note is assigned to the
United States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid
a claim, the FHA may require the lender to repurchase the paid claim and to
accept a reassignment of the loan note. If the lender subsequently obtains a
valid and enforceable judgment against the borrower, the lender may resubmit a
new insurance claim with an assignment of the judgment. Although the FHA may
contest any insurance claim and make a demand for repurchase of the loan at any
time up to two years from the date the claim was certified for payment and may
do so thereafter in the event of fraud or misrepresentation on the part of the
lender, the FHA has expressed an intention to limit the period of time within
which it will take such action to one year from the date the claim was certified
for payment.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. For the purposes
hereof, the "Claimable Amount" means an amount equal to 90% of the sum of: (a)
the unpaid loan obligation (net unpaid principal and the uncollected interest
earned to the date of default) with adjustments thereto if the lender has
proceeded against property securing such loan; (b) the interest on the unpaid
amount of the loan obligation from the date of default to the date of the
claim's initial submission for payment plus 15 calendar days (but not to exceed
9 months from the date of default), calculated at the rate of 7% per annum; (c)
the uncollected court costs; (d) the attorney's fees not to exceed $500; and (e)
the expenses for recording the assignment of the security to the United States.
The Secretary of HUD may deny a claim for insurance in whole or in part for
any violations of the regulations governing the Title I Program; however, the
Secretary of HUD may waive such violations if it determines that enforcement of
the regulations would impose an injustice upon a lender which has substantially
complied with the regulations in good faith.
OTHER LEGAL CONSIDERATIONS
The Loans are also subject to federal laws, including: (i) Regulation Z,
which requires certain disclosures to the borrowers regarding the terms of the
Loans; (ii) the Equal Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise of
any right under the Consumer Credit Protection Act, in the extension of credit;
and (iii) the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience. Violations of
certain provisions of these federal laws may limit the ability of the Sellers to
collect all or part of the principal of or interest on the Loans and in addition
could subject the Sellers to damages and administrative enforcement.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated material federal income
tax consequences of the purchase, ownership, and disposition of the Securities
and is based on the opinion of Brown & Wood LLP, special counsel to the
Depositor (in such capacity, "Tax Counsel"). The summary is based upon the
provisions of the Code, the regulations promulgated thereunder, including, where
applicable, proposed regulations, and the judicial and administrative rulings
and decisions now in effect, all of which are subject to change or possible
differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change, and
such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the
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Code. Prospective investors may wish to consult their own tax advisers
concerning the federal, state, local and any other tax consequences as relates
specifically to such investors in connection with the purchase, ownership and
disposition of the Securities.
The federal income tax consequences to holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit ("REMIC") under the
Internal Revenue Code of 1986, as amended (the "Code"); (iii) the Securities
represent an ownership interest in some or all of the assets included in the
Trust Fund for a Series; or (iv) an election is made to treat the Trust Fund
relating to a particular Series of Certificates as a partnership. The
Prospectus Supplement for each Series of Securities will specify how the
Securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to such Series.
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)(5)(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 (the "OID Regulations"). A holder should be aware, however,
that the OID Regulations do not adequately address certain issues relevant to
prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero if
it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes
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the original principal amount of the Debt Security, but generally will not
include distributions of interest if such distributions constitute "qualified
stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. In the opinion
of Tax Counsel, the interest on such Debt Securities will be unconditionally
payable and constitute qualified stated interest, not OID. However, absent
clarification of the OID Regulations, where Debt Securities do not provide for
default remedies, the interest payments will be included in the Debt Security's
stated redemption price at maturity and taxed as OID. Interest is payable at a
single fixed rate only if the rate appropriately takes into account the length
of the interval between payments. Distributions of interest on Debt Securities
with respect to which deferred interest will accrue, will not constitute
qualified stated interest payments, in which case the stated redemption price at
maturity of such Debt Securities includes all distributions of interest as well
as principal thereon. Where the interval between the issue date and the first
Distribution Date on a Debt Security is either longer or shorter than the
interval between subsequent Distribution Dates, all or part of the interest
foregone, in the case of the longer interval, and all of the additional
interest, in the case of the shorter interval, will be included in the stated
redemption price at maturity and tested under the de minimis rule described
below. In the case of a Debt Security with a long first period which has non-de
minimis OID, all stated interest in excess of interest payable at the effective
interest rate for the long first period will be included in the stated
redemption price at maturity and the Debt Security will generally have OID.
Holders of Debt Securities should consult their own tax advisors to determine
the issue price and stated redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The Internal Revenue Services (the "IRS") recently issued regulations (the
"Contingent Regulations") governing the calculation of OID on instruments having
contingent interest payments. The Contingent Regulations represent the only
guidance regarding the views of the IRS with respect to contingent interest
instruments and specifically do not apply for purposes of calculating OID on
debt instruments subject to 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 Trustee intends to base its computation on Code Section 1272(a)(6)
and the OID Regulations as described in this Prospectus. However,
69
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 which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method
is to increase the portions of OID required to be included in income by a holder
to take into account prepayments with respect to the Loans at a rate that
exceeds the Prepayment Assumption, and to decrease (but not below zero for any
period) the portions of original issue discount required to be included in
income by a holder of a Pay-Through Security to take into account prepayments
with respect to the Loans at a rate that is slower than the Prepayment
Assumption. Although original issue discount will be reported to holders of
Pay-Through Securities based on the Prepayment Assumption, no representation is
made to holders that Loans will be prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the Internal Revenue
Service were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include OID
in gross income, but such a holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax Counsel,
holders will be required to report income with respect to the related Securities
under an accrual method without giving effect to delays and reductions
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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 deduced
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 Issuer intends to take the
position that all of the income derived from an Interest Weighted Security
should be treated as OID and that the amount and rate of accrual of such OID
should be calculated by treating the Interest Weighted Security as a Compound
Interest Security. However, in the case of Interest Weighted Securities that
are entitled to some payments of principal and that are Regular Interest
Securities the 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
Internal Revenue Service could assert that an Interest Weighted Security should
be taxable under the rules governing bonds issued with contingent payments.
Such treatment may be more likely in the case of Interest Weighted Securities
that are Stripped Securities as described below. See "--Tax Status as a Grantor
Trust--Discount or Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in the case
of Debt Securities bearing interest at a rate that varies directly, according to
a fixed formula, with an objective index, it appears that (i) the yield to
maturity of such Debt Securities and (ii) in the case of Pay-Through Securities,
the present value of all payments remaining to be made on such Debt Securities,
should be calculated as if the interest index remained at its value as of the
issue date of such Securities. Because the proper method of adjusting accruals
of OID on a variable rate Debt Security is uncertain, holders of variable rate
Debt Securities should consult their own tax advisers regarding the appropriate
treatment of such Securities for federal income tax purposes.
Market Discount. In the opinion of Tax Counsel, a purchaser of a Security
may be subject to the market discount rules of Sections 1276-1278 of the Code.
A Holder that acquires a Debt Security with more than a prescribed de minimis
amount of "market discount" (generally, the excess of the principal amount of
the Debt Security over the purchaser's purchase price) will be required to
include accrued market discount in income as ordinary income in each month, but
limited to an amount not exceeding the principal payments on the Debt Security
received in that month and, if the Securities are sold, the gain realized. Such
market discount would accrue in a manner to be provided in Treasury regulations
but, until such regulations are issued, such market discount would in general
accrue either (i) on the basis of a constant yield (in the case of a Pay-Through
Security, taking into account a prepayment assumption) or (ii) in the ratio of
(a) in the case of Securities (or in the case of a Pass-Through Security, as set
forth below, the Loans underlying such Security) not originally issued with
original issue discount, stated interest payable in the relevant period to total
stated interest remaining to be paid at the beginning of the period or (b) in
the case of Securities (or, in the case of a Pass-Through Security, as described
below, the Loans underlying such Security) originally issued at a discount, OID
in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general,
71
the deferred portion of any interest expense will be deductible when such market
discount is included in income, including upon the sale, disposition, or
repayment of the Security (or in the case of a Pass-Through Security, an
underlying Loan). A holder may elect to include market discount in income
currently as it accrues, on all market discount obligations acquired by such
holder during the taxable year such election is made and thereafter, in which
case the interest deferral rule will not apply.
Premium. In the opinion of Tax Counsel, a holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the Security at a premium, which it may
elect to amortize as an offset to interest income on such Security (and not as a
separate deduction item) on a constant yield method. The legislative history of
the 1986 Act indicates that premium is to be accrued in the same manner as
market discount. Accordingly, it appears that the accrual of premium on a class
of Pay-Through Securities will be calculated using the prepayment assumption
used in pricing such class. If a holder makes an election to amortize premium
on a Debt Security, such election will apply to all taxable debt instruments
(including all REMIC regular interests and all pass-through certificates
representing ownership interests in a trust holding debt obligations) held by
the holder at the beginning of the taxable year in which the election is made,
and to all taxable debt instruments acquired thereafter by such holder, and will
be irrevocable without the consent of the IRS. Purchasers who pay a premium for
the Securities should consult their tax advisers regarding the election to
amortize premium and the method to be employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Tax Counsel, if a REMIC election is made with
respect to a Series of Securities, then the arrangement by which the Securities
of that Series are issued will be treated as a REMIC as long as all of the
provisions of the applicable Agreement are complied with and the statutory and
regulatory requirements are satisfied. Securities will be designated as
"Regular Interests" or "Residual Interests" in a REMIC, as specified in the
related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, in the opinion of
Tax Counsel (i) Securities held by a domestic building and loan association will
constitute "a regular or a residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's
assets consist of cash, government securities, "loans secured by an interest in
real property," and other types of assets described in Code Section
7701(a)(19)(C)); and (ii) Securities held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(6)(B),
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 clause (i) or
(ii) above, then a Security will qualify for the tax treatment described in
clause (i) or (ii) in the proportion that such REMIC assets are qualifying
assets.
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REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of Tax Counsel, all of the expenses of a
REMIC will be taken into account by holders of the Residual Interest Securities.
In the case of a "single class REMIC," however, the expenses will be allocated,
under Treasury regulations, among the holders of the Regular Interest Securities
and the holders of the Residual Interest Securities on a daily basis in
proportion to the relative amounts of income accruing to each holder on that
day. In the case of a holder of a Regular Interest Security who is an
individual or a "pass-through interest holder" (including certain pass-through
entities but not including real estate investment trusts), such expenses will be
deductible only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the holder, exceed 2% of such Holder's adjusted gross
income. In addition, for taxable years beginning after December 31, 1990, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation for taxable years beginning after 1990)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross income
over the applicable amount, or (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year. The reduction or disallowance of
this deduction may have a significant impact on the yield of the Regular
Interest Security to such a holder. In general terms, a single class REMIC is
one that either (i) would qualify, under existing Treasury regulations, as a
grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and which is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
specified in the related Prospectus Supplement, the expenses of the REMIC will
be allocated to holders of the related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC.
Calculation of REMIC Income. In the opinion of Tax Counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between (i) the gross income produced by the REMIC's assets, including stated
interest and any original issue discount or market discount on loans and other
assets, and (ii) deductions, including stated interest and original issue
discount accrued on Regular Interest Securities, amortization of any premium
with respect to Loans, and servicing fees and other expenses of the REMIC. A
holder of a Residual Interest Security that is an individual or a "pass-through
interest holder" (including certain pass-through entities, but not including
real estate investment trusts) will be unable to deduct servicing fees payable
on the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
such holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See "Taxation of Debt Securities" above. However, a REMIC
that
73
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions,
a tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
In the opinion of Tax Counsel, the holder of a Certificate representing a
residual interest (a "Residual Interest Security") will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which such holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the holders (on such
day) of the Residual Interest Securities in proportion to their respective
holdings on such day.
In the opinion of Tax Counsel, the holder of a Residual Interest Security
must report its proportionate share of the taxable income of the REMIC whether
or not it receives cash distributions from the REMIC attributable to such income
or loss. The reporting of taxable income without corresponding distributions
could occur, for example, in certain REMIC issues in which the loans held by the
REMIC were issued or acquired at a discount, since mortgage prepayments cause
recognition of discount income, while the corresponding portion of the
prepayment could be used in whole or in part to make principal payments on REMIC
Regular Interests issued without any discount or at an insubstantial discount
(if this occurs, it is likely that cash distributions will exceed taxable income
in later years). Taxable income may also be greater in earlier years of certain
REMIC issues as a result of the fact that interest expense deductions, as a
percentage of outstanding principal on REMIC Regular Interest Securities, will
typically increase over time as lower yielding Securities are paid, whereas
interest income with respect to loans will generally remain constant over time
as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to the
holder's adjusted basis at the end of the calendar quarter in which such loss
arises. A holder's basis in a Residual Interest Security will initially equal
such holder's purchase price,
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and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be
used only to offset income of the REMIC generated by the same REMIC. The
ability of holders of Residual Interest Securities to deduct net losses may be
subject to additional limitations under the Code, as to which such holders
should consult their tax advisers.
Distributions. In the opinion of Tax Counsel, distributions on a Residual
Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a holder of a Residual Interest Security. If the amount of such payment
exceeds a holder's adjusted basis in the Residual Interest Security, however,
the holder will recognize gain (treated as gain from the sale of the Residual
Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel, a holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the amount
realized and such holder's adjusted basis in the Residual Interest Security at
the time of such sale or exchange. Except to the extent provided in
regulations, which have not yet been issued, any loss upon disposition of a
Residual Interest Security will be disallowed if the selling holder acquires any
residual interest in a REMIC or similar mortgage pool within six months before
or after such disposition.
Excess Inclusions. In the opinion of Tax Counsel, the portion of the REMIC
taxable income of a holder of a Residual Interest Security consisting of "excess
inclusion" income may not be offset by other deductions or losses, including net
operating losses, on such holder's federal income tax return. An exception
applies to organizations to which Code Section 593 applies (generally, certain
thrift institutions); however, such exception will not apply if the aggregate
value of the Residual Interest Securities is not considered to be "significant,"
as described below. 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 REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December
31, 1986, unless a residual holder elects to have such rules apply only to tax
years beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Day multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest at the beginning of each calendar quarter will equal its issue price
(calculated in a
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manner analogous to the determination of the issue price of a Regular Interest),
increased by the aggregate of the daily accruals for prior calendar quarters,
and decreased (but not below zero) by the amount of loss allocated to a holder
and the amount of distributions made on the Residual Interest Security before
the beginning of the quarter. The long-term federal rate, which is announced
monthly by the Treasury Department, is an interest rate that is based on the
average market yield of outstanding marketable obligations of the United States
government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all Federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest is disregarded, the transferor would be liable
for any Federal income tax imposed upon taxable income derived by the transferee
from the REMIC. The REMIC Regulations provide no guidance as to how to
determine if a significant purpose of a transfer is to impede the assessment or
collection of tax. A similar type of limitation exists with respect to certain
transfers of residual interests by foreign persons to United States persons.
See "--Tax Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that the IRS recently released proposed regulations
(the "Proposed Mark-to-Market Regulations") which provide that a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
The Proposed Mark-to-Market Regulations change the temporary regulations
discussed below which allowed a REMIC Residual Interest Security to be marked-
to-market provided that it was not a "negative value" residual interest and did
not have the same economic effect as a "negative value" residual interest. This
mark-to-market requirement applies to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The temporary regulations released on December 28, 1993 (the
"Temporary Mark to Market
76
Regulations") provided that for purposes of this mark-to-market requirement, a
"negative value" REMIC residual interest is not treated as a security and thus
may not be marked to market. In addition, a dealer was not required to identify
such REMIC Residual Interest Security as held for investment. In general, a
REMIC Residual Interest Security has negative value if, as of the date a
taxpayer acquires the REMIC Residual Interest Security, the present value of the
tax liabilities associated with holding the REMIC Residual Interest Security
exceeds the sum of (i) the present value of the expected future distributions on
the REMIC Residual Interest Security, and (ii) the present value of the
anticipated tax savings associated with holding the REMIC Residual Interest
Security as the REMIC generates losses. The amounts and present values of the
anticipated tax liabilities, expected future distributions and anticipated tax
savings were all to be determined using (i) the prepayment and reinvestment
assumptions adopted under Section 1272(a)(6), or that would have been adopted
had the REMIC's regular interests been issued with OID, (ii) any required or
permitted clean up calls, or required qualified liquidation provided for in the
REMIC's organizational documents and (iii) a discount rate equal to the
"applicable Federal rate" (as specified in Section 1274(d)(1)) that would have
applied to a debt instrument issued on the date of acquisition of the REMIC
Residual Interest Security. Furthermore, the Temporary Mark to Market
Regulations provided the IRS with the authority to treat any REMIC Residual
Interest Security having substantially the same economic effect as a "negative
value" residual interest. The IRS could issue subsequent regulations, which
could apply retroactively, providing additional or different requirements with
respect to such deemed negative value residual interests. Prospective
purchasers of a REMIC Residual Interest Security should consult their tax
advisors regarding the possible application of the Proposed Mark to Market
Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject
to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As further specified in the related Prospectus Supplement, if a
REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series, "Pass-
Through Securities"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("Stripped Securities"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
In the opinion of Tax Counsel, each holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the Trustee and the Servicer and
similar fees (collectively, the "Servicing Fee")), at the same time and in the
same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and paid
directly its share of the Servicing Fees. In the case of Pass-Through
Securities other than Stripped Securities, such income will consist of a pro
rata share of all of the income derived from all of the Loans and, in the case
of Stripped Securities, such income will consist of a pro rata share of the
income derived from each stripped bond or stripped coupon in which the holder
owns an interest. The holder of a Security will generally be entitled to deduct
such Servicing Fees under Section 162 or Section 212 of the Code to the extent
that such Servicing Fees represent "reasonable" compensation for the services
rendered by the Trustee and the Servicer (or third parties that are compensated
for the performance of services). In the case of a noncorporate holder,
however, Servicing Fees (to the extent not otherwise disallowed, e.g., because
they exceed reasonable compensation) will be deductible in computing such
holder's regular tax liability only to the extent that such fees, when added to
other miscellaneous itemized deductions, exceed 2% of adjusted gross income and
may not be deductible to any extent in computing such holder's alternative
minimum tax liability. In addition,
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for taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation in taxable years beginning after 1990) will be reduced by
the lesser of (i) 3% of the excess of adjusted gross income over the applicable
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
such taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values, determined
as of the time of purchase of the Securities. In the typical case, the Trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
Loan as having a fair market value proportional to the share of the aggregate
principal balances of all of the Loans that it represents, since the Securities,
unless otherwise specified in the related Prospectus Supplement, will have a
relatively uniform interest rate and other common characteristics. To the
extent that the portion of the purchase price of a Pass-Through Security
allocated to a Loan (other than to a right to receive any accrued interest
thereon and any undistributed principal payments) is less than or greater than
the portion of the principal balance of the Loan allocable to the Security, the
interest in the Loan allocable to the Pass-Through Security will be deemed to
have been acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of
a prescribed de minimis amount or a Stripped Security, a holder of a Security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a Loan could arise, for example, by virtue of the financing
of points by the originator of the Loan, or by virtue of the charging of points
by the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a
Loan will be includible in income, generally in the manner described above,
except that in the case of Pass-Through Securities, market discount is
calculated with respect to the Loans underlying the Certificate, rather than
with respect to the Security. A holder that acquires an interest in a Loan
originated after July 18, 1984 with more than a de minimis amount of market
discount (generally, the excess of the principal amount of the Loan over the
purchaser's allocable purchase price) will be required to include accrued market
discount in income in the manner set forth above. See "--Taxation of Debt
Securities; Market Discount" and "--Premium" above.
In the case of market discount on a Pass-Through Security attributable to
Loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Loans, a right to receive only
principal payments on the Loans, or a right to receive certain payments of both
interest and principal. Certain Stripped Securities ("Ratio Strip Securities")
may represent a right to receive differing percentages of both the interest and
principal on each Loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. Section 1286
of the Code applies the OID rules to stripped bonds and stripped coupons. For
purposes of computing original issue discount, a stripped bond or a stripped
coupon is treated as a debt instrument issued on the date that such stripped
interest is purchased with an issue price equal to its purchase price or, if
more than one stripped interest is purchased, the ratable share of the purchase
price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess servicing")
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the Loan principal balance) or
the Securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any
78
non-de minimis discount arising from a subsequent transfer of the Securities
should be treated as market discount. The IRS appears to require that
reasonable servicing fees be calculated on a Loan by Loan basis, which could
result in some Loans being treated as having more than 100 basis points of
interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury
regulations, appear specifically to cover instruments such as the Stripped
Securities which technically represent ownership interests in the underlying
Loans, rather than being debt instruments "secured by" those loans.
Nevertheless, it is believed that the Cash Flow Bond Method is a reasonable
method of reporting income for such Securities, and it is expected that OID will
be reported on that basis unless otherwise specified in the related Prospectus
Supplement. In applying the calculation to Pass-Through Securities, the Trustee
will treat all payments to be received by a holder with respect to the
underlying Loans as payments on a single installment obligation. The IRS could,
however, assert that original issue discount must be calculated separately for
each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the Trustee intends, absent contrary authority, to report income to Security
holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each non-Interest Weighted
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped principal payments; (ii) the
non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted Stripped
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities, there
is no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans character is not carried over to the
Securities in such circumstances. Pass-Through Securities will be, and,
although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of Section
856(c)(6)(B) 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
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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. In the case of a
Security held by a bank, thrift, or similar institution described in Section 582
of the Code, however, gain or loss realized on the sale or exchange of a Regular
Interest Security will be taxable as ordinary income or loss. In addition, gain
from the disposition of a Regular Interest Security that might otherwise be
capital gain will be treated as ordinary income to the extent of the excess, if
any, of (i) the amount that would have been includible in the holder's income if
the yield on such Regular Interest Security had equaled 110% of the applicable
federal rate as of the beginning of such holder's holding period, over the
amount of ordinary income actually recognized by the holder with respect to such
Regular Interest Security. For taxable years beginning after December 31, 1993,
the maximum tax rate on ordinary income for individual taxpayers is 39.6% and
the maximum tax rate on long-term capital gains reported after December 31, 1990
for such taxpayers is 28%. The maximum tax rate on both ordinary income and
long-term capital gains of corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a holder, other than a holder
of a REMIC Residual Security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally
applies if the holder of a Security (i) fails to furnish the Trustee with its
taxpayer identification number ("TIN"); (ii) furnishes the Trustee an incorrect
TIN; (iii) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). Holders should
consult their tax advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
The Trustee will report to the holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
("Nonresidents"), in the opinion of Tax Counsel, such interest will normally
qualify as portfolio interest (except where (i) the recipient is a holder,
directly or by attribution, of 10% or more of the capital or profits interest in
the issuer, or (ii) the recipient is a controlled foreign corporation to which
the issuer is a related person) and will be exempt from federal income tax.
Upon receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from such interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer to withhold at a 30% rate (unless such
rate were reduced or eliminated by an applicable tax treaty) on, among other
things, interest and other fixed or determinable, annual or periodic income paid
to Nonresidents. Holders of Pass-Through Securities and Stripped Securities,
including Ratio Strip Securities, however, may be subject to withholding to the
extent that the Loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder. They will, however, generally be subject to the
regular United States income tax.
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Payments to holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income
does not qualify for exemption from United States withholding tax as "portfolio
interest." It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding
prior to the distribution of cash in the case of Residual Interest Securities
that do not have significant value. Under the REMIC Regulations, if a Residual
Interest Security has tax avoidance potential, a transfer of a Residual Interest
Security to a Nonresident will be disregarded for all Federal tax purposes. A
Residual Interest Security has tax avoidance potential unless, at the time of
the transfer the transferor reasonably expects that the REMIC will distribute to
the transferee residual interest holder amounts that will equal at least 30% of
each excess inclusion, and that such amounts will be distributed at or after the
time at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See "--Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a partnership
will not be an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that (1) the Trust Fund will not
have certain characteristics necessary for a business trust to be classified as
an association taxable as a corporation and (2) the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the Trust
Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. In such a circumstance, Tax Counsel is, except
as otherwise provided in the related Prospectus Supplement, of the opinion that
the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any
given series of Notes, additional tax considerations with respect to such Notes
will be disclosed in the applicable Prospectus Supplement.
81
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of Tax Counsel, the Notes
will not be considered issued with OID. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued in
accordance with such Noteholder's method of tax accounting. Under the OID
regulations, a holder of a Note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are made
on the Note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a Note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a Short-
Term Note reporting interest income as it is paid may be required to defer a
portion of any interest expense otherwise deductible on indebtedness incurred to
purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. In the opinion of Tax Counsel, if a Noteholder
sells a Note, the holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the holder's adjusted tax
basis in the Note. The adjusted tax basis of a Note to a particular Noteholder
will equal the holder's cost for the Note, increased by any market discount,
acquisition discount, OID and gain previously included by such Noteholder in
income with respect to the Note and decreased by the amount of bond premium (if
any) previously amortized and by the amount of principal payments previously
received by such Noteholder with respect to such Note. Any such gain or loss
will be capital gain or loss if the Note was held as a capital asset, except for
gain representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made (or
accrued) to a Noteholder who is a nonresident alien, foreign corporation or
other non-United States person (a "foreign person") generally will be considered
"portfolio interest", and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person (i) is not actually or constructively a "10
percent shareholder" of the Trust or the Seller (including a holder of 10% of
the outstanding Certificates) or a "controlled foreign corporation" with respect
to which the Trust or the Seller is a "related person" within the meaning of the
Code and (ii) provides the Owner Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a foreign person and
providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and
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(ii) in the case of an individual foreign person, the foreign person is not
present in the United States for 183 days or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and profit-
sharing trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust Fund will be required to withhold
31 percent of the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Tax Counsel, the IRS successfully asserted that one or more of the Notes did
not represent debt for federal income tax purposes, the Notes might be treated
as equity interests in the Trust Fund. If so treated, the Trust Fund might be
taxable as a corporation with the adverse consequences described above (and the
taxable corporation would not be able to reduce its taxable income by deductions
for interest expense on Notes recharacterized as equity). Alternatively, and
most likely in the view of Tax Counsel, the Trust Fund might be treated as a
publicly traded partnership that would not be taxable as a corporation because
it would meet certain qualifying income tests. Nonetheless, treatment of the
Notes as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain holders. For example, income to certain
tax-exempt entities (including pension funds) would be "unrelated business
taxable income", income to foreign holders generally would be subject to U.S.
tax and U.S. tax return filing and withholding requirements, and individual
holders might be subject to certain limitations on their ability to deduct their
share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization
of the arrangement involving the Trust Fund, the Certificates, the Notes, the
Trust Fund and the Servicer is not clear because there is no authority on
transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the opinion
of Tax Counsel, the Trust Fund will not be subject to federal income tax.
Rather, in the opinion of Tax Counsel, each Certificateholder will be required
to separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
83
In the opinion of Tax Counsel, the tax items of a partnership are allocable
to the partners in accordance with the Code, Treasury regulations and the
partnership agreement (here, the Trust Agreement and related documents). The
Trust Agreement will provide, in general, that the Certificateholders will be
allocated taxable income of the Trust Fund for each month equal to the sum of
(i) the interest that accrues on the Certificates in accordance with their terms
for such month, including interest accruing at the Pass-Through Rate for such
month and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the Loans
that corresponds to any excess of the principal amount of the Certificates over
their initial issue price (iii) prepayment premium payable to the
Certificateholders for such month; and (iv) any other amounts of income payable
to the Certificateholders for such month. Such allocation will be reduced by
any amortization by the Trust Fund of premium on Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Depositor.
Based on the economic arrangement of the parties, in the opinion of Tax Counsel,
this approach for allocating Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, in the opinion of Tax Counsel, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of expenses
of the Trust Fund (including fees to the Servicer but not interest expense)
would be miscellaneous itemized deductions. Such deductions might be disallowed
to the individual in whole or in part and might result in such holder being
taxed on an amount of income that exceeds the amount of cash actually
distributed to such holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less than
the remaining principal balance of the Loans at the time of purchase. If so, in
the opinion of Tax Counsel, the Loan will have been acquired at a premium or
discount, as the case may be. (As indicated above, the Trust Fund will make
this calculation on an aggregate basis, but might be required to recompute it on
a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. 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. If such a termination occurs,
the Trust Fund will
84
be considered to distribute its assets to the partners, who would then be
treated as recontributing those assets to the Trust Fund as a new partnership.
The Trust Fund will not comply with certain technical requirements that might
apply when such a constructive termination occurs. As a result, the Trust Fund
may be subject to certain tax penalties and may incur additional expenses if it
is required to comply with those requirements. Furthermore, the Trust Fund
might not be able to comply due to lack of data.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the Certificates sold. A Certificateholder's tax basis in a Certificate will
generally equal the holder's cost increased by the holder's share of Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the
Certificates and the amount realized on a sale of a Certificate would include
the holder's share of the Notes and other liabilities of the Trust Fund. A
holder acquiring Certificates at different prices may be required to maintain a
single aggregate adjusted tax basis in such Certificates, and, upon sale or
other disposition of some of the Certificates, allocate a portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a separate
tax basis in each Certificate for purposes of computing gain or loss on a sale
of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Receivables would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or
lesser amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal year
of the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will
85
provide the Schedule K-l information to nominees that fail to provide the Trust
Fund with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies .
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold
Certificates through a nominee are required to furnish directly to the Trust
Fund information as to themselves and their ownership of Certificates. A
clearing agency registered under Section 17A of the 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 to change its withholding procedures. In determining a holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only
86
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.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Material Federal Income Tax Considerations," potential investors should consider
the state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into subclasses.
If Securities are divided into subclasses the related Prospectus Supplement will
contain information concerning considerations relating to ERISA and the Code
that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which such plans, accounts or arrangements are invested) (collectively "Plans")
subject to ERISA and on persons who are fiduciaries with respect to such Plans.
Generally, ERISA applies to investments made by Plans. Among other things,
ERISA requires that the assets of Plans be held in trust and that the trustee,
or other duly authorized fiduciary, have exclusive authority and discretion to
manage and control the assets of such Plans. ERISA also imposes certain duties
on persons who are fiduciaries of Plans. Under ERISA, any person who exercises
any authority or control respecting the management or disposition of the assets
of a Plan is considered to be a fiduciary of such Plan (subject to certain
exceptions not here relevant). Certain employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)) and, if no election has
been made under Section 410(d) of the Code, church plans (as defined in ERISA
Section 3(33)), are not subject to ERISA requirements. Accordingly, assets of
such plans may be invested in Securities without regard to the ERISA
considerations described above and below, subject to the provisions of
applicable state law. Any such plan which is qualified and exempt from taxation
under Code Sections 401(a) and 501(a), however, is subject to the prohibited
transaction rules set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a Plan makes an "equity" investment could be deemed for
purposes of ERISA to be assets of the investing Plan in certain circumstances.
However, the regulation provides that, generally, the assets of a corporation or
partnership in which a Plan invests will not be deemed for purposes of ERISA to
be assets of such Plan if the equity interest acquired by the investing Plan is
a publicly-offered security. A publicly-offered security, as defined in the
Labor Reg. Section 2510.3-101, is a security that is widely held, freely
transferable and registered under the Securities Exchange Act of 1934, as
amended.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ("Parties in Interest") having certain
specified relationships to a Plan and imposes additional prohibitions where
Parties in Interest are fiduciaries with respect to such Plan. Because the
Loans may be deemed Plan assets of each Plan that purchases Securities, an
87
investment in the Securities by a Plan might be a prohibited transaction under
ERISA Sections 406 and 407 and subject to an excise tax under Code Section 4975
unless a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's prohibited
transaction rules certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of "mortgage
pool pass-through certificates" in the initial issuance of such certificates.
PTE 83-1 permits, subject to certain conditions, transactions which might
otherwise be prohibited between Plans and Parties in Interest with respect to
those Plans related to the origination, maintenance and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or deeds
of trust on single-family residential property, and the acquisition and holding
of certain mortgage pool pass-through certificates representing an interest in
such mortgage pools by Plans. If the general conditions (discussed below) of
PTE 83-1 are satisfied, investments by a Plan in Securities that represent
interests in a Pool consisting of Loans ("Single Family Securities") will be
exempt from the prohibitions of ERISA Sections 406(a) and 407 (relating
generally to transactions with Parties in Interest who are not fiduciaries) if
the Plan purchases the Single Family Securities at no more than fair market
value and will be exempt from the prohibitions of ERISA Sections 406(b)(1) and
(2) (relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Securities, and at least 50% of all Single Family Securities are purchased by
persons independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving Subordinate Securities.
Accordingly, unless otherwise provided in the related Prospectus Supplement, no
transfer of a Subordinate Security or a Security which is not a Single Family
Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The Depositor believes that, for purposes of PTE 83-
1, the term "mortgage pass-through certificate" would include: (i) Securities
issued in a Series consisting of only a single class of Securities; and (ii)
Securities issued in a Series in which there is only one class of Trust
Securities; provided that the Securities in the case of clause (i), or the
Securities in the case of clause (ii), evidence the beneficial ownership of both
a specified percentage of future interest payments (greater than 0%) and a
specified percentage (greater than 0%) of future principal payments on the
Loans. It is not clear whether a class of Securities that evidences the
beneficial ownership in a Trust Fund divided into Loan groups, beneficial
ownership of a specified percentage of interest payments only or principal
payments only, or a notional amount of either principal or interest payments, or
a class of Securities entitled to receive payments of interest and principal on
the Loans only after payments to other classes or after the occurrence of
certain specified events would be a "mortgage pass-through certificate" for
purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Securityholders against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the Pool. The Depositor believes that the first general condition referred to
above will be satisfied with respect to the Securities in a Series issued
without a subordination feature, or the Securities only in a Series issued with
a subordination feature, provided that the subordination and Reserve Account,
subordination by shifting of interests, the pool insurance or other form of
credit enhancement described herein (such subordination, pool insurance or other
form of credit enhancement being the system of insurance or other protection
referred to above) with respect to a Series of Securities is maintained in an
amount not less than the greater of one percent of the aggregate principal
balance of the Loans or the principal balance of the largest Loan. See
"Description of the Securities" herein. In the absence of a ruling that the
system of insurance or other protection with respect to a Series of Securities
satisfies the first general condition referred to above, there can be no
assurance that these features will be so viewed by the DOL. The Trustee will
not be affiliated with the Depositor.
88
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
On September 6, 1990 the DOL issued to Greenwich Capital Markets, Inc., an
individual exemption (Prohibited Transaction Exemption 90-59; Exemption
Application No. D-8374, 55 Fed. Reg. 36724) (the "Underwriter Exemption") which
applies to certain sales and servicing of "certificates" that are obligations of
a "trust" with respect to which Greenwich Capital Markets, Inc. is the
underwriter, manager or co-manager of an underwriting syndicate. The
Underwriter Exemption provides relief which is generally similar to that
provided by PTE 83-1, but is broader in several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTE 83-l. The Underwriter Exemption contains an expanded
definition of "certificate" which includes an interest which entitles the holder
to pass-through payments of principal, interest and/or other payments. The
Underwriter Exemption contains an expanded definition of "trust" which permits
the trust corpus to consist of secured consumer receivables. The definition of
"trust", however, does not include any investment pool unless, inter alia, (i)
the investment pool consists only of assets of the type which have been included
in other investment pools, (ii) certificates evidencing interests in such other
investment pools have been purchased by investors other than Plans for at least
one year prior to the Plan's acquisition of certificates pursuant to the
Underwriter Exemption, and (iii) certificates in such other investment pools
have been rated in one of the three highest generic rating categories of the
four credit rating agencies noted below. Generally, the Underwriter Exemption
holds that the acquisition of the certificates by a Plan must be on terms
(including the price for the certificates) that are at least as favorable to the
Plan as they would be in an arm's length transaction with an unrelated party.
The Underwriter Exemption requires that the rights and interests evidenced by
the certificates not be "subordinated" to the rights and interests evidenced by
other certificates of the same trust. The Underwriter Exemption requires that
certificates acquired by a Plan have received a rating at the time of their
acquisition that is in one of the three highest generic rating categories of
Standard & Poor's Corporation, Moody's Investors Service, Inc., Duff & Phelps
Inc. or Fitch Investors Service, Inc. The Underwriter Exemption specifies that
the pool trustee must not be an affiliate of the pool sponsor, nor an affiliate
of the Underwriter, the pool servicer, any obligor with respect to mortgage
loans included in the trust constituting more than five percent of the aggregate
unamortized principal balance of the assets in the trust, or any affiliate of
such entities. Finally, the Underwriter Exemption stipulates that any Plan
investing in the certificates must be an "accredited investor" as defined in
Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of PTE 83-1 and the Underwriter Exemption, and the potential
consequences in their specific circumstances, prior to making such investment.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify which,
if any, of the classes of Securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of Securities that qualify as "mortgage related
securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
89
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacted
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities",
securities will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one
states adopted such legislation prior to the October 4, 1991 deadline. SMMEA
provides, however, that in no event will the enactment of any such legislation
affect the validity of any contractual commitment to purchase, hold or invest in
securities, or require the sale or other disposition of securities, so long as
such contractual commitment was made or such securities were acquired prior to
the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable
federal authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to Credit
Unions No. 96, as modified by Letter to Credit Unions No. 108, which includes
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities and the NCUA's regulation "Investment and Deposit
Activities" (12 C.F.R. Part 703), which sets forth certain restrictions on
investment by federal credit unions in mortgage related securities.
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities", which are "high-
risk mortgage securities" as defined in the Policy Statement. According to the
Policy Statement such "high-risk mortgage securities" include securities such as
Securities not entitled to distributions allocated to principal or interest, or
Subordinated Securities. Under the Policy Statement, it is the responsibility
of each depository institution to determine, prior to purchase (and at stated
intervals thereafter), whether a particular mortgage derivative product is a
"high-risk mortgage security", and whether the purchase (or retention) of such a
product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depositors institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining
whether and to what extent the Securities constitute legal investments for such
investors.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Securities may be effected from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices to be determined at the time of
sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Securities will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Greenwich Capital Markets, Inc. ("GCM") acting as underwriter with other
underwriters, if any, named therein. In such event,
90
the related Prospectus Supplement may also specify that the underwriters will
not be obligated to pay for any Securities agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Depositor. In connection with
the sale of the Securities, underwriters may receive compensation from the
Depositor or from purchasers of the Securities in the form of discounts,
concessions or commissions. The related Prospectus Supplement will describe any
such compensation paid by the Depositor.
Alternatively, the related Prospectus Supplement may specify that the
Securities will be distributed by GCM acting as agent or in some cases as
principal with respect to Securities that it has previously purchased or agreed
to purchase. If GCM acts as agent in the sale of Securities, GCM will receive a
selling commission with respect to each Series of Securities, depending on
market conditions, expressed as a percentage of the aggregate principal balance
of the related Trust Fund Assets as of the Cut-off Date. The exact percentage
for each Series of Securities will be disclosed in the related Prospectus
Supplement. To the extent that GCM elects to purchase Securities as principal,
GCM may realize losses or profits based upon the difference between its purchase
price and the sales price. The Prospectus Supplement with respect to any Series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Securities of such Series.
The Depositor will indemnify GCM and any underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or will
contribute to payments GCM and any underwriters may be required to make in
respect thereof.
In the ordinary course of business, GCM and the Depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the Depositor's loans or private asset backed
securities, pending the sale of such loans or private asset backed securities,
or interests therein, including the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Holders of Securities should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Securities of each Series, including certain material
federal income tax consequences with respect thereto, will be passed upon for
the Depositor by Brown & Wood LLP, New York, New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Securities of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies (each, a "Rating Agency") specified in the related
Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Trust Fund Assets and any credit enhancement with respect to such
class and will reflect such Rating Agency's assessment solely of the likelihood
that holders of a class of Securities of such class will receive payments to
which such Securityholders
91
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ from
that originally anticipated or the likelihood of early optional termination of
the Series of Securities. Such rating should not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such Series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of mortgage loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Loans. No assurance can be given that values of any Properties have remained
or will remain at their levels on the respective dates of origination of the
related Loans. If the residential real estate markets should experience an
overall decline in property values such that the outstanding principal balances
of the Loans in a particular Trust Fund and any secondary financing on the
related Properties become equal to or greater than the value of the Properties,
the rates of delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry. In additional,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by mortgagors of scheduled payments of principal
and interest on the Loans and, accordingly, the rates of delinquencies,
foreclosures and losses with respect to any Trust Fund. To the extent that such
losses are not covered by credit enhancement, such losses will be borne, at
least in part, by the holders of one or more classes of the Securities of the
related Series.
92
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR INCORPO-
RATED 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 SECU-
RITIES OFFERED HEREBY, NOR AN OFFER OF THE SECURITIES IN ANY STATE OR JURIS-
DICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by Reference............................ S-3
Available Information...................................................... S-3
Summary.................................................................... S-4
Risk Factors............................................................... S-14
The Pool................................................................... S-21
Empire Funding............................................................. S-28
Prepayment and Yield Considerations........................................ S-33
The Trust.................................................................. S-48
Description of the Offered Securities...................................... S-49
Description of Credit Enhancement.......................................... S-57
Description of the Transfer and Servicing Agreements....................... S-58
Certain Federal Income Tax Consequences.................................... S-64
State Tax Consequences..................................................... S-64
ERISA Considerations....................................................... S-65
Legal Investment Matters................................................... S-66
Use of Proceeds............................................................ S-66
Method of Distribution..................................................... S-67
Legal Matters.............................................................. S-67
Ratings.................................................................... S-67
Index of Defined Terms..................................................... S-69
PROSPECTUS
Prospectus Supplement or Current Report on Form 8-K........................ 2
Incorporation of Certain Information by Reference.......................... 2
Available Information...................................................... 2
Reports to Securityholders................................................. 3
Summary of Terms........................................................... 4
Risk Factors............................................................... 11
The Trust Fund............................................................. 16
Use of Proceeds............................................................ 22
The Depositor.............................................................. 22
Loan Program............................................................... 22
Description of the Securities.............................................. 24
Credit Enhancement......................................................... 34
Yield and Prepayment Considerations........................................ 40
The Agreements............................................................. 42
Certain Legal Aspects of the Loans......................................... 55
Certain Material Federal Income Tax Consequences........................... 67
State Tax Considerations................................................... 87
ERISA Considerations....................................................... 87
Legal Investment........................................................... 89
Method of Distribution..................................................... 90
Legal Matters.............................................................. 91
Financial Information...................................................... 91
Rating..................................................................... 91
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EMPIRE FUNDING HOME LOAN
OWNER TRUST 1997-2
$16,500,000 CLASS A-1,
8.85% HOME LOAN ASSET BACKED NOTES
$16,500,000 CLASS A-2,
7.78% HOME LOAN ASSET BACKED NOTES
$25,500,000 CLASS A-3,
7.78% HOME LOAN ASSET BACKED NOTES
$11,000,000 CLASS A-4,
7.67% HOME LOAN ASSET BACKED NOTES
$24,016,000 CLASS A-5,
7.96% HOME LOAN ASSET BACKED NOTES
$7,000,000 CLASS A-6,
7.74% HOME LOAN ASSET BACKED NOTES
$16,728,000 CLASS M-1,
7.80% HOME LOAN ASSET BACKED NOTES
$15,683,000 CLASS M-2,
8.03% HOME LOAN ASSET BACKED NOTES
FINANCIAL ASSET
SECURITIES CORP.
(DEPOSITOR)
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PROSPECTUS SUPPLEMENT
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GREENWICH CAPITAL MARKETS, INC.
CONTIFINANCIAL SERVICES CORPORATION
MAY 23, 1997
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